I remember we had a long and involved argument about this a while, so I’m flagging Dsquared’s neat post about how hard insurance can be over at Crooked Timber:
But I think he’s underestimating quite how complicated insurance markets can get, and in this post, I’m going to illustrate how complicated they can get with a simple(ish) adverse selection example1. In the case set out below, despite the assumed existence of insurance companies prepared to write business at a fair price, it turns out to be absolutely impossible for the insurance market to exist without government intervention. And it’s all because of a bloke called Fatty. Follow along with a pencil and paper if you like, or alternatively email me and I’ll send you the spreadsheet I used to cook up this numerical example.
(details)
And so we reach the punchline
In a perfectly competitive market, insurance could not exist in this situation. No insurer would commit capital to a market in which any contract was vulnerable to becoming uneconomic at the drop of a hat. In order to get insurance to exist, you either have to assume a cartel in pricing, or you have to introduce something like the NHS; a pooled insurer which Jim-Bobs have to pay for whether they want it or not10. Since one of the things which we do know about health insurance is that the costs are driven by a small number of very expensive patients, I would suggest that my “Blame it on Fatty” model is potentially a quite realistic stylised picture of the situation. And in this model, not only can we get something cheaper by pooling our funds, but if we don’t pool our funds, we can’t get it at all!
i declare this mccullough thread to be the REAL insurance thread and decry the other as a pretender. this sounds like that nyt mag article about the death spiral that insurance companies go through when they have to jack up prices to cover the cost of high maintenance sick people (fatties?) thus making it too pricey for young healthy/robust people, thus making the % of highly sick people in the pool increase, thereby requiring an even bigger hike to cover expenses.
The problem with insuring fatties against expensive health troubles is that being fat might be their own damn fault, and all the slim folks that ought to pay for them might resent that.
How does a compulsory insurance system deal with people who deliberately increase their health risks? The insurer can’t just dump them, after all. Will they take monthly tests to see how much they exercise, drink, eat, smoke? And then send thugs and hitmen over to enforce healthy living?
but isn’t a huge chunk of healthcare costs simply the result of people not dying? the elderly, etc. even a healthy young person will eventually get to cancer/stroke/alzheimers/coma age sometime.
Insurance companies can’t dump them now, and in the heavily regulated health insurance market have difficulty raising rates to match their risk. A compulsory insurance system would spread the risk by forcing healthy people to pay, but protect healthy people from the risk that their health would turn while they were not paying. It is assumed that the natural advantages of good health will keep people from “gaming the system” by engaging in unhealthy behaviors while they are insured.
Insurance companies can’t dump them now, and in the heavily regulated health insurance market have difficulty raising rates to match their risk. A compulsory insurance system would spread the risk by forcing healthy people to pay, but protect healthy people from the risk that their health would turn while they were not paying. It is assumed that the natural advantages of good health will keep people from “gaming the system” by engaging in unhealthy behaviors while they are insured.[/quote]
Oh yes this has worked well. It must explain why America has more obese people then any other nation. We are a country of fatties who smoke, drink, eat crap and don’t exercise.
I remember hearing about a case in Britain a couple of years back that was related to exactly this problem. A guy got a heart transplant, and was told to stop smoking (details fuzzy, but stopping smoking was definitely part of it).
He didn’t stop smoking, and a couple of years later needed yet another heart transplant. The gov’t flat-out refused to pay for it, he screamed bloody murder, and the court backed the gov’t.
Robert Samuelson had a good, if pessimistic, column on health care reform in the Washington Post yesterday. Best quote:
We Americans want the impossible. We want our health care system to provide everyone with good care covered by comprehensive insurance, prevent insurance companies or government bureaucrats from dictating our choice of doctors, hospitals or treatments, and hold down costs. Well, we can have any two of these goals – but not all three. If everyone has coverage and choice, costs will skyrocket. No one is empowered to control them. But controlling costs involves limits on insurance or choice.
Good point, I shouldn’t have listed smoking – although very expensive surgery like heart transplants may be necessary before the bastard dies, see Gav’s example.
However, I think overeating, alcoholism, and being a couch potato tends to encourage not an early death but early disability and chronic organic diseases. Not that I have any numbers on that, thouh…
Good article, Kyle. Interesting tidbit: “About 10 percent of patients – the very sickest – account for 70 percent of spending, says health economist Len Nichols.”
You can’t cut those costs unless a miracle cure comes along; indeed, better treatments are only likely to get more expensive, and prolong the life of a sick person without actually healing him, thus requiring even more of those expensive treatments.
And hence the conclusion:
The practical problem, says Drew Altman of the Kaiser Family Foundation, is to find ways of imposing limits on individual patients. This is hard at best, but it requires a political will that’s missing.
The government should just cover the first $50,000-100,000 in total healthcare expenses for every person and then let us buy insurance in excess of that ourselves. People can choose if they want to submit specific expenses against their individual allocation (do I to use $60 a month of my remaining $23,230 on Lipitor or do I want to exercise and eat better?) This would make individuals both price and health conscious. Parents could buy insurance in utero for new babies to cover the really bad illnesses that are impossible to predict.
This idea is wacky, I know. It puts the burden on individuals with a decent safety net.
If 70% of the expenses are claimed by 10% of the people, a $100,000 limit (I’m assuming that’s lifetime?) isn’t going to accomplish anything other than save everyone money by killing off the 10%.
Cosmetic/lifestyle stuff like Liptor simply has nothing to do with our current health care problems. “Kid with leukemia who needs expensive treatments through their entire life” would probably be a closer canonical case: only happens to a small minority, very expensive treatments exist, and the treatments (mostly) work.
Oh, and I’m not arguing about making people pay a significant share of costs for optional treatments; that’s obviously necessary to get the moral hazard under control. That’s not the major health care problem we have, however.
Because there’s not enough money for the alternative?
And don’t even think of creating a compulsory prioritized healthcare system where, say, people would have to pay for their own glasses and occasional medication so that the super-expensive long-term cases can be fully financed. Nobody would ever vote for a party that proposed such a system.
Maybe we still get better healthcare but the German healthcare system is in a permanent financial meltdown just as well.
Long-term care for the elderly has been pulled out into an additional compulsory insurance because regular healthcare couldn’t pay for it anymore. Patients are required to pay a nominal fee for medication and visits to the doctor, even for chronic diseases, unless they’re actually too poor to pay. Patients are also required to pay part of the bill when they get glasses and dentures. Doctors have posters in their practice saying how they are not to blame, it’s those evil insurers…
The course here is definitely set to change the health insurance system (every insured person gets full coverage) into a “health welfare” system (you only get something if you’re poor). It’s inevitable in my opinion, but the Germans covered by the compulsory system (I’m not) don’t like it one bit – understandably, since they keep paying more and more, and will get back less and less.
The problem is to reconcile infinite wants with finite means. In some way, health care will be rationed. Some people will not get as much as they desire. Some people will not get as much as they need to stay alive.
There are atypical cases like your child with leukemia, but in general, health care costs are low for the young and high for the old. Consider a hypothetical world in which the average 20-year-old pays $1000 a year for health care, but in which his health care costs increase 10% each year he lives. By the time he’s 80, it will cost $300,000 a year to keep him alive.
In a perfect capitalist society, everyone pays for his own health care. Everyone’s life is important to him, and he’ll spend every cent he has to preserve it. But because care gets more expensive every year, diminshing returns kick in. So an ancient rich man can only buy himself extra months of life with the money that would have bought a dying poor man extra years.
In a perfect socialist society, all health care expenditures are controlled by the state. Everyone gets the same amount to spend on preserving his life. Everyone gets the same lifespan. And that lifespan will be longer, on average, than in the perfect capitalist society.
This is a vastly simplified model, but it highlights the basic moral question: “Is it right to take money away from those who’ve earned it, depriving them of months of life, to buy years of life for the poor?”
This is a vastly simplified model, but it highlights the basic moral question: “Is it right to take money away from those who’ve earned it, depriving them of months of life, to buy years of life for the poor?”
So I take it you’re against all forms of insurance folllowing this model - high costs concentrated in a (practically) random claims by a minority? Like, say, social security disability insurance?
Insuring the poor isn’t the big issue; the insurance meltodown in the middle class is.
How come they don’t vote it out of existance, then, if they don’t like it so much? And I don’t see what’s wrong with long-term care being separate, or being required to copay.
