As health insurance premiums continue to rise, and the cost of prescription medications skyrockets, you may be wondering: Why does health care cost so much? The answer is absurdly simple: It’s because of sick people. What may surprise you is just how much those sick people are costing the rest of us.
The Sick Few
The healthcare system relies on the fact that most of the people who pay premiums don’t actually require much care. In fact, the bottom 50% of people paying for healthcare are together responsible for only 3% of patient costs and resources. Meanwhile, the top 1% of healthcare spenders are using more resources than the bottom 75%.
Furthermore, this has been the case for decades: the premiums paid by the healthy majority are covering costs of the small minority who need expensive care, such as cancer patients and those with chronic or otherwise severe illnesses or injuries.
The Healthcare Gamble
This is the gamble that all healthcare providers take. They’re betting that most of the people who hold policies with them will continue to pay premiums, year after year, without actually getting sick—or at least not seriously or often. That way, the money those people pay can be used to cover the costs of those who do need expensive care and keep their costs low.
If everyone who paid premiums to a certain provider suddenly needed expensive healthcare at the same time, the provider wouldn’t have enough money on hand to pay for it all. They’d be forced either to raise premiums significantly or simply stop providing care altogether.
This is what happened recently in Arizona. Healthcare providers kept their premiums competitively low, in order to attract more customers. But when more of those customers ended up getting sick and needing care than they had anticipated, the low premiums weren’t enough to cover the costs of care, and providers started losing money.
As a result, many providers withdrew their coverage from the area, taking away the competition that was keeping prices low, and leaving most areas with only one—much more expensive—healthcare option.
The Healthy Paying for the Sick
Even when the gamble does pay off, some people object to it. The entire business model revolves around healthy people paying money to cover those who are sick. Some people, including House Speaker Paul Ryan, have been critical of the fact that such a small percentage of the population is receiving the lion’s share of healthcare resources. But in fact, that’s the way all insurance works, from car insurance to homeowner’s insurance, and more.
You pay regular premiums on a policy that the insurance company is gambling you’ll never need. The majority who are paying premiums and not having car accidents or suffering damage to their homes are providing the money for the insurance company to pay out to the few who do go through these disasters.
Health insurance is no different—except that the gamble isn’t always paying off the way providers had hoped. And the result is rising premiums for everyone so that the few who are getting sick can be fully covered.
That’s what’s causing many, including a number of people in Congress, to call for a reform of the current healthcare system. Of course, what that reform will entail remains to be seen. The attempt by House Republicans to repeal the Affordable Care Act failed to get enough votes, and the proposed replacement has proven to be largely unpopular.
Speaker Ryan has expressed that he still plans to get rid of the current plan, but what the next steps are on that path are unclear. In the meantime, we’ll continue with our current system, wherein the healthy majority pay premiums to cover the sick few. It may not be perfect, but for the time being, it’s the best we’ve got.
