We have a remarkably complex healthcare system in the United States, many different payers: private payers, governmental payers, many different providers of care: hospitals, doctors, pharmacies, skilled nursing facilities, home healthcare agencies, a number of manufacturers of drugs and devices. It is a very complex system. We're going to talk about insurance and paying for healthcare now. There are a number of different kinds of insurance: health insurance, car insurance, house insurance. Why do we have insurance in the first place? There are really three main reasons to have insurance. The first is to protect people against large financial losses, large random losses. If God forbid you had an appendicitis or got hit by a bus, it would cost a lot of money, and appendicitis could cost you $50,000 for the operation, a few tests, and a couple of days in the hospital to recover. Most American families cannot afford to pay $50,000 out of their pocket at one fell swoop in an unexpected moment. And so to protect against that, insurance comes in. You pay a small amount every month or every year for the large payout if God forbid something bad happens. So one purpose of insurance is to protect against large financial losses. A second purpose of insurance is to reduce the barrier to people using services. If you have to pay to go to the doctor, pay to fill a prescription, pay to get a particular test, you might think too much and you might not do those things. You might not take your medicine. You might not get a colonoscopy to prevent you from getting colon cancer. Insurance pays for those health care services reducing the financial barrier to actually getting the necessary healthcare. And the third goal of health insurance is to pool risk. Any individual person it's uncertain whether they're gonna get sick or not. A good analogy is to take a dice. If you roll a dice, who knows you might get the six, you might get one, you might get a five and the single roll is very uncertain what it will come up. But if you roll a dice enough times, it will average out to 3.5 over time, that's because over a large number, the average holds. The same thing actually happens in healthcare. If you take a variety of people, if you have a small number of people the chance that some person will get sick unpredictable and high. On the other hand, once you have a large number of people, it becomes very predictable how many people will get sick, how much health care services they'll need. Pooling works by bringing large numbers of people together, so that you can predict the use of health care services and make the health insurance amount needed much more predictable. These benefits of health insurance come with two problems. The first problem is called adverse selection. If you allow people to voluntarily decide whether they're going to buy insurance or not insurance, we know that people who are sick or who have a high likelihood of getting sick are more likely to buy health insurance. That has a problem. If only the sick buy insurance, then you increase the price as you increase the price that people who are less sick but who were buying insurance will stop buying insurance and you will concentrate the number of people buying insurance who are very sick. This has what's called a death spiral effect. More people who are sick in an insurance plan increases the cost, the well stop buying, super concentrating the sick and the prices go up leading to a problem that no one can afford the coverage. That is the problem of adverse selection. It's inherent in any voluntary system for buying health insurance. A second problem is called moral hazard. By providing people with insurance, you're actually reducing the price they see. If I go to the doctor and I need a test, insurance lowers the price of that test. The result is moral hazard. I tend to use more expensive tests and I tend to use more healthcare, when I don't see the real cost of the services I see at a lower cost. Well, insurance companies have developed a lot of approaches to counteract the problem of moral hazard. The first one is obviously premium. They charge you a lot for the insurance. The second is a deductible, that is, you have to pay say the first $250 or $500 of your health bill before the insurance kicks in and covers the other parts. That deductible makes you cautious about using a lot of services. Similarly, every time you go to the doctor, or every time you fill a prescription, there could be a copay, that is a set amount that you pay for going to the doctor say $20 for a doctor visit or $5 to get a prescription filled. That is a copay each time you use a service. Coinsurance is like a copay, but it's a fixed percentage. So say you go into the hospital and you have a 20 percent coinsurance, you're responsible for 20 percent of the hospital bill. Out-of-pocket expenses are all of those combined. They're the premium, with the deductible, with the copay and coinsurance. They're how much you need to spend out-of-pocket in total. Sometimes people call out-of-pocket expenses skin in the game. We have to increase the amount of skin in the game that people have that means we have to increase the amount that they have to pay for health insurance out of their own pocket. With that introduction to health insurance, next we're going to look at how people get health coverage through private insurance and a variety of governmental programs.
