“Harrumph, harrumph,” grumbled the crowd, “This place used to be better when you could beat the waiters.”

The purpose of insurance is to provide protection from low-risk, high-cost events like car accidents and medical emergencies. The first major insurance company was Lloyd’s of London in 1688. It began in a coffee shop popular with sailors and merchants, so it was a good place to get news on sea trade. The sea was a dangerous place at that time (hint: AARGH! SHIVER ME TIMBERS!) and merchants wanted protection from losses. Speculators began offering to pay for potential losses according to the perceived risk in exchange for fees from the merchants. Basically, they were gambling on which ships would sink. If the ship sank, the merchant won, and if it didn’t, the speculator won. This practice later spread to other activities. Then the government got involved – with predictable results. Crop insurance came to the US in 1938 and flood insurance in 1968. Like everything else the government does, its insurance programs are costly and heavily in debt. More on this later.

Insurance companies work only as long as the value of the claims paid is less than the revenue (premiums) they get from their customers. In short, there are only so many things they can pay for and stay in business. If the government required car insurance companies to pay for oil changes, car insurance would become much more expensive and every car insurance companies would go bankrupt. And it would be impossible to find a mechanic on Saturday.

This situation is similar to what has been happening with health insurance. Most people do not spend much on healthcare between the ages of 1 and 60. For an average person in the US, about $9,000 is spent on healthcare in the first year of life, and about $3,000 per year until the age of 60. Costs rise steeply after that. For a typical American, about 30% of all the money spent on healthcare in their life is spent in their last year of life and about 80% in their last 15 years of life. For this reason, in countries with government-run healthcare, old and seriously ill people often face very long wait times for medical treatment. The bureaucrats hope that they will die before the government must pay for their treatment. This isn’t a conspiracy theory. Britain’s National Healthcare Service freely admits to rationing care such as cancer drugs and hip replacements to fix the hole in its budget.

Dr Mark Porter, leader of the British Medical Association, said: “The NHS is being forced to choose between which patients to treat, with some facing delays in treatment and others being denied some treatments entirely. This survey lays bare the extreme pressure across the system and the distress caused to patients as a result.”

Those of us in the US hear constantly about how greedy heartless health insurance companies are because they won’t pay for this or that (often a highly questionable this or that, Sandra Fluke). But it’s important to realize that NO insurance system, whether private or public, can pay for everything. The whole point of insurance is that many people pay in some often and a few take out a lot rarely. This isn’t politics. It’s arithmetic. And for those who claim that Britain or Canada’s system is better because it is cheaper, the reason it is cheaper is not because it is more efficient. It’s because they decide in advance how much to spend each year. It’s easy to keep costs down when you decide you will only spend so much and keep people waiting for as long as possible.

Again, insurance can only work when it is used for low-risk, high-cost events. For health insurance, this means that the only things that ought to be covered are things like surgeries and expensive medicines. Some people might choose to buy extra health insurance, just as some people with pricey cars buy extra car insurance. But if you drive a regular car, there is no point to fancy car insurance, and if you are healthy, you do not need fancy health insurance. In short, if you want to fix America’s healthcare system, the best thing to do would be to let consumers buy whatever level of coverage they want. For most people, this would mean a cheap plan with a high deductible–the so-called substandard and junk policies.

President Obama has repeatedly referred to the 4.7 million discontinued policies as “substandard.”[3] When the President announced his administrative “fix” that attempted to allow those with canceled plans to keep their existing plans for another year, Senator Tom Harkin (D–IA) said he was still “concerned about people having policies which don’t do anything. They’re just junk policies.”[4]

The only kind of junk insurance is the kind you can’t afford and are forced to buy.

Now let’s go back to the US government’s insurance programs. The US govt flood insurance program is currently $25 billion in debt. If it was a private company, it would have gone bankrupt decades ago. The Federal Crop Insurance program has done better since it was partially privatized in 1980. The government is still paying about 60% of its $12 billion cost.

The lesson: whatever the good or service, it is always cheaper and better through the market than through the government.