Arnold Kling  

Health Insurance Regulatory Crisis

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May Day Mourning... Public Choice Outreach...

Republicans John Shadegg and Jim DeMint write,


In the past 30 years, state governments have instituted more than 1,500 mandated benefits. According to the Council for Affordable Health Insurance, these mandates have increased the cost of individual health insurance by as much as 45 percent in some markets. Some people may not want or need health insurance coverage for drug abuse treatment, hair pieces, or acupuncture -- but if the state they live in mandates it, they can only buy policies with that coverage.

You cannot get the benefit of a market if the state defines the product. Moreover, states often mandate the terms of competition--in some states it is illegal for a health insurance company to "discriminate" on the basis of risk, other than using age or some other broad category.

Of course, if the main argument in Crisis of Abundance is correct, then reducing the cost of the insurance process per se will not make health insurance affordable. I argue that the main issue is the large number of expensive procedures that we undergo, often without regard to cost-effectiveness.


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COMMENTS (4 to date)
Lord writes:

it is illegal for a health insurance company to "discriminate" on the basis of risk, other than using age or some other broad category

The real problem is the opposite. It is discrimination on the basis of risk based on such narrow categories that insurance becomes only a prepayment plan, or even a payment until termination plan, generally by you when you can no longer afford the premiums. The annual premium model undermines much of the utility of insurance since conditions often persist over longer periods.

Arnold Kling writes:

The annual premium model undermines much of the utility of insurance since conditions often persist over longer periods.

You and I have a very similar view of insurance. In my book, I spell out some ideas for multi-year catastrophic health insurance.

nrc writes:

The problem with the main argument in Crisis of Abundance as outlined here is that allowing insurance purchases to exclude certain coverages results in adverse selection resulting in higher premiums in all categories. The whole point of insurance is subsidization; that is, we have a pool of people pay, but only a small subgroup actually uses the service.

I concur with Kling. Our premiums are pre-tax by employers, while service payments are made by a third party. Why would the user ever worry about price?

R.J. Lehmann writes:
The whole point of insurance is subsidization; that is, we have a pool of people pay, but only a small subgroup actually uses the service.

This is confusing ends with means. The "point" of insurance is to transfer risk. Pooling is the mechanism that makes such transfers possible, by having all members of the pool exchange the certainty of a small defined loss (by way of premium payments) for the uncertainty of a potentially large one.

But pooling is not the same thing as "subsidization." An effective pool will made up of relatively homogenous risks. Where there isn't, where you see great disparity among insureds in either the potential severity or potential frequency of a given covered peril, THAT'S where you'll see adverse selection, as those with smaller, less frequent risks will opt out of subsidizing those with larger and more frequent ones.

That's why insurers look to segment risk, both in through their underwriting criteria, and in their rate-making structures.

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