David R. Henderson  

Health Care Summit "Mid-Mortem"

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Health Care Summit Pre-Mortem... Nurture and Orientation Recons...

I've been watching the health care summit on C-SPAN and I followed the live blogging on Cato's site done by Arnold Kling and others.

I could comment on many things but I'll choose three:

1. Obama, at about the 12:48 EST point, confused the idea of insurance pooling. He said that the purpose of insurance pooling is to put low-risk and high-risk people together. It's not. The purpose is to pool like risks. This leads to point #2.

2. The Republicans have not handled THE tough problem. By agreeing that insurance companies should not be able to price based on pre-existing conditions, they have backed themselves into a regulatory corner. Although Obama tends to be dismissive of Joe Biden, and he did it again at about the 12:50 point, Biden nailed it. If we agree, he said, that insurance companies shouldn't be allowed to "discriminate" based on pre-existing conditions, that's not a small agreement, that's a big one.

3. My pet peeve: How come Obama gets to comment on everything?


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COMMENTS (27 to date)
RL writes:

Perhaps the Republicans should go whole hog on the "pre-existing illness insurance discrimination" issue:

They should urge the President to also end car insurance discrimination against young and inexperienced drivers.

They should urge the President to also end home insurance discrimination of renters vs owners.

They should urge the President to also end life insurance discrimination of the old vs the young.

Like having a pre-existing illness, being young, being poor, and being old are not things we "choose." Republicans should condemn the President's inconsistency and urge him to call for sweeping insurance anti-discrimination overhauls.

Then they could ask him to address the problem of the increase in starving Irish children...

Jason writes:

RL, your attempt to draw equivalencies between health insurance, car insurance, and various forms of health insurance don't make much sense to me. Driving cars or purchasing real estate aren't, in and of themselves, life-and-death matters. Getting cancer is. What you're advocating is really a kind of Darwinism that's not even based on any sort of individual achievement. It's just a matter of dumb luck: "Oh, sorry, you have cancer, so we're not not going to extend insurance to you. Tough break, kid."

Don't you think such a position is heinously cruel?

spencer writes:

You are completely wrong on pooling.

If you but like risks together how does it spread the risk?

spencer writes:

Do you also advocate that all 18 year old drivers should be insured by one company that will not insure any other drivers?

Wouldn't that spread the risk according to your argument?

Maximum Liberty writes:

> My pet peeve: How come Obama gets to comment on everything?

Because he's the immoderator.

Max

MikeDC writes:

Jason,
Driving a car is certainly a life and death matter, and the liabilities it exposes one to are financial life and death matters.

There's not a lot of difference, I think, between an uninsured motorist causing someone a million dollars harm or getting a cancer that'll cost a million dollars to cure.

If we were actually only talking about insurance against low-probability but high cost risks (insurance as opposed to insulation, as Arnold Kling calls what passes for most health insurance now), the difference would be smaller still.

Bill writes:

Do you also advocate that all 18 year old drivers should be insured by one company that will not insure any other drivers?

No...

Each company can pool 18 y/os and then charge them a higher rate than they do 40 y/os, thereby distributing the risk amongst 18 y/o. That is pooling.

Jason writes:

MikeDC, in and of itself, driving a car is not a life-and-death matter. The point that the previous commenter made was that if the government was going to force health insurance companies to accept applicants with pre-existing conditions, then what's to stop it from forcing car insurance companies to no long discriminate based on age, gender, driving record, etc. I don't think that's a valid argument because you're dealing with two very different entities.

Of course, the whole idea of "health insurance" is nauseating to me, as it is to many others. I would very much prefer a health care system like the one my sister and brother-in-law enjoys in Britain. Health insurance in America is just a way for huge corporations to reap profits from the physical misery of others. That's the real sickness.

David R. Henderson writes:

@spencer.
Spencer raises two issues. I'll respond seriatim.
First issue. He writes:
If you [p]ut like risks together how does it spread the risk?
Answer: [I assume that by "spread" he means "pool."] By taking advantage of the law of large numbers. See the article Insurance in my Encyclopedia.
http://www.econlib.org/library/Enc/Insurance.html
Second issue. He writes:
Do you also advocate that all 18 year old drivers should be insured by one company that will not insure any other drivers?
Wouldn't that spread the risk according to your argument?
My answer: No, I don't advocate that. I think insurers should be free to insure the groups they want to and that they will figure it out.
But certainly if an insurer did decide to insure just 18 year olds, he would pool (not spread) risk.

mulp writes:

"The purpose is to pool like risks."

So, in your view, the house burning down should be removed from the insured pool of houses not burning down, so the rate for the house burning down can be raised?

Unless you can buy insurance before birth that you hold for life no matter what, you run the risk of a preexisting condition. US law makes terminating coverage for those who become ill a bigger incentive as more and more people are excluded because they already have a preexisting condition, or their odds of having one soon is higher than the mean.

The/a Republican proposal was for increased government subsidies for high risk pools so that everyone would be able to delay buying insurance until needed and then buy the high risk pool, or if poor without assets, getting Medicaid. Sounds a lot like single payer....

I wish Obama had taken up the Republican call to start from scratch and propose the solution he said he would advocate if starting from scratch. And given the Tea Party activists shouting "keep your government hands off my Medicare", it is a start from scratch solution that Tea Party protesters seem to like: Medicare for all.

RL writes:

Jason asks me "Don't you think such a position is heinously cruel," where, by "such a position" he referred to my suggestion that people with pre-existing conditions not be allowed to subsidize their health care on the backs of the young and healthy.

As a physician myself, and one with many pre-existing medical conditions, my answer is "No." I think what is heinously cruel is the assumption that people are playthings for you to perform "kindness" on using other people's money. What I think is heinously cruel, and also uninformed by the economics of adverse selection and moral hazard, is the blithe assumption that the best way to help sick people--something I do every day--is to let their fate be decided by power brokers in Washington.

RL writes:

BTW, Jason, I notice you felt my analogies to car and home insurance failed because they were not matters of life and death. Do you feel the same way about my third analogy, with life insurance? I can assure you, Jason, that old age is a terminal illness, a true matter of life and death. If you think it unfair to charge more for health insurance to those already sick, do you also think it unfair to charge more for life insurance just because someone is already old?

Aaron writes:

We need to separate the "receiving health care" and "paying for health care" if we're going to debate seriously. Receiving health care is a matter of life and death. Every person in America can receive health care. Health insurance is not a matter of life and death, it is financial protection. If someone gets cancer and racks up $100,000 in debt having it cured, they are not going to die from the debt.

spencer writes:

No, No, No.

You are advocating putting similar risk together.

That directly contradicts the law of large numbers.

One reason that having individuals get their insurance through their employers evolve is that it is a cheap, efficient way to put together a pool of diverse risk.

spencer writes:

NO, NO,No.

Putting similar risk together directly contradicts the law of large numbers.
The law of large numbers is based on the premise of random errors offsetting each other. This is what you get with diverse pool. But in a pool of similar risk the random errors would tend to reinforce each other.

As an insurance company I know a certain small share of those I insure will file a claim. So I can charge each policy holder a small sum and that spreads the policy holders risk of financial ruin and I can do it profitably.

But if I but similar risk together the number of policy holders making a claim will be very large.
Consequently, I will have to charge each policy holder a very large fee to insure them. That is exactly the opposite of pooling in insurance.

You have the concept of insurance pool exacly backwards.

I picked the example of an 18 year young male driver because it is a clearly understood example of the problem. As far as I know there is not a single private, for profit, insurance company that voluntarily insures young male drivers. In every state of the country the state insurance regulators and the insurance company have to make special arrangements to insure young made drivers because the markets have failed in every state.

If you want to understand insurance pooling I suggest you talk to an insurance company executive and not rely on the econolog Encyclopedia propaganda.

Jason writes:

RL, thanks for your response. So what would you propose we do for people with pre-existing conditions who are denied health insurance? If we're not going to use our government to force health insurance corporations to accept them, what's the alternative? Just let sick people die?

Jason writes:

Aaron, I think you make an excellent point regarding the need to separate "receiving health care" from "paying for health care" as life-and-death matters

RL, to be honest, I'm not sure how I feel about life insurance. To me, that's also a separate issue from health, car and real estate insurances. I would have to give it more thought.

Jason writes:

RL, I understand your grievances about forcing otherwise healthy people to pay for the health care of the sick. Personally, I don't have a problem with it. I think it's the noble, honorable thing to do, and it's one area in which I'm happy to pay my taxes. But that's a philosophical debate for another day. The question I have for you is this: If we're not going to use our government to force insurance corporations to accept people with pre-existing conditions, are you morally fine with just allowing such people to simply suffer and perhaps die, or maybe go bankrupt in the process of meeting their health needs? If you're not morally okay with that, what would you propose as an alternative solution to helping people with pre-existing conditions who can't get insurance?

David R. Henderson writes:

Normally, my rule on comments is that unless a commenter makes a good point, I will not respond to commenters who get nasty. Spencer got nasty. But I'm making an exception because his misconception is commonly held.
Spencer writes, "But in a pool of similar risk the random errors would tend to reinforce each other."
I don't know what he means by "errors." But what's true is that an insurance company wants to charge the same premium to people who have the same risk of a given loss. So, for example, 90-year-old men will not pay the same life insurance rate as 20-year-old men. The insurance company, if it has low-cost ways of getting information, will segment more finely beyond age. So it might have a few different risk pools even for 20-year-old men.

Aaron writes:

Spencer,

To offer another perspective - I think you've got the law of large numbers wrong. The law of large numbers only depends on all individual cases having the same distribution (i.i.d.). As you increase the sample size, the sample mean trends to the expected value for a single individual. The nature of the risks involved does not change this.

Why would insurance companies want to pool like risks together? I don't build pricing models, but I think the central limit theorem might help explain this. Increasing sample size causes the distribution of the sample mean to approach Normal, with variance equal to s^2/n. Decreasing variance translates into lower risk for the insurance company, so you either want to lower the variance for an individual claim (s^2), or increase the sample size (n). Smaller pools decreases n, but they also decrease s^2 because the claims experience for individuals is similar. If the decrease in s^2 outweighs the decrease in n, you want to pool. Apparently it does, because insurance companies pool risks.

There is a problem similar to what you describe, but it doesn't apply to car insurance. The risk is having a single event that causes a large number of claims, i.e. a Florida hurricane, or a California forest fire. Because of this, property and casualty insurers diversify geographically, but they still pool their risks (house insurance is expensive in Florida if you take state government out of the equation). As far as I can tell, there is no single event that would cause a large number of claims among 18 year old drivers. If I were to guess, I think insurance companies don't want to insure younger drivers because many states set a price ceiling, or have a fixed limit on how much more you can charge high risk drivers than the average customer.

Oh, and if I wanted to know about pooling risk, I would ask an actuary (though they sometimes become insurance company executives).

Todd writes:

Aaron,

Speaking as an actuary, it doesn't sound like you need to consult one on the topic of pooling risk. Excellent explanation.

RL writes:

Jason asks me: "So what would you propose we do for people with pre-existing conditions who are denied health insurance? If we're not going to use our government to force health insurance corporations to accept them, what's the alternative? Just let sick people die?"

Oh, of course not. Sick people should never die. An entire nation should impoverish itself and rack up unsustainable debt to prevent this. Death is never an option.

Are we done with hyperbolic questions now? Then let's talk about reasonable alternatives.

I have a chronic illness. I've been fortunate that in the last two decades it hasn't led to any hospitalization or major therapy beyond daily medication. Other people with the same illness may be less fortunate: they may have required numerous surgeries and hospitalizations, both for the disease itself and for complications arising therefrom. Pooling risk would make all of us with this disease pay more than a young healthy man with no prior illnesses, but it wouldn't bankrupt us, because there are more of us who don't require frequent hospitalization. The costs would be lower yet if I, a single man not in a relationship, didn't have to pay for the pregnancy and mammography mandates in my state.

There are many ways to lower healthcare costs. You seem to confuse lowering healthcare costs with shifting healthcare costs. This strikes me as silly as seeing justice in trying to shift restaurant costs from obese gourmands to asthenic vegetarians on the grounds food is vital to life and its unfair for some to pay more than others. Why is it wrong for sick people to pay more for healthcare but reasonable for fat people to pay more for food? Fat people consume more food, and sick people consume more health care. The fact that sometimes life is unfair does not give you a coercive mandate to force others to correct what you see as a problem. I grant if I didn't have this chronic illness, I'd have more assets to spend on other things, just as I grant if I were taller, I'd have better luck at both dating and running for President. This last fact does not allow me to implement the Procrustean solution on all of society.

spencer writes:

So I'm not nice.

Good excuse for deserting the field after you realized there was no way you could show that
your concept was wrong.

Everyone makes mistakes and no one will think the worse of you for admitting it.

Floccina writes:

Spencer I wonder if you go for my compromise plan. It allows government provide the type of insurance that insurance that you seem to advocate. (That is before birth insurance against being a low earner with high medical cost.)

http://un-thought.blogspot.com/2009/09/healthcare-compromise.html

The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty line income (say $25,000 for a family of 4) + $300. So a family of 4 with a trailing year adjusted income of $30,000 would have a deductible of $5,300. A family of 4 with a trailing year adjusted income of $80,000 would have a deductible of $55,300. Middle class and rich people could fill the gap with private supplemental insurance but this should be full taxed.

On what RL wrote:

If someone gets cancer and racks up $100,000 in debt having it cured, they are not going to die from the debt.

It is important to note that most Americans can amortize $100,000 and so IMO we are grossly over insured.

Aaron writes:

Todd,

Thanks. I'm actually making my way through the exams right now, so I hope to have that title soon.

RL writes:

Floccina: I didn't write what you attribute to me. Aaron did.

Chris Koresko writes:

@David: "Obama, at about the 12:48 EST point, confused the idea of insurance pooling. He said that the purpose of insurance pooling is to put low-risk and high-risk people together. It's not. The purpose is to pool like risks."

My impression is that for President Obama the purpose of pooling *is* to put high-risk and low-risk people together, so that the low-risk people subsidize the high-risk people.

I agree with you on your Point 2, though -- it seems to me that forcing insurance companies to insure against problems that have already occurred fundamentally breaks the system. That's a big deal, and I cringe when I hear the Republicans advocate it.

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