But Now You Know

The search for truth in human action

What If Car Insurance Were Like Health Insurance?


Insurance is supposed to be something you hope to never, ever use.
Not even once.

That’s how, for example, car insurance works. If you’re careful and lucky, you’ll “waste” money on it your whole life, and never need to make a claim. You are just pooling a risk with everyone else, and only a few of you should need to cash it in, per year.

But imagine if we all had car “insurance” that covered routine things we expect to need, like oil changes and gasoline.

Since we, and the insurance company, know we will be paying for these things regularly; our insurance cost will go up by the full amount of what we’d have paid anyway, plus the extra overhead for their bureaucratic costs and profit.

You Pay Extra for “Free” Stuff

If you think gasoline is expensive now, wait until you see what it costs when it's free.

If you think gasoline is expensive now, wait until you see what it costs when it's free.

If your car insurance now costs $800/year, and you spend another $800/year on gas/oil, for a total of $1,600/year, the price of your insurance will probably go up to well over that. For example, with a mere 10% profit margin, plus another 10% in bureaucratic costs, the extra $800 would cost you $160 on top of itself.

So you’d pay $1,760 to have “full coverage”, instead of $1,600 to have normal insurance and buy your own gasoline and oil changes.

But, worse, since we’re not actually paying for each gallon and pint out of pocket, demand for gasoline and oil changes will go up, which will increase the price. It will increase it a lot.

Think of how much people changed behavior because gas prices were high in 2008. It dramatically cut demand. People bought more economical cars, moved closer to work, didn’t drive on distant vacations as often, et cetera. And this helped cut the cost of gas back in half, because the price is set by, in part, a combination of supply and demand.

With gasoline costing “nothing”, people would feel free to buy cars that get worse gas mileage. They would feel better about living farther from work. They could go on road trips as often and far as they pleased.

So the price of gasoline would skyrocket.

But since most people would have “full coverage” insurance, they wouldn’t even notice that.

What we all would notice is the price of car insurance going through the roof.

If car insurance covered normal and minor costs, its price would expand out of control

If car insurance covered normal and minor costs, its price would expand out of control

Let’s say the price of gasoline only doubles, back to its 2008 prices. Now people are using $1,600 in gasoline per year…except they’re also driving more. Let’s say only 25% more…that’s $2,000 in gasoline. Including the profit margin and bureaucratic cost, that means the price of “full coverage” goes from $1,760 per year to $3,200 per year.

But it doesn’t stop there…the insurance company doesn’t really have the same incentive, nor power, to hold down prices that consumers do.

Oh, pundits imagine they do, because they’re big companies and all that…but they lack the power of the actual consumer: They can’t make people stop driving and getting oil changes. So the oil and gas providers are able to start raising prices, as long as they can justify it…and when money’s involved, people can justify a lot. For example, now the gas stations and quick lube joints have to pay a whole second staff just to handle the “insurance” paperwork, in order to get paid for the gasoline and oil changes we buy.

So the price of gas and oil will go up even more than supply and demand would require…which means that $3,200/year for “full coverage” car insurance is only the start. If we add a mere 10% on that for the oil/gas companies’ insurance compliance staff, plus another 10% for padding they can get away with because the insurance company can’t make its customers stop going in response to high prices, then $3,840 per year.

The Uninsured Suffer

Of course, one group will feel the pinch of gasoline and oil change prices going up:

We who are smart enough not to waste our money on “full coverage”, but buy our gasoline and oil out of pocket, saving the twenty percent overhead on the insurance. But now we’re paying insanely high prices for these things, either way.

In fact, soon nobody without “full coverage” car insurance will feel like they can afford to drive, because gasoline and oil changes are so expensive.

Next step: Rationing of gasoline

Next step: Rationing of gasoline

Inevitably, this would all balloon into a:

Car Care Crisis

Media and Liberal politicians would be demanding that government insure all Americans who are not already covered, and that they “control car care costs”, which would be expanding to cripple the economy.

They would, surely, try to nationalize automotive care…they already hate that we drive so much, they say so all the time. Instead of trying specific, reasonable things, of course, they’d demand that we put all eggs in one basket with a single, gigantic, hurried bill passed into law, all or nothing.

This, of course, will end up making things worse, as such brute-force government interventions always do.

All because people were foolish enough to start buying “insurance” for predictable, regular needs, instead of only for catastrophes they hope will never happen anyway.

Health Insurance = Car Insurance

This is what is happening, now, in the health care industry.

We are paying up to $8,000 per year for a family of five, in order to get “full coverage” that pays for our normal checkups, our doctor’s visits for colds, the flu, emergency room visits for skinned knees and sprained ankles…and then we are paying for ALL of that minor, predictable stuff, plus profit and bureaucratic costs, and increased paperwork costs from health care providers, and padding of costs handed off to insurance companies…through skyrocketing health insurance prices.

Before government stepped in, health insurance was only for rare emergencies. It cost a tiny fraction of what it does today, even considering inflation. But then government took over half of health care spending with the socialized Medicare/Medicaid programs, and forced employers to offer “full coverage” health insurance, hiding the cost you pay by deducting it from what they would offer you in the first place.

The crisis this created is exactly what we should expect to happen. The problem is simply that we’re paying middleman, for no reason whatsoever, and getting exactly what we deserve.

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September 10, 2009 - Posted by | Economy, Family, Health, Politics | , , , , , , , , , , , , , ,

16 Comments »

  1. All I got to say is NICE article! That is an interesting question…what if our car was like health insurance. Personally speaking I wish companies gave money back to your for safe driving.

    I have been driving for years and have NEVER gotten into a wreck…but yet sometimes I need to pay more for my insurance.

    Makes sense?

    No.

    Thanks for the article!

    -Jamie

    Comment by The Oil Change Dude | October 20, 2011 | Reply

  2. Nice weblog, do you wish to start a link swap?

    Comment by sensa trial | August 20, 2011 | Reply

  3. I wonder how price controls on health care will affect insurance.

    Comment by Michael Ejercito | February 20, 2011 | Reply

    • Price caps always create a shortage of the resources so regulated.

      Comment by kazvorpal | February 28, 2011 | Reply

  4. oil change needs to be done as often as possible to maintain the good performance of any kind of machinery ,*;

    Comment by Soap Dispenser | November 17, 2010 | Reply

    • In fact, doing an oil change too often is hard on your engine. Even doing it as often as recommended by the automaker is sometimes too often, wearing the engine down faster.

      Comment by kazvorpal | November 18, 2010 | Reply

  5. If health insurance were like car insurance then this problem would be fixed!

    Comment by Michael | September 2, 2010 | Reply

    • That would be an improvement, except that so many states wrongfully make car insurance mandatory.

      This produces conditions where car insurance increases up to eight times in cost, yet the percentage insured actually does not significantly increase.

      Meanwhile, it makes automotive repairs, and used cars, more expensive, harming poor to middle class consumers.

      Comment by kazvorpal | September 6, 2010 | Reply

  6. I’m now in my 25th year of driving. I’ve paid once full insurance and twice third party insurance in the last 25 years. Being a very careful driver with experience covering more than the average person I’ve had no accidents ever that was of my cause.

    If I estimate the cost of insurance at an average of $800/year over 22 years then I would have save myself an estimated $17600.

    But, having said that I think insurance cover for a car is a mandatory even if you’re just considering third party cover. There are so many bad drivers out there who can cause you to make a mistake. I have now purchased insurance.

    Comment by Matt | April 8, 2010 | Reply

    • In fact, because at least liability coverage is mandatory in most states, even car insurance is FAR more expensive than it needs to be.

      Back when it was only mandatory in a portion of the country, there were famous statistical analyses that showed car insurance as costing between two and ten times as much in mandatory states…yet with poorer service, and (most importantly) a similar percentage of people not being covered, anyhow.

      Comment by kazvorpal | April 16, 2010 | Reply

  7. for the theoretical car insurance example, it may make more sense if you said that people started buying total car insurance because tax codes subsidies it rather than out of stupidity.

    since they had high income taxes, and benefits aren’t taxed, employers figured they’d pay employees with toal car insurance.

    Comment by bill | October 9, 2009 | Reply

    • Very good point…this is all a failure of socialism, not capitalism.

      It is the fact that employers are punished (through taxes) if they do not offer health insurance, and employees are punished (through taxes) if they do not take the insurance, that we have gotten into this insane predicament in the first place.

      I could also have extended the analogy to government paying for half of our car maintenance out of the taxpayer’s pocket, as happens with health care.

      Comment by kazvorpal | October 10, 2009 | Reply

      • I am an insurance agent and I agree with you 100%. Thank you so much for your input. It seems so simple yet they make it so difficult and confusing.

        Comment by Michael Overstreet | August 30, 2010 | Reply

  8. […] post: What If Car Insurance Were Like Health Insurance? « But Now You Know Comments […]

    Pingback by What If Car Insurance Were Like Health Insurance? « But Now You Know « Auto Insurance Quotes | September 10, 2009 | Reply

  9. Very nice

    Comment by Timmy K | September 10, 2009 | Reply


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