Much has been made of the healthcare crisis of late, but very little of it addresses two of the biggest financial problems with the system: the third party payer problem and the reality that health insurance bears no resemblance to true insurance.

Insurance is a pooling of risk. The odds are that just over one in every 250 people will contract cancer in the next year. Cancer is an incredibly expensive disease to treat. So if 250 people got together and put aside enough savings to cover one case of cancer between them, they have effectively pooled their risk, and, on average, they should have enough to cover the statistical cancer they as a group are likely to incur.

This risk pooling works better in larger numbers. A statistician would be unsurprised if one group of 250 had four cases of cancer while three others had none. But a single group of 10,000 people is much more likely to remain near the nationwide average, and if each of the 10,000 people pays just a little extra, they should be able to cover an extra case or two. Because the risk of cancer is so remote, risk-pooling works.

The current health “insurance” isn’t insuring against risk – a remote possibility that something might happen to an individual; it’s insuring against near-certainty. Most people are likely to get sick or injured enough to need some form of medical treatment each year. Since the Affordable Care Act outlawed catastrophic insurance – or true risk pooling – what we really see on the ground is more akin to pre-paid medical care.

This exacerbates an already problematic third party payer issue. When someone with a catastrophic health care plan gets the flu, he is unlikely to seek medical care. For the young and healthy, the flu tends to run its course without complications. It’s only when a cold or flu lingers that he might go to his general practitioner or the urgent care center. Even then, he asks the doctor to consider the costs of the tests he wants to run.

He’s there for two reasons: to make sure it’s not something more serious, and to get affordable treatment if it’s available. He thinks about the costs of care before deciding to seek treatment, and only does so if the gains outweigh the costs. If that same person gets cancer, he will seek whatever treatment is available and affordable to him. With catastrophic coverage, he will likely be able to afford good care, if not the most cutting edge experimental care available anywhere.

But when we consider someone with pre-paid medical care, we know that not only is she going to have coverage for catastrophic emergencies, she is likely to go to a doctor any time she’s a bit under the weather. She has paid up front for all her medical care, so she rationally wants to get her money’s worth. The only deterrent to her is the time she will spend sitting in the waiting room, and the small co-pay she may incur. Once she gets to the doctor, there is no reason at all she shouldn’t have him look at every little thing that hurts, in addition to her flu.

We can see two related problems trigged by the pre-paid model for health coverage. One is overconsumption/overprovision of health services. If you buy a season pass to the pool, you’re going to go a lot more often. The same is true with doctors. If a patient has an all-the-care-you-need pass (i.e. ACA-compliant coverage), it makes sense to check out every little ache and pain. The second is a disregard for the cost of various treatment options. Imagine two hypothetical flu treatments: one that relieves all symptoms after 48 hours and sells for $10 per treatment, and another that relieves all symptoms in 12 hours, but costs $1,500. Most people who are paying their own costs out of pockets would suffer for the extra day and a half so they could afford their mortgage payment. But someone who has the buffet model is going to press for the opulent treatment. It’s only rational.

What is not rational is continuing the national conversation on the skyrocketing costs of health care without addressing these perverse incentives. Each of us is paying for everyone else to get far more care, and care at a more expensive price, than is really needed. The fact that these costs are baked in to the price of our “insurance” should not distract us from the fact that we are all paying for them.

Mike Davis is Research Fellow at 1889 Institute. He can be reached at [email protected].

The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.