Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Tuesday, July 28, 2009

Insurance and Risk

The health insurance refom debatemakes it worth revisiting some basic questions about insurance. Insurance is about pooling risk and hedging risk. The individual hedges risk with insurance, by asking someone else to absorb the risk for a fee. The insurer pools risks of this kind. So, for example, I pay $x/year rather than face the small but nonzero of losing my house to fire and having to pay to fix it. The reason individuals get insurance is not so much to rationally hedge risk as to transfer intolerable risks to those who can bear them. That is worth repeating. The reason I pay fire insurance is that I can't afford to fix my house. If it burns down, I am homeless. So I am not weighing the value of insurance payments vs. the cost of fixing the house, I am weighing the insurance versus destitution. See the profit potential there, do you? Because of a lack of capital, the risk *to me* of the house burning down is far greater than the risk *to the insurance company*. It need merely pay $200K to rebuild it (or whatever). I and my family would be homeless.

Health insurance is a tougher bargain. The threat of dying from a car accident without being able to afford treatment is too much to bear. You would obviously pay big profits to insurance companies to avoid that. To avoid the worst effects - people dying on hospital steps untreated because they can't pay - the federal EMTALA law requires that emergency rooms treat patients even without payment. The EMTALA law was the worst thing we ever did in one sense, and the best in another. It was merciful in that it saved a lot of lives, but it also (1) created the most expensive and least-effective health-care delivery system for the uninsured you could imagine by treating all serious ailments at the worst possible time and in the most expensive way and (2) removed the very misery that would have prompted health care reform at an earlier date. I have heard Republicans say just in the past few weeks that "everyone gets treatment today." What they mean is that people who end up in emergency rooms are not turned away. The fact that nobody will change this doesn't seem to enter into their minds.

The other reason to have insurance is to protect others against harms you may cause them that you cannot afford to fix. This is liability insurance. If, as a result of a banana peel I negligently leave on my front stoop, the mail carrier becomes a paraplegic, I cannot afford to compensate her for her injuries. So I have insurance. Health insurance would take care of many costs, but it would not, for example, replace the lost income to her family. Disability insurance would help to easy my burden in that situation, or should. If I don't have the insurance, I will suffer and lose what little money i have, but the mail carrier won't get enough compensation forthe injury. This is why American lawyers then sue others (the maker of the concrete stoop, the banana manufacturer) with "deep pockets" and, oddly, why juries let them collect. Someone's gotta pay, right?

Obviously we start asking the question: who should be buying which insurance? New Zealand has experimented with a generalized social insurance where all such risks are paid for out of a single national pool through taxation. For all the "moral hazard" arguments that can be thrown at it, is it really such a bad idea? You would need far fewer lawyers. That's a start...


Raised By Republicans said...

So how would a public option health care plan alter these calculations?

If the public plan would be the cheapest, it would attract the poorest (and presumably least healthy) bloc of people with which to pool risk. These are the people whose risk private companies are unwilling to take on except at very high prices.

But after its been in place for some time, being poor and being less healthy would be less highly correlated (one would hope).

If, however, the public option plan would enable the government to compete with huge corporate employers (like Ford or Walmart), then relatively well off and healthy people could be in the pool right from the start.

It's this second possibility that has private insurance companies worried about health care reform. They don't want to compete directly with government because (as has been pointed out in earlier threads on this blog), the government is likely to provide insurance with far less administrative overhead and so may be able out compete them.

Dr. Strangelove said...

I think the "moral hazard" arguments against systems such as the experiment you describe in New Zealand are greatly minimized when the coverage is limited to those events that are largely if not completely beyond our control: fires, earthquakes, floods, car accidents, cancer, etc.

While there are steps we can all take to reduce the dangers of these events--planting fire retardant crops, following strict building codes, trying not to build in mudslide zones, wearing seatbelts, controlling carcinogens in our environment, etc.--these are behaviors we impose anyway outside of the insurance framework.

I see no reason why we cannot all pool the risk together as a society. And I see no reason at all why anyone needs to be able to profit from that.

The Law Talking Guy said...

"And I see no reason at all why anyone needs to be able to profit from that."

Now that makes a lot of sense.

The Law Talking Guy said...

Private insurance companies tell us that a public option will lead to "rationing" and will be much worse than private insurance. Of course, if this were true, the market would save them, since nobody would want that insurance. It's because that's not true - because it would be no worse than private insurance, just cheaper - that they are afraid. But since we all would win, we shoudl be for that!

The Law Talking Guy said...

The fear is that many businesses would terminate health insurance coverage and let their employees instead go on the public plan. This is likely. But to blame that on the government would be absurd.

Dr. Strangelove said...

At college, everyone knew why all the dorm cafeterias sucked: They were pretty much the only providers and we all had to pay for our meal plans in advance. I think that's the basic reason why insurers screw us over too. "Thanks for the premiums, now go away."

USwest said...

The conservatives are using scare tactics. The status quo is always safer for these people with the grand sense of entitlement. They do not want government to be effective for people because then people would like government. It's best to paint government, the very entity that is supposed to watch out for people, as the bad guy. Instead, we get screwed by the for profits,

That whole "rationing of care" argument is bullshit. In France, when I got sick, a doctor showed up at my house. He examined me, left a prescription, and left all within 15 minutes. And I didn't have to get sicker going out in the cold and waiting in some room somewhere. That's how it should be. Hell, the hospitals in this country are sending people home ASAP so that they don't get infections in hospitals. What does that tell you about the state of our hospitals?

Arguments that socialized medicine isn't modern are also bullshit. My French host dad has a serious illness. He was given top flight care and is now in remission. The French system works for people. They have more treatment options there and their doctors cooperate with each other.

Everyone in the U.S. military including dependants has "socialized" health care. It's a high risk population- you know fighter pilots, foot soldiers, etc. Now, we've had some scandals, but over all the military and the V.A. do a pretty good job caring for a lot of people. No one waits for care and the doctors get paid regularly. They are happy with it.

My mother who has medicare, never waits to see a doctor. So we have a model for generalized government run health care. And any American who believes the Republicans and the Blue Dogs is an ignorant fiil.

All we'd have to do is nationalize one large insurance company, and the debate would be over.

Raised By Republicans said...

"Rationing" This is another of my pet peeves. We already have health care rationing. Only now, we ration based on income. If you have less income you get less health care provided. If you have more income, you get more health care.

Rationing!? Pah! We already have it. We're just arguing about the criteria.

Bob said...

Regarding "rationing", I thought Matt Yglesias had a very good take on it. By his definition, rationing isn't going to happen, and doesn't happen now. But of course, the point is to define "rationing". Any definition makes the Republican argument stupid.

Matt points out that rationing generally means when there's a shortage of something (say, gasoline), then the government steps in and limits how much an individual can buy. This keeps some evil millionaire (or guy in front of you in line) from buying all the gasoline and leaving you with none.

There has not, and there never will, be a health care bill in the US that proposes limiting how much health care anyone is _allowed_ to buy. If you want to pony up the dough, you're welcome to all the surgery (or whatever) you want.

Health care reform bills are solely about medical care when the individuals don't have the money to pay (which is what insurance is for, and as LTG pointed out, is typical of most unexpected health care costs).

Only at the extreme margins (specialized surgeries that only a limited number of people can perform, for example) is there any supply limitation to health care anyway. Otherwise, "rationing" according to the usual meaning (i.e., Matt's meaning) doesn't apply.