Arnold Kling

Health Insurance Reform

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Various Articles... Economic Arguments...

Recent stories on an increase in the number of Americans without health insurance prompted a couple of essays on health insurance reform.

Ronald Bailey writes,


One way to increase the number of insured Americans is to break the link between a job and a health insurance policy.

I also have an essay that argues against the focus on third-party provision of health insurance.

The fundamental problem is that we believe that health insurance is something that only should be received as a gift -- never obtained for oneself. Thus, we immediately assume that when a family does not have health insurance, they are to be pitied for not having received the gift, rather than being blamed for not having taken responsibility.

UPDATE: See also the Greg Blankenship's post on a column in the Chicago Tribune.

For Discussion. In the essay, I argue for mandatory catastrophic health insurance. In what ways would this alleviate the "pre-existing condition" issue with today's system, and in what ways would "pre-existing conditions" pose a challenge to a system of mandatory catastrophic coverage?


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COMMENTS (49 to date)
Lawrance George Lux writes:

All miss the failure of health insurance in this country. The lack is in primary care for a huge group of Citizens. Americans believe they should receive equal care and medical treatment, whether they are Poor, Working Poor, or Millionaire Trust-fund babies. The problem lies in Society and the Economy's inability to finance four or five trips to the hospital at $100,000 a trip; for Someone who spent forty-five years making $500,000, of which he spent $450,000 of the Income on living expenses.

The Government needs to mandate every Medical Insurer must provide a standard Policy of $1000 premium per year, in order to be licensed. Said Policies would cover whatever they could, with benefits gone upon use for the year. An estimated 34% of Families would not use the total of their yearly benefits, and an estimated 61% of Individuals would not use up their yearly benefits. Reexamination of statistics suggest approximately 72% of Families and 80+% of Individuals could afford their health care with such a Policy.

Effects of such a Plan: Government could probably reduce their health care cost by a minimum of $50 Bilion per year. Medical Insurers would apply pressure on medical Providers to reduce their primary charges, leading to a probable 10% reduction in current medical costs. Some Twenty percent of Insurers and Medical Provider Accounting costs could be eliminated by the standardization of Medical charges. The basic necessities of Families and Individual for Medical Insurance could be realized. Excessive Medical Costs could be previewed by Government underwriting, and limited in extension; through both health value and social value. lgl

dsquared writes:

Arnold, wouldn't it be monstrously inefficient to base a healthcare system on catastrophe insurance? Imagine what a catastrophe-based *dental* care system would be like!

Eric Krieg writes:

I don't see how there is any problem with pre-existing conditions, except initially when you set up the new system. Perhaps those with pre-existing conditions would have to be put in a pool and assigned to insurance companies by a lottery.

As for inefficiencies, D^2 will have to elaborate because I don't see the problem.

In past posts, Boonton brought up the problem of enforcement. With mandatory auto insurance, the state spends a lot of time and money making sure that people have insurance. We might have a problem enforcing mandatory health insurance. The mechanism that makes sure that you have insurance could be a little heavy handed.

How would libertarians like Arnold deal with this problem?

dsquared writes:

Ask any dentist whether it makes more sense to regularly visit for a check-up, or to wait until you have some sort of "crisis" (toothache). That's the intuition I'm working on here; it's notorious in medicine that preventive medicine is massively more cost-efficient, and I don't see how it fits into a "crisis insurance" model.

Eric Krieg writes:

D^2, I got it. Thanks for the explanation.

Isn't the "prevention model", which after all was the basis of the entire HMO experiment, now discredited? Haven't HMOs found that prevention DOES NOT lower overall healthcare costs?

Again, let's look at the automobile model of insurance. Do people skip changing the oil on their car simply because insurance does not pay for it?

No. If anything, people change their oil WAY too often. Most people change it every 3000 miles, which was the proper schedule for a 1963 Volkswagon Beetle, but NOT for a 2004 Honda or Toyota (or even those EVIL resource wasting SUVs).

Boonton writes:

"In past posts, Boonton brought up the problem of enforcement. With mandatory auto insurance, the state spends a lot of time and money making sure that people have insurance. We might have a problem enforcing mandatory health insurance. The mechanism that makes sure that you have insurance could be a little heavy handed."

One way would be to require a 'default' insurance unless you could show that you aquired the 'proper' insurance. The 'default' could be based on some broad based tax like a payroll tax. If done in the right way it would make economic sense for the person to aquire 'proper' insurance....

My position on the subject, though, is that society has a mixed view. We accept that some things should be available to all. We don't like the idea that a person who is working 40 hrs a week should be financially ruined because of a chance illness that isn't covered either because their insurance company is stingy or because the job didn't offer insurance. On the other hand most people also accept that some medical expenses should come out of their own pocket (think cosmetic surgery).

My solution is this:

1. Create a universal coverage voucher paid for by some broad based tax.

2. This voucher can be cashed against an employer provided policy, donated to charity, used to purchase care directly or....

3. To purchase coverage from an insurance company. In order for the insurance company to redeem the voucher, though, they must limit excessive premiums based on age, genetic profiles and pre-existing conditions.

4. Anyone who doesn't use their voucher will be put into a pool for some type of default universal policy that insurance companies can bid on.

What I like about my plan is that the market can function to find the right mix between covering just catastrophic illnesses & encouraging preventative care (the HMO model). You get universal coverage but if you want something better you are perfectly free to chip in your own money.

Arnold Kling writes:

Just because only catastrophic care is *insured* does not mean that only catastrophic care is *obtained.* It is rational for people to pay for preventive care. Catastrophic coverage reduces the incentive to obtain preventive care, but not by much.

Remember where we are today: millions of uninsured, who certainly have no incentive to obtain preventive care. They would not be worse off with catastrophic coverage, would they?

Eric Krieg writes:

Prevention is over-rated.

The dentist is not a good example, because we all need to have the tartar scraped off our teeth every six months.

I don't know of any analogous maintenance that you get at the doctor. The annual physical is a waste of time for the vast majority of people. A health care system that pays for a universal annual physical is wasting an extraordinary amount of money.

I really do think that a system of mandatory catastrophic insurance, with spending paid for with after-tax money out of the individuals pockets, would do wonders for out health care system AND our economy.

Health care inflation would still be high because of the high cost of new technology. But it wouldn't be the maddenind 15%+ that we have today.

Boonton writes:

"I don't know of any analogous maintenance that you get at the doctor. The annual physical is a waste of time for the vast majority of people. A health care system that pays for a universal annual physical is wasting an extraordinary amount of money."

Actually it is neither a waste of time nor an extraordinary amount of money. When you consider the number of serious problems that can be caught before they turn into operations or other forms of expensive care coupled with the fact that an annual visit can nudge people towards making a few small investments that pay off big in health (i.e. losing 10 pounds, 20 minutes of exercise 3 times a week etc.).

Eric Krieg writes:

>>Actually it is neither a waste of time nor an extraordinary amount of money. When you consider the number of serious problems that can be caught before they turn into operations or other forms of expensive care coupled with the fact that an annual visit can nudge people towards making a few small investments that pay off big in health (i.e. losing 10 pounds, 20 minutes of exercise 3 times a week etc.).

No, actually it IS an extraordinary waste of time and money.

Look, the whole HMO phenomenon started based on your thinking above. HMOs were going to go out of their way to provide preventive care, which was going to be cheaper in the long run.

Unfortunately for the HMOs (and us customers too), preventive care does not result in lower long term costs. In fact, it is cheaper to treat the heart attack at age 50 (or whatever) of a limited number of individuals than pay for a lifetime of annual physicals for everyone.

So then the HMOs had to fall back on their other main feature, the restriction of care. You know, the need to go to an "in-plan" doctor, get a referal, etc. etc. All the things that make people hate HMOs so much.

Don't get offended, I'm not saying that annual physicals are a waste of time for everyone. Maybe it is a good idea for the elderly, or children, or whatever. But for the majority of people, it does not make sense. And a system that wastes money on a universal annual physical has some SERIOUS opportunity cost issues.

David Thomson writes:

“...wouldn't it be monstrously inefficient to base a healthcare system on catastrophe insurance? “

On the contrary. this is the only way to do it. Health insurance must be perceived as expensive---or it will be promiscuously used. Human nature is innately selfish. Alas, how many times must I point out that the at least metaphorical reality of Original Sin is alive and well on planet Earth?

The Wall Street Journal recent cited the health insurance policies of Wal-Mart. This company’s attitude almost exactly reflects my own. Wal-Mart makes darn sure its employees pay a lot of the upfront costs. However, Wal-Mart also takes very good care of those employees truly suffering from major illnesses.

Boonton writes:

If HMO's are a failure then the people who purchase health insurance have had a hard time figuring that out. I guess they just are as not as smart with their money as you are.

The 'restriction of care' is not a feature of HMO's because preventative care failed, it is there to force doctors to exercise some basic cost-benefit analysis in their recommendations. I agree this can be done in an abusive manner and end up in tragedy but it is also necessary. There has been numerous studies showing that doctors often have prescribed expensive therapies when cheaper ones would have done the job just as well. It's niave to pretend that the HMO is evil but the doctor is always the good guy prescribing just the right care.

Neither catastrophic nor HMO style plans should get a preference in the market by the gov't. If you want to say everyone get's a 'universal' package of health insurance of $3000/yr then let the market choose what plans are offered.

Eric Krieg writes:

>>If HMO's are a failure then the people who purchase health insurance have had a hard time figuring that out. I guess they just are as not as smart with their money as you are.

It's all in your perspective. HMOs have done a decent job in reigning in health care inflation, at least until recently. So from employers' perspectives, they are a good thing. In fact, there are many employers who wouldn't even offer health insurance if HMOs didn't exist.

And for those of us who are healthy and don't go to the doctor, they're fine.

But if you are sick, and go to the doctor a lot, they're a hassle. In my humble opinion, of course. And I'm sure that some are better than others in that regard.

Eric Krieg writes:

>>The 'restriction of care' is not a feature of HMO's because preventative care failed, it is there to force doctors to exercise some basic cost-benefit analysis in their recommendations.

Actually, from what I've read, the restriction of care was an outgrowth of preventive care not giving HMOs the bang for the buck that they expected.

I don't think that there is anything wrong with an HMO using its vast experience to standardize care along best practices lines. They have a large number of customers and can use their vast database of information to come up with best practices. Doctors don't like when HMOs do that, of course, since it diminished their authority.

I just don't like some of the hoops that I have to jump through with my HMO in order to get care. In some ways, I wish that it were me paying the bill, and I could just go to the specialist I want to without getting a referral from my primary care physician.

Eric Krieg writes:

>>Neither catastrophic nor HMO style plans should get a preference in the market by the gov't.

We've had this argument before. Unless health benefits become taxable income, there is a bias towards HMOs by the government.

I just got my renewal notice for my HMO for next year. My company pays 87% of the HMO premium. That's all untaxed money. That's quite a subsidy by the Feds. I think that in my case it is over $1000, maybe in the $1500 range.

Now, tell me why the Feds should be subsidizing my family's health to the tune of $1500 per year? Talk about a middle class entitlement!

Boonton writes:

"...Doctors don't like when HMOs do that, of course, since it diminished their authority."
"I just don't like some of the hoops that I have to jump through with my HMO in order to get care."

Neither do I but everything comes at a cost. Fast Food isn't as good as a more expensive meal but you are compensated for that by it being cheaper and faster. HMO's may give you a hassel but if they are cheaper than that means they are passing on some of their cost containment on to you.


Your assertion that there is a bias towards HMO's still eludes me. The tax benefit applies towards either HMO's or a traditional type of plan. If I had $5000 to put towards health insurance & catastrophic policies gave me a better bang for the buck (assuming I'm willing to pay full price for routine care) then it makes sense for me to buy a catastrophic policy. My tax benefit is exactly the same as if I purchased a $5K HMO plan.

Eric Krieg writes:

>>Your assertion that there is a bias towards HMO's still eludes me.

It is very possible under our current system for me to not spend one dime of taxable income on health care. My HMO premium is paid for with pre-tax dollars. And I have a health care flexible spending account where I save pre-tax dollars to spend on out of pocket expenses like deductibles and co-pays.

Call it what you want, tax avoidance, whatever. It is a subsidy from the government to me. I'm in the 15% bracket, I get a 15% discount on my health care because of the way the system is set up.

Catastrohic insurance (without a FSA, of course) would not have the same level of subsidy. The consumer would be paying for preventive care out of his own pocket with after tax dollars.

And I would set it up to that the catastrophic insurance is bought by the individual with after tax dollars as well, just as with car insurance. It makes no sense to me that the health care sector, something like 15% of our economy, is partially untaxed. Health care should be taxed like any other service. If there is to be subsidies, it should be for the truly poor, not the middle class.

Boonton writes:

Catastrophic insurance does have the same level of subsidy. If your premium is $5K per year you can deduct that whether it is an HMO or catastrophic policy.

You may or may not be able to deduct the portion of health expenses you pay out of pocket. Guess what, the same case arises with an HMO! Your $10 or $20 co-pay may or may not be deductable depending on how you do your taxes. The same problem arises with an HMO if you get a service the HMO doesn't cover & therefore pay all or most of it OOP. With a catastrophic policy, one you hit your deductable you are more or less free to spend as much as you want as long as you are not blatently engaging in fraud.

If society is of the opinion that there should be universal coverage, then there is going to be an element of subsidy. Whether its done thru the tax system, a straight check or a combination of the two does not change that fact.

Eric Krieg writes:

B, if an insurance policy is bought by an individual, it is not tax deductible. If it is bought by a company, it is.

We need to move towards a system where individuals buy health insurance like they buy car insurance. No using pre-tax money. No having insurance pay for preventive care, with the insurance bought by a third party with pre-tax dollars.

I'm not going to say that such a system would solve every health care problem we have, because most of the health care inflation is being caused by new technology, which is a GOOD thing. But it will be a much fairer, more streamlines system.

Eric Krieg writes:

>>If society is of the opinion that there should be universal coverage, then there is going to be an element of subsidy.

Not under my system. Mandate that people have a certain amount of health insurance, and repeal the tax deduction for health insurance provided by employers. Get rid of FSAs. Then everyone would be forced to buy insurance themselves with after-tax money.

There might be a subsidy there, but it wouldn't be coming from the Feds.

Boonton writes:

I could be wrong but I believe that health insurance purchased by the individual is deductable as long as the person itemizes their deductions...no different than a person itemizing their OOP health expenses.

Mandating universal coverage would be a subsidy & a tax. First off, if the gov't mandates that you buy insurance you can't claim you've found a taxless solution to the problem. By all accounts the mandate should be considered a form of tax for economic analysis purposes. Second how do you handle those who refuse or cannot afford the mandated policy? Do you have the gov't buy a 'default' policy that covers the poor & rebels when they get sick and cannot pay?

Boonton

Eric Krieg writes:

>>I could be wrong but I believe that health insurance purchased by the individual is deductable as long as the person itemizes their deductions...no different than a person itemizing their OOP health expenses.

Boonton writes:

Why again do we want to repeal tax subsidy for health insurance? Being covered by health insurance should actually reduce healthcare inflation because fewer people will 'freeload' off the system by forcing their health expenses to be written off.

Boonton writes:

"Nope. Not deductible. And those OOPs are only deductible to the extent that they exceed 7.5% of your adjusted gross income."

I thought that was to the extent that all of your combined deductions exceed 7.5% of your adjusted gross income? If they don't then you can take the standard deduction which means the picture becomes much more complicated (as it always does with rl tax policy).

Anyway an accident of history pushed the US towards employer provided healthcare while other nations moved towards gov't provided care. IMO, the 'throw everyone to the insurance companies' approach suffers from the fundamental problem with insurance: It only works as long as you don't really know what is going to happen.

If you know 1 in 1000 homes will burn down, then homeowners insurance is viable. If it is known that Bill Smith's home will burn down then the market is destroyed. The other 999 homeowners will have no reason to buy insurance and no company will write Bill a policy.

Pre-existing conditions, general profiling & genetic and other high tech profiling in the future makes individual health insurance more difficult IMO. In a pure market world, those with healthy profiles have no incentive to pool themselves with less healthy profiles. They can pick up inexpensive insurance in the off chance that they get sick. The unhealthy create a de facto ghetto of uninsurable people who need insurance the most. Mandating health insurance no more solves the problem than mandating home ownership solves the homeless problem.

It seems the logic of any type of universal coverage drives towards gov't regulation of some sort. I think my plan keeps the best of the market while providing for universal coverage.

Eric Krieg writes:

>>Being covered by health insurance should actually reduce healthcare inflation because fewer people will 'freeload' off the system by forcing their health expenses to be written off.

There are about 10 economic falacies built into that one sentence.

Any real economists care to answer?

Let me give you a conservative political argument, rather than an economic one.

Why should the government be subsidizing people who can well afford to pay for health care themselves? I'm in the middle class, I spend my money on a lot of things that SHOULD come after my health (like my new IPAQ PDA with Wi-Fi. Woo Hoo!). Why should I be subsidized? It just distorts the economy, and the political process for that matter (politics is less efficient than the free market, after all).

Not to even mention people with more income than I. I'm not even at the median for the Chicago area. Why should the government be subsidizing those with high incomes. It just doesn't make any sense whatsoever.

Boonton writes:

You can easily create a means tested voucher system with a sliding scale. This would, in effect, tax the rich to provide for the poor. In either case gov't regulation would create the ability of people to pool. This imo is the problem with individually purchased health insurance, the individual is too easily weeded out so that only the healthy can afford insurance.

Preserving the ability to pool is an implicit subsidy from the healthy to the sick (or from those less likely to get sick to those more likely to get sick).

Your proposed solution would require a subsidy for those unable to buy insurance & an implicit subsidy for those whose premiums would otherwise make insurance unaffordable. Just because you are not writing a check to the gov't & the gov't isn't writing a check to you doesn't mean you've discovered a libertarian policy that achieves a liberal goal!

Just like import quotas that have no direct effect on the Federal budget, your policies are as much gov't meddling in the market as mine. If you are going to meddle in the market then it should be to accomplish an extra-market goal. I think my solution does a better job at that.

Eric Krieg writes:

>>Pre-existing conditions, general profiling & genetic and other high tech profiling in the future makes individual health insurance more difficult IMO. In a pure market world, those with healthy profiles have no incentive to pool themselves with less healthy profiles.

Yeah, that's why the government needs to mandate that you have insurance! Then there is no problem. The healthy are forced into SOME level of insurance.

And THAT is where the subsidy arises. The healthy are subsidizing the non-healthy in the insurance pool, to a certain extent.

B, I admit that I am being a total utopian here. Maybe your criticisms are real, and in the end pre-existing conditions and such will make anything but a universal coverage system untenable. But, if so, I still think that univeral coverage should be limited to catastrophic care only. The deductible might have to be based on a moving average of income.

Imagine a Medicare system where the government paid nothing until annual medical bills exceeded x% of 3 year averaged income. Doctors visits, hospitalizations, medication, etc. that did not exceed that x% would be paid for by the individual. How does that sound to you?

Eric Krieg writes:

>>the individual is too easily weeded out so that only the healthy can afford insurance.

Well, the system now is that only those employed by large corporations are insured. So isn't my system better than the status quo?

Boonton writes:

No because your system does nothing to protect the ability to pool. Corporate insurance unintentionally accomplishes that because employers can group individuals together and demand that premiums be roughly equal. When it is just individuals only the sick have an incentive to try pooling while the healthy don't. Your solution is basically no different than solving poverty or homelessness by outlawing it.

Eric Krieg writes:

>>When it is just individuals only the sick have an incentive to try pooling while the healthy don't.

If everyone is required to buy insurance, why is there no incentive to pool? The healthy have no choice but to buy.

After all, good drivers don't shirk their responsibility to buy auto insurance just because they think that they won't get into an accident.

With a high enough deductible, is this even a big concern? How many people have medical bills exceeding, say $3000 per year? Pre-existing conditions may be something Arnold and I have to think a little bit more about, but I don't think that it is a deal breaker.

Eric Krieg writes:

B, the MEDICAL EXENSES have to exceed 7.5% of your AGI, not ALL of your DEDUCTIONS.

http://www.irs.gov/newsroom/article/0,,id=109652,00.html

See the second paragraph.

Boonton writes:

"If everyone is required to buy insurance, why is there no incentive to pool? The healthy have no choice but to buy."

Why would, say, 1000 people get together to buy insurance? One reason is that they could collectively negotiate a better rate than on their own. That's the market power of a large buyer at work. Another power of the pool, though, is that it requires insurance companies to accept the sick. An insurance company would love to have all of its customers be healthy 20 year olds who will pay $250 a month and maybe have $75 in expenses per year.

In order to get those profitable 20yr olds, the insurance company must accept some loss making 50 year olds. This may seem somewhat unfair for the 20 yr olds but the fact is insurance is a transfer system from the lucky to the unlucky. By thinking about mandating insurance you are requiring that the sick be cared for by the healthy. In other words, you are proposing a tax but your libertarian sensibilities are causing you to make believe its something else.

So getting back to your question, the healthy person has every incentive to break the pool and try to insure himself without a pool of sick people who do nothing for him but drive up his costs. Let this happen enough and insurance becomes unworkable. The only way this can't happen is if the pool has such great market power that the savings they achieve is greater than the loss the healthy person incurs by pooling with less healthy people.

joe shropshire writes:

LGL: do you have a Spell Checker that capitalizes every Noun, or do you do that Yourself? Actually, the Effect is rather charming: I feel as though I'm reading the Declaration of Independence or something every time I see one of your Posts.

Eric Krieg writes:

>>So getting back to your question, the healthy person has every incentive to break the pool and try to insure himself without a pool of sick people who do nothing for him but drive up his costs.

B, I don't see how this can happen if insurance is mandatory. The healthy cannot break the pool, they're forced into it.

Now, maybe insurers will try to cherrypick the healthy.

Boonton writes:

A pool is simply a group of people buying a product together. In theory, if you and all your neighbors loved apples you could pool together and buy them wholesale by the truckload each week instead of each going to the store individually. Whether you pool or not has nothing to do with with apple buying being mandatory.

Right now there is an incentive for the healthy to pool with the sick. This is done via employer provided insurance which has the benefit of market power & tax subsidies as you noted. Remove the tax subsidies & the only thing you have left is just raw market power. Would a healthy person get a better rate by joining hundreds of sicker people to try to purchase insurance as a mass or would they be better off approaching the insurance company as an individual buyer?

Eric Krieg writes:

>>Would a healthy person get a better rate by joining hundreds of sicker people to try to purchase insurance as a mass or would they be better off approaching the insurance company as an individual buyer?

I honestly don't know. Arnold?

Boonton writes:

Think of it as trying to sell apples. If you have a really, really nice apple then you would get a nice price selling it on its own. Suppose you have a few nice apples but some bad ones? Put them together in a bag so you can force your customers to take the bad apples off your hands.

Would you buy such a bag? How much would you spend? It depends on how much you need apples & the ratio of good to bad apples.

The benefits manager at a company is like a farmer selling apples. She has some really nice healthy people but she also has some sick people. Since the company wants to give everyone health insurance, she bundles the people together and 'sells' them to an insurance company at the best rate she can get.

Of course, the insurance company would rather have all the apples sold individually so they could reject the bad ones and fill their basket with nice ones.

Now suppose you are an apple and want someone to buy you! If you're a bad apple you'll want to jump in a bag filled with as many nice apples as possible. If you're a nice apple you'll want to be sold individually...perferably on a nice display stand with good lighting. You can look at insurance as taking care of the bad apples by forcing them into one bag with good apples.

Eric Krieg writes:

I have a question for a real, live economist.

Is "pooling", as Boonton has described, economically efficient? Is having the healthy subsidizing the unhealthy economically efficient?

To some extent "health" is a matter of luck. Childhood cancer comes to mind as an example of an ilness gotten by no fault of one's own.

But many, many illnesses are lifestyle induced. If people would just keep their weight under control and do a little excerice, their health would improve dramatically.

It seems to me that these lifestyle induced illnesses are becoming epidemic in this country. And I see pooling as one reason why. People's lifestyle choices (and thus, their health) have no bearing on how much they are paying for health care. Talk about a market failure!

Boonton writes:

There's two ways to look at your bad luck analogy. One way is that some illnesses are caused by things we just don't know. Maybe drinking purple Hi-C causes 1 in 1000 extra cases of cancer. Just your bad luck that you've been drinking that every day until the discovery was made. Another way is illnesses caused by things you have no control over. For example, illnesses caused by heredity or things outside your control (maybe you breathed in a lungful of dust when you were in NYC on 9/11/01).

In either case, insurance can offer an economically efficient incentive to modify behavior where it is reasonable. Quitting smoking almost always reduces your insurance costs. Some dangerous professions have higher insurance rates than safer ones.

Can insurance efficiently monitor something like whether or not a person gets 20 minutes of exercise every week? Well I can think of an HMO that would open its own gym & give an individual discount based on how many visits the person makes in a week. If it reduces illness costs enough then it is economical enough to happen. If it doesn't then it won't happen.

My voucher idea leaves the market place open for these types of experiments. The 'pooling mandate' would be flexible only so no one would be priced out of insurance.

dsquared writes:

>>>>Would a healthy person get a better rate by joining hundreds of sicker people to try to purchase insurance as a mass or would they be better off approaching the insurance company as an individual buyer?

Probably yes, as the insurance company can use sound actuarial principles for measuring and managing the risk of a large pool of people, but can't do so with a single risk.

Note that, as I said on my blog a while ago, that the variance in *severity* of illness is actually quite a small driver of the claims risk of an insurance company compared to the *timing* of the claim (and therefore the number of premia paid before a claim). Even if I had perfect information about the susceptibility of my insured population to every kind of insured disease, I would only have reduced my risk by about 20%. For the rest, I have to rely on pooling.

dsquared writes:

By the way, just to throw into the mix that the French system is based around mutual insurance companies which pool customers by industry rather than by company, and seems to work pretty well.

Eric Krieg writes:

>>Quitting smoking almost always reduces your insurance costs.

Yeah, but that cost is never reflected in the individuals premium. My company does not charge me more for my HMO because I smoke, or are 20 pounds overweight, or because my idea of excercise is to lift nothing weighing more than 12 oz. (if you know what I mean).

Instead, especially for small companies, the health care consequences of my negative lifestyle behavior is reflected in the premiums FOR EVERYONE.

Again, how is that efficient? I don't see it. A useful market mechanism (pricing health insurance based on factors like smoking, body mass index, etc.) is not being used. That, my friend, is a market failure.

Boonton writes:

It may very well be inefficient. If that was the case an insurance company could profit above and beyond its peers by offering rates that vary with 'lifestyle choices'. I already suggested one way, join up with local gyms to report how often customers go. You can then offer a rebate every month if people went at least twice a week.

Nothing is preventing you from taking this idea to an insurance company or starting one yourself. I suspect, though, that the reason we don't see this type of thing so often is that it really is inefficient. The savings caused by getting people to change their behavior is not more than the cost of policing them.

Life insurance companies seem to know this, they typically keep their requirements in the neighborhood of a physical and asking whether or not you smoke.

Eric Krieg writes:

>>I suspect, though, that the reason we don't see this type of thing so often is that it really is inefficient.

Yeah, its the flip side of my contention that preventive medicine doesn't save money. Discriminating on the basis of "bad habits" doesn't save money.

Boonton writes:

It does if it can be done cheaply enough. Life insurance currently does so with smokers. If it wasn't worthwhile to have two sets of tables then a smart life insurance company would get a jump on the competition by eliminating the duel rates & consolidating.

Gathering information and analyzing it is getting cheaper every year so the incentive to differentiate becomes greater and greater. I suspect that a lot of savings will not come in behavior modification but in screening out higher risks....in effect making it difficult to obtain affordable insurance if your genetic profile or pre-existing conditions fit an unprofitable template.

While pooling eliminates this problem, it doesn't alter the overall profile of the population. An older population will be sicker & average rates are destined to increase. This is something that no amount of reform can avoid. Older people consume more medical care than younger people.

Eric Krieg writes:

Why don't life insurers pool?

All I had to do in order to get life insurance is provide a urine sample which, they told me, they did a nicotine test upon.

I passed, BTW.

What would be the differences between life insurance and catastrophic health insurance that would make one use pooling and one not? They seem pretty similar to me.

Boonton writes:

The risk of death is significantly different than the risk of illness. You are still basically insurable for your life because you are still young (or at least young enough). If you were 74 you would find that the life insurance companies would be much less friendly. In those cases pooling may work for you, say if you were working and your employer provided a group plan.

Eric Krieg writes:

>>If you were 74 you would find that the life insurance companies would be much less friendly.

Would they be less friendly? They would charge me more, certainly. But they (probably) would take my business.

I imagine that that would be the case for catastrophic insurance. They would still offer insurance, it would just cost more. As, I think, it should.

Boonton writes:

Of course they would charge you more, but then that's the whole problem isn't it? We want everyone to have some sort of coverage so we must contend with the fact that the dynamics of the market will make it difficult or impossible for some people to obtain coverage.

When you require an outcome different than what the market produces (i.e. no homeless, no unemployed, no uninsured) then you are going to have to change the rules that the market operates by.

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