James d. Gwartney

Affordable Care Act
(?)
, enacted by Congress in 2010, added further complexity by mandating
broader coverage and implementing a system of taxes, penalties, and subsidies. In other
countries, there is complete government control of the healthcare system. The complexities
surrounding healthcare insurance and international comparisons of systems are beyond the
scope of this book, but we want to make a few principles clear.
The payments made for healthcare insurance come in four forms. First, premiums (or
taxes) are paid to obtain the coverage offered by the plan. Second, a deductible may apply.
Third, there is the copay, which is a fee for a particular service such as a doctor office visit or
prescription. Fourth, coinsurance is the percent of the medical bill the customer must pay. For
example, a plan may require the customer to pay 20 percent of the bill for a hospital stay or
medical procedure. In some countries, supplementary private insurance is available to cover
the copay or the coinsurance.
There are circumstances where having insurance protection actually increases risk. This
is known as moral hazard. Consider the following scenarios. Rachel trades in her twelve-year-

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old car and buys the most recent model, which has all the latest technological advances and
safety devices. Since Rachel feels safer in the new car, she might actually drive a little less
carefully knowing that her chance of becoming injured in a collision is less because of the
safety devices. Jacob’s mother insists he wears a helmet, knee and elbow pads, and long pants
when he rides his skateboard. Emboldened with a sense of security and protection, Jacob might
attempt more dangerous jumps and maneuvers on his skateboard, knowing that an injury is less
likely. Ivanka has not skied for several years and is not sure how much she remembers. With
full health insurance to cover her broken bones, she might dare to challenge the Black
Diamond slopes. Without insurance, she might decide to stick with the Blue runs. Under each
of these scenarios, the risk increases because of the change in behavior from feeling safer.
Other types of insurance to consider, but not covered here, include life, disability, and
long-term care. The need for these (or any type of insurance) is highly dependent on the social
protection policies of individual countries. It is impossible in a general interest book to offer
appropriate advice for each individual’s situation. What we can say is that it is a wise policy to
examine your own situation carefully and not merely to assume that “everything will be fine.”
After evaluating your personal choices that determine the level of risk in your life, carefully
analyze the risks you cannot avoid but can reduce through the effective use of insurance. It
makes sense to insure against risks with large potential adverse effects, but when the potential
financial damages are small, it is generally best to either absorb their cost in your monthly
budget or cover them with funds from your emergency savings. The most important objective
of an insurance strategy is to prevent devastating financial losses.
While insurance is generally associated with middle or high-income countries and
families, it is usually the poor who have the most to gain when they can find appropriate
insurance products. Many such products are currently being developed.