One common assumption runs through nearly all American antipoverty programs: the poorer you are, the less you need to get by. Across the board, those who benefit from government assistance shouldn’t be living as well as the taxpayers who provide that assistance.
We take for granted that public housing isn’t large or luxurious, and it is scandalous if food stamps purchase lobster. A recent Kansas law lists places where a Temporary Assistance to Needy Families benefit card can’t be used, including cruise ships and theme parks. Many Americans are deeply upset by the thought that their tax dollars might buy someone else luxuries they deny themselves.
For the working poor, an unexpected expense might be catastrophic.
If such an attitude seems like common sense—or at worst harmless—in most settings, there is at least one area where it steers public policy astray: health insurance. At its root, all insurance is based on a backwards logic. You are making a bet that you hope to lose, one that will pay off if your house burns down or your car is totaled. As a result, many things about insurance run exactly opposite to common sense, including this: the poorer you are, the better your health insurance needs to be. In other words, if (like me) you are an American of average or above-average means, you should be paying taxes so that the poor can have a level of health insurance that you may be able to get by without. As crazy as it may sound, health insurance is the unique situation in which the poor should be the ones getting the lobsters and the penthouse views.
Current public policy doesn’t work that way, and the national debate revolves around making it less so. The American Health Care Act, President Trump’s and Speaker Ryan’s recently abandoned attempt to repeal and replace Obamacare, called for gradually moving millions of the working poor off of Medicaid, and sharply cutting the subsidies that help slightly-better-off families buy private insurance.
For the moment, Obamacare has survived, but even it is based on the idea that the poor and near-poor can get by with less. Those who, even with subsidies, can only afford “bronze” plans may face higher deductibles and co-pays than middle-class and wealthy Americans. But, we think, shouldn’t they be happy just to have insurance at all?
To see what’s wrong with that logic, let’s reexamine insurance from first principles.
Even good insurance is usually a bad deal. For over sixty years, my parents had fire insurance on their home, but they never had a fire. That’s how it is for most homeowners. Year after year, they pay money into a fire-insurance fund, and that money never comes back. What a crummy deal!
For most people, term life insurance is a similarly bad investment: you pay the insurance company and don’t die. At the end of the term, the company walks away with your money.
And yet, neither is a stupid thing to do. The reason to buy fire or life insurance isn’t to come out ahead, but to protect your vision of the future. The odds of your house burning down might be small, but a house represents such a large portion of most homeowners’ wealth that, without insurance, it couldn’t be replaced. Worse, every other financial plan you’d ever made, like retiring or sending your kids to college, could go up in smoke as well. The life you had envisioned before the fire would be over. That’s what you’re insuring against.
The richer you are, the more insurance you can do without. This idea seems weird, because we’re not used to thinking of the rich doing without anything. But it makes sense: insurance is usually a bad investment, so doing without insurance is usually a good investment, if you can afford to.
To decide whether you can afford to do without, ask yourself: “If the Bad Thing happens, what happens next?” If the answer is that you replace your losses and get on with life as before, you don’t need insurance. But if your future would have to change in ways you’re not willing to accept, you do.
Which way that answer comes out depends on how tight your finances are. A middle-class person needs fire insurance on a house, but probably not an extended warranty on a camera. But if you were a billionaire, you might not even need fire insurance. If your house burned down, you could just move into one of your other houses until you rebuilt bigger and better.
Middle-class people run into this issue when they decide how big a collision deductible to have on their car insurance. If you can lay your hands on $1,000 without distorting your life too badly, a $1,000 deductible is a good idea: if you have a $10,000 accident, you’ll pay your $1,000 deductible out of the money you’ve saved (or will save) on premiums, and thank God you have insurance for the other $9,000.
But for the working poor, an unexpected $1,000 expense might be catastrophic. You can’t raise the repair money quickly, and then you can’t get to work, and then your life starts to spiral down the drain to more dire poverty.
So minimum-wage workers can’t afford to scrimp on car insurance premiums. They need the higher-priced insurance that better-off people can do without.
Rich and poor bodies work exactly the same. The ability of better-off people to do without insurance often gets masked by the fact that they have more to lose. A rich family might own a mansion or luxury car that is as hard for them to replace as a poor family’s shack or rust bucket, and their fire or car insurance premiums might be correspondingly higher.
But when it comes to health insurance, bodies are bodies. Rich people don’t have luxury organs that are more expensive to repair or replace, and a poor woman with breast cancer needs the same treatments a rich woman does, if she’s to have the same chance to survive. Unless we measure the value of a person’s life by the size of their bank account, poor people have just as much health to lose as rich people.
Poor people need the best insurance. Programs that assist the less-well-off often start with the question: What’s the minimum they need to get by? The answer we usually expect is that they need less than the rest of us: lower-quality food, less space, fewer gadgets, less entertainment, and so on.
The perverse logic of insurance, where you make bets and then hope to lose them, leads to a counterintuitive result. The minimum health insurance a poor person needs is better than what the rest of us can get by on. My $30 co-pay isn’t going to prevent me from consulting my doctor about a worrisome symptom. If I owe $5,000 for a $100,000 treatment that saves my life, I’ll pay it and thank God that I have insurance.
For a minimum-wage worker who needs the same treatments I do, it may not work that way. That co-pay might be just enough to start him hoping his lump goes away on its own. And if it doesn’t, going bankrupt for $5,000 is just the same as going bankrupt for $100,000, so his insurance does him no good at all.
Obamacare may have survived for now, but the national conversation on health care shouldn’t be over. And we shouldn’t be talking about how much less insurance the poor and lower middle class can get by on, but how much more they really need.