The Law of Large Umbrellas: Away from Risk Reduction in Health Insurance

Unlike other forms of insurance, such as auto, life, or commercial general liability, health insurance in the United States covers many risks that do not meet traditional criteria for insurability. A large margin of health care that we view as essential—including preventive care, care for preexisting conditions, and elective care—departs from actuarial principles of confining insurance to risks that are independent, probabilistic, and uncorrelated. Health insurance covers these risks for sound public health reasons, and decades of incremental change and political compromise have culminated in our choice to cover these through health insurance rather than general social spending. But channeling these expenses through health insurance, particularly through publicly subsidized private insurance, has contributed to terrifically high health care costs in the absence of price controls. Drawing on George Priest’s work in the economics of insurance, this essay argues that we have abandoned the “law of large numbers” in favor of a “law of large umbrellas”—a choice to prioritize access to care by covering more people and more risks than would be possible under actuarial principles. But when people are left out in the rain—including the millions of people projected to lose insurance in the coming years—the high prices enabled by insurance are prohibitive. Revisiting Priest’s insights clarifies the economic and normative tradeoffs of this choice.