The goal of insurance is to spread risk. The health “insurance” most Americans have — and many can’t afford — not only pays for disasters, but also pays for everyday medical expenses. This creates negative externalities just like at the restaurant table.
Flood insurance only pays in catastrophes — not every time you mop the floor. If it did, you’d probably waste a lot more water.
“If the tax exemption for employer-provided medical care and Medicare and Medicaid had never been enacted, the insurance market for medical care would probably have developed as other insurance markets have,” said the late economist Milton Friedman in the winter 2001 edition of Public Interest. “The typical form of medical insurance would have been catastrophic insurance.”
“Claims would be rare and large, as in fire insurance. Premiums would be low, as in fire insurance,” said economist Arnold Kling.
But even ignoring the allocation problem, there’s little reason to believe government reforms can reduce costs.