Is health insurance really insurance?

The last few “Ask An Economist” questions sent my way have dealt with questions regarding money and banking, so I was happy to get a different sort of question from Heath this week. He asks,

“Should ‘health insurance’ actually be called insurance anymore? My understanding is that insurance is where you pay a small premium to the insurance company so they take on the risk of something catastrophic unexpectedly happening. Currently “health insurance” covers lots of things that are known and predictable (physicals, screenings, etc)” … “I hear from a lot of people is if preventative care isn’t covered under insurance then people won’t pay for it which would then lead to higher expenses down the road. I am not sure if I agree with that counter argument since people get ‘preventative care’ all the time for their vehicles since they do not want to have to pay for more expensive repairs in the future.”

Heath brings up an interesting question about the nature of insurance. Before I directly address his question, I think it’s best we analyze what a “pure” version of insurance looks like.

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