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normally, people have great incentives to avoid risk and harm. consequently, people tend to act safely in order to avoid risks and harm. we lock up our houses and possessions to protect ourselves from theft, we take care with matches and we keep extinguishers handy to avoid fires and though we know it's inevitable, we try like hell not to die.
insurance takes a great deal of these risks (or the financial component of them, anyway) and shifts them from the insured to the insurance carrier. this lowers the risk the insured faces in the sense that they'll be financially compensated for their loss. as a result, the insured might not take as great care as they might otherwise.
you might be more inclined to leave your motor running while you step into a convenience store, knowing that if the car gets stolen you get a replacement with the insurance money. in the most egregious cases, you might even deliberately cause harm, e.g., setting fire to your house because the insurance money is worth more than the house.
this is known as "moral hazard", and is something insurance companies work very hard to avoid in order to protect themselves.
however, health insurance is unique among major types of insurance when it comes to moral hazard because in this case, the insurance company actually has incentives to cause harm. your life insurance carrier wants you to stay alive, and will send you a newsletter giving you tips to stay healthy. your car insurance company wants you to drive safely, and will effectively pay you to take driving safety classes, drive less, or switch to a safer vehicle.
health insurance companies, on the other hand, has some very perverse incentives:
1) they would prefer you to die than to generate more claims.
because HEALTH insurance has nothing to do with LIFE insurance, if you get an expensive and potentially deadly illness, the insurance company saves the most money by killing you off. they have every incentive to deny claims, lose paperwork, erect stupid hurdles for you to jump through and generally try to talk you OUT of life-saving treatment because their best case scenario is that you die quickly.
this is not some theoretical incentive. at today's health care prices, it's virtually impossible for them to make a profit on you once you've got a chronic condition if they actually paid what you needed for the rest of your life.
if HEALTH insurance companies had to make a big payout when you die, especially if you died due to medical neglect and most especially due to denial of treatment, then the insurance company might have the right incentive, that is, to keep you alive even if that would mean an expensive operation. but as it is, they want you dead.
2) they would rather you have a serious illness at your next job than pay for anything preventative at this job.
because health insurance is tied to employment, people switch carriers frequently. heck, even if you stay at the same job, your employer might switch carriers. insurance companies know that just because you're insured with them today doesn't mean that you'll be insured with them next year. so when they're contemplating their policy toward diagnostic and preventative tests that might prevent an expensive future condition, their models take into account the fact that that expensive future condition might well be paid by one of their competitors instead.
in fact, medical condition and the ability to hold down a job, and therefore health insurance, are strongly linked. various state and federal laws notwithstanding, people who develop severe, chronic medical conditions may well lose their job. and once that happens, faced with medical bills and no income, they might well lose their medical coverage simply because they cannot afford to pay 102% of the premium under cobra (your employer won't contribute toward premiums and there's usually a 2% administration fee for cobra -- try paying that as soon as you lose your income) even if you can afford cobra, it only lasts 18 months. after that, you're uninsured and most likely uninsurable.
to recap, health insurance companies have an incentive to push potentially expensive treatments into the future, in the hopes that you'll know longer be their problem at that point.
... and back to point #1, if you die as a result, they win!
3) since deductibles reset each year, they have an incentive to push medical expenses into the next year.
if you've hit your deductible for the year and now the insurance company is really paying for your condition, they have an incentive to keep you sick and avoid treatment or procedures until next year when the deductibles reset. why cure you in november if they can delay your treatment until january when you'll have to pay a brand new deductible.
... and back to point #2, if you lose your job in the interim, they win!
... and back to point #1, if you die in december as a result, they win!
auto insurance companies don't have a list of parking lots where you can and cannot park. they'll charge more if your car is generally garaged in newark, nj, but they don't tell you you can't visit this state or park in that spot. and what little they do (charging you more for a sports car, e.g.), at least their incentives are aligned with yours -- they want to keep you and your car safe. your homeowners insurance company doesn't require a prior authorization form from your electrician in order to bring home a toaster. and again, to the extent that they do restrict what you can do and still be covered, it's in order to keep you and your house safe.
all insurance companies have an incentive to weasel out of payment, find an error on your original application, or catch you in a lie in order to shift the cost back to you. but they don't have an incentive to cause you to face increased risk in the first place. there's no moral hazard on the part of the insurance company.
health insurance as it currently exists is unique in that the insurance company has some specific incentives to cause make you UNhealthy and to INCREASE your medical risk and costs. they do have the usual incentive to shift whatever costs there are back to you, but they have the additional moral hazard of actually having incentives to cause you harm through denial and delay.
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