Health insurance

Health insurance is a big big thing in the US where it is pretty much mandatory. In India, it has just begun picking up. It is important to realize that health insurance as available in India is completely different from what is available in the US.

I don't like the health insurance plans in India. The ones in US, I like even less. But my opposition to the US plans is more ideological while my opposition to plans in India is pragmatic - Indian health insurance plans do not make financial sense.

What is Insurance?

From wikipedia, "Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment". Further, "The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate the insured in the case of a financial (personal) loss." (Emphasis mine).

Please note that the operative phrase is relatively small. In other words, something can be called as insurance if the premium is small as compared to the amount insured.

Typical Health Insurance Premiums

Consider insurance for Rs 5 Lakh. The premiums vary from Rs 3000-7000 (over 0-45 years) and then shoot up to Rs 40,000 by the age of 65-75. The total premium over a lifetime is over Rs 5 Lakh. But that is fine because the limit is really Rs 5 Lakh per year and not overall.

Is it really Insurance?

In no sense are the premiums relatively small as compared to the sum assured. But this makes sense. Health expenses do not vary significantly between people (unless in case of some catastrophic illness which I will cover later) so health insurance plans are really mechanism to spread your medical costs uniformly over your lifetime. This is thus really an annuity in reverse rather than insurance.

Issues

The average person should not care about the nomenclature but rather about whether the plans make financial sense or not. The problem with adding an intermediary is that it brings additional costs. Thus, it is more expensive to buy health insurance than to manage an emergency fund by oneself.

A larger issue is moral hazard - you tend to get medical (and sometimes quasi cosmetic) procedures done just because they are covered by insurance. I have seen multiple instances where people would not have done a procedure if they had to pay for it from their pockets. Since ultimately these costs come from the pockets of the insured, in effect, insurance makes people overspend on things that they would not otherwise have.

The only corresponding benefit of insurance would be that insurance funds are better placed to bargain and so costs may come down. My experience with car insurance however tells me that this effect is overshadowed by others.

When to get Health Insurance

It makes sense to get health insurance when you total net worth is very low and you have no liquid or semi liquid funds. But this is a temporary expense and should be eliminated in 2-3 years. On the other hand, catastrophic health insurance - which are for specified diseases (like cancers and heart issues) and provide 25 lakh and higher cover for a small (3,000 - 5,000 annually) are much more like insurance and should be taken.

For other cases, it is better to invest the premium in a fund and keep your other long term savings in a semi liquid form (like mutual funds or ETFs) to tide over emergencies.