Self-insuring for (financial) health

I've been thinking about my private health insurance, and whether it makes sense from a financial and risk management point of view, compared to self-insurance.

I am in my 20's, married, and hoping to start a family soon. I've had private health insurance my whole life; I was on my parents' policy until I moved out of their place, and on a policy with my wife for the last 5 years.

The reason I take out insurance is to mitigate risks that are too large for me to accept. I have house insurance because without it I could not afford to re-build if my house burnt down. I have car insurance because I couldn't afford the repairs if I smashed into a Mercedes. But I don't see any great risks in not having private health insurance.

I live in Australia where the government funded health system (Medicare) is mostly quite good. Medicare will cover the cost of nearly all urgent health care needs. I don't see any risk of relying on Medicare for urgent needs that might arise.

So what if something goes wrong that Medicare considers non-urgent? I've heard stories of people spending years on waiting lists with problems that seem pretty urgent to me. For example a lady who had a large hernia that prevented her from working had to wait years (according to a tabloid TV current affairs program). That is where I think self-insurance makes sense.

If I save say $60 per week, then I can draw on those savings in case my wife or I need some medical treatment that Medicare considers non-urgent. It's pretty much the same as having insurance, except there is no insurance company taking a cut, and if we don't claim, the money is still in our account.

I love the idea of being able to make an insurance “claim” that is as simple as transferring money from the account where I've been saving it. No filling out and posting forms, or dealing with call centres, or trying to work out whether I'm covered. I had a lot of difficulty a few years ago getting NIB to pay a claim for wisdom tooth extraction, because they said it was pre-existing.

There is a risk with self-insuring that my wife or I will need some treatment that Medicare considers non-urgent before I have saved enough to pay for it, but I think that risk is pretty small. At $50 per week I'll have over $3,120 plus interest saved in the first year, and being young-ish, I think it is unlikely my wife or I will need any treatment that is (1) non-urgent by Medicare's standards, (2) over $3K and (3) occurring in the next 12 months. And if we did I could take a loan. I think that risk's likelihood and impact are small enough to accept.

Unfortunately the government has laid down a few quirks to ensure it is not as simple as that:

1. If you take out private health insurance, the government will pay 30% of the premium. There's no such rebate for people who self-insure – which seems unfair to me.
2. If you don't take out private health insurance by the time you're aged 30, but take it out later in life, then you have to pay a higher premium than someone who's been covered since they were 30. (this is called lifetime loading)

Another quirk in the market is that private health insurance companies negotiate with private hospitals to get cheaper prices for insured patients than non-insured patients get charged.

All these factors seem like good reasons to have insurance.

What I would really like to see is an insurance company bring out a type of policy that combines the best of both worlds – you pay your premium to the insurance company, and they keep it in an account for you, and they accept any claims you make (there would be no list of exclusions), and the total value of claims would be limited to the total amount of premiums you have paid over the life of the policy. This way the policy would still attract the government rebate, and get the discounted prices at private hospitals, and avoid the lifetime loading. The insurance company could make money in two ways – by charging an excess on claims and/or by keeping the balance remaining in the policyholders' accounts when policyholders leave.

So my plan is to have a foot in both camps – I will keep my private health insurance, but at the lowest possible level, and self-insure for anything that isn't covered by it.

I'm interested to hear your thoughts, please leave a comment.