Health Insurance

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People sometimes wonder why rich folks can't just pay for their healthcare out of pocket instead of getting insurance. You might think you could just skip insurance and pay for medical stuff when you need it. But the answer is more complicated than that and has a lot to do with how healthcare providers manage their financial risks.

Let's break it down with an example. Picture a small clinic with two doctors and four staff members. These doctors take care of about 1,000 patients total, each with different health needs and histories.

This clinic takes up about 5,000 square feet including some parking spaces for the business. Just renting this space costs around $10,000 every month (and that's a triple net lease, meaning they pay for everything). Then they spend another $5,000 on equipment and supplies. The salaries, health insurance, and benefits for the staff easily hit $75,000 per month.

So how do you handle these massive fixed costs when you have no clue how many urine tests, ultrasounds, or prescriptions you'll need to provide in any given month? This question has been debated for decades in America. Every tax form filled out gives tons of info about risks and business practices. Complaints get addressed. Eventually, every risk finds a solution. The unpredictable nature of healthcare revenue ultimately led to insurance premiums.

Clinics that work with insurance companies typically want guaranteed monthly payments. That $90,000 in monthly expenses, spread across 1,000 patients, means the insurance company pays about $90 per patient per month to the clinic. The insurance company might then charge employers $100 per insured person.

Society doesn't want people going without treatment - sick people often pay less taxes. That's why the federal government made insurance payments tax-deductible for companies, treating them as a business expense rather than direct wages. This encourages companies to hire people and provide benefits instead of just paying higher salaries or dividends.

Health insurance covers way more than just your regular doctor visits. Prescriptions, hospital stays, emergencies, long-term care, and out-of-state emergencies all need their own coverage categories. These work similarly to how banks match different rates. Some health conditions require more frequent specialist visits.

Insurance companies have their own administrative costs and profit margins. These margins cover their risks. There's always uncertainty about which insured person will use which healthcare provider. Margins also need to cover initial capital - otherwise, investors wouldn't start insurance companies, and property developers wouldn't build hospitals. Reinsurance (basically insurance for insurance companies) also costs money and helps spread risks across states since the Affordable Care Act. This explains why few insurance companies joined state health marketplaces.

That $100 we calculated for an in-network office visit actually ends up being about $700 in the United States, though individual plans vary. The long-term market trends suggest you need to sign up with an insurance company for clinics and providers to accept you as a patient. This guarantees them a steady income to cover rent and wages, which helps them manage risks. Without this system, many would go out of business. This creates a strong incentive to find in-network providers.

Pharmacies are often in-network too. Their fixed costs are lower because they sell other products in their stores. Prescriptions can be distributed across multiple locations, which lowers their risks.

Our example health insurance company might collect about $84 million from 10,000 insured people. Reinsurance and other Affordable Care Act measures help spread these risks. In the future, more democratic debt policies might spread risks even better.

Call.