7 Feb 2012

Insurance vs membership

When you buy fire insurance, you pay a monthly fee in case your house burns down. You may "make money" if it does, but few people want that. You pay to offset the bad consequences of a fire.

When you buy a gym membership, you pay a monthly fee for unlimited access to facilities. You "get your money's worth" if you go a lot, so there's an incentive to do so. You pay to get as much exercise as possible.

These differences clarify why people misunderstand "health insurance." It's supposed to be there to take care of you in an accident, but a lot of people try to get their money's worth by using it like a membership. That's why healthcare costs (and insurance costs) are rising [previous post with details].

In the Netherlands, I am required to buy (private) health insurance, but it only covers accidents. Most routine treatments cost money, so I don't get them unless it's worth paying €80 ($100). That's why health care costs less in the Netherlands than in the US.

Bottom Line: Use the right instrument for the right problem (incentives matter).