Catastrophic Health Insurance Can Lower Costs

Health care costs will increase by 32 percent by 2017 in the individual market when Obamacare is fully phased in, according to the nonpartisan Society of Actuaries, a professional organization serving 22,000 actuaries.

Secretary of Health and Human Services Secretary Kathleen Sebelius explained during a White House briefing that cost increases were due to better insurance: "Some of these folks have very high catastrophic plans that don’t pay for anything unless you get hit by a bus. They’re really mortgage protection, not health insurance."

No, Madam Secretary, higher costs are due to worse insurance -- the Affordable Care Act that President Obama pushed through in 2010.

Catastrophic health insurance could lower the cost of care as people pay for routine expenditures out of tax-favored health savings accounts.

But under Obamacare, catastrophic health plans are only allowed to be sold on exchanges to people under 30 years of age. Everyone else has to buy plans with free preventive care, mental health and drug abuse coverage, and contraceptives.

The actuaries project that 42 states and the District of Columbia will see double-digit percentage increases in health care costs, three will see single-digit increases and five will see decreases. At the top end, Ohio and Wisconsin will see spikes of 80 percent.

Why? The newly insured will increase their health care spending to the level of the insured, according to the report. Savings from more preventive care would be offset by more spending in areas such as "corrective orthopedic surgery" and "advanced diagnostic tests."

Some employers will drop coverage and their employees will get more expensive coverage on the exchanges. Plus, the pool of insured will get sicker as some choose to pay the fine and skip expensive insurance.

Catastrophic insurance against large expenses can reduce costs. It’s generally accompanied by tax-favored health savings accounts from which individuals pay for routine care.

The purpose of insurance is to protect people against major unforeseen events -- such as getting hit by a bus -- rather than covering predictable expenses.

Routine expenses such as a checkup or flu treatment are manageable because they are usually a small percentage of income.

But being hit by Sebelius’ bus, getting cancer or suffering a heart attack are catastrophic events that can become financial tragedies, too. It’s rational for people to insure against major costs that could reach hundreds of thousands of dollars -- not against small expenses.

Requiring insurance to pay for minor expenses raises the cost of premiums. With auto and home insurance, everyone knows that the higher the deductible -- i.e., the more the owner pays in case of damage -- the lower the premium.

Why? First, insurance companies are freed from the administrative burden of small expenses. Second, when people pay out of pocket, they shop around, lowering costs.

If people pay for predictable costs, they are more likely to find the best deals. They use less medical care and they watch their dollars carefully -- just as they do at grocery stores.

Your cold might get better on its own in a few days -- you might postpone that doctor’s visit.

Moving from catastrophic health insurance plans to the Affordable Care Act’s prescribed generous health insurance plans will change people’s behavior. As people stop observing costs, they demand more services -- and health care costs rise.

Indiana has saved millions through its Healthy Indiana Plan by moving to catastrophic health insurance with tax-free health savings accounts to cover routine care.

Despite Sebelius’ skepticism, Congress should allow anyone, not just those under 30, to purchase catastrophic health insurance and pay for routine care out of health savings accounts. It beats a 32 percent cost increase.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner