Purpose of Government Insurance Policies

Insurance is a type of risk management, but only some risk management is profitable. Government insurance programs exist to provide insurance coverage when private companies either do not want to deal with the risk or will only cover people at a prohibitively high cost.

Insurance

• Sometimes large financially damaging things happen to people for no reason -- a tree falls on a house, or an otherwise healthy person gets cancer -- and that one event can bankrupt a household. To guard against this risk, people pay an amount of money regularly to a large fund and have the right to receive compensation for the catastrophe that they are guarding against in the case that they are unlucky; insurance is that fund.

The Insurance Industry

• In many cases private companies can make money off of this risk management as more people want to guard against the catastrophe than it will actually happen to. Private companies provide life insurance, some health insurance, homeowners' insurance, car insurance and more. However, private companies often screen out high-risk people-people who live in flood zones or have bad health, or the insurance company charges them many times the amount most people pay.

Government Insurance

• Government insurance programs exist to manage risk when private companies will not. People still pay premiums (the price of the plan) and usually co-payments (a set amount that a person pays when she gets a service that the insurance plan covers), but the plan is subsidized by the government, which keeps premiums low and can channel extra funds to distribute when customer payments do not cover all of the necessary payouts.

Examples

• The federal government runs a number of insurance programs such as Medicaid and Medicare, as well as flood insurance, and states run some of their own as well; for example, California runs an insurance pool for earthquake insurance. Medicare illustrates the purpose of government insurance programs particularly well: Medicare is for aging people and individuals with complicated illnesses. Health insurance companies will not cover these populations because they need a lot of ongoing medical attention. Hence, the government subsidizes their healthcare through a government insurance program.