What’s driving up the cost of health care for the average American? Duh, it’s the insurance premiums! But why are insurance premiums going up? Perhaps counter-intuitively, it’s because we’re getting smarter about our own health.
Tools from WebMD to home genetics-testing products give unprecedented power to the average citizen; it’s perfectly common for a person to know before they ever set foot in a doctor’s office exactly from what they suffer, and how worried to be about their ability to pay for the treatment. And if I know before my doctor, you can bet I know before my insurance company.
This democratic power is actually crumbling the bedrock of our private insurance industry. Private insurance works best when the folks buying it are both heterogeneous and ignorant. As long as this holds out, the healthy will almost perfectly subsidize the sick and everybody can pay the same, perfectly reasonable premium. But when either the pool of insured becomes more homogeneous or when people get smarter about their actual risks, things get dicier for the insurer—and those counting on the insurance.
Those who have reason to believe themselves healthy face a strong incentive to stop subsidizing the sick by defecting from the status quo and forming their own, new, healthy pool of insured; this will assure that all those healthy folks can pay a significantly lower rate for their insurance. Simultaneously, those who have reason to believe themselves sickly face an equally strong incentive to upgrade to the most generous insurance plan possible so as to receive better service. In this fashion a multi-tiered* system will emerge: healthy people pay almost nothing for almost no services, and sick people pay out the wazoo for everything they could ever need. In fact, this starts to look very much like a system where no one has insurance at all—except that the people selling the “insurance” walk away with a healthy cut of everyone's premiums, and the cost of health-service-provision rises.
The most efficient alternative to the current system—wherein everyone is losing except the insurance companies—is to set up a system whereby as large and diverse a pool of people as possible are insured and the healthy have no means to defect to a cheaper alternative. To those playing at home, this will look very much like a single, national, mandatory health insurance plan. Any compromise or political “solution” that looks different is born of either inexcusable ignorance of economics or inexcusable deference to insurance titans. Fuck that.
* Actually, this will tend to become an infinitely-tiered system wherein everyone pays in a premium that almost exactly corresponds with the amount they will eventually take back out, plus the overhead, profit, and lost-interest that they will generously forfeit to their insurance company.
First off, I believe it should become tradition to end all posts with "Fuck that."
ReplyDeleteSecondly, I think multiple types of insurance suffer from inhomogeneous groups of less-than-ignorant individuals. Automobile insurance, for instance, charges more for young males and other risky drivers. How come this hasn't devolved into infinitely many tiers?
I like your point about people becoming smarter though, I hadn't thought about that before.
If you've applied for auto insurance recently, you'll notice something interesting. They don't just ask for your age, gender, car type and driving history anymore.
ReplyDeleteNow they ask your salary, your job type, and, increasingly often, your credit score; if you think they're just after this info for marketing or demographic purposes, you're kidding yourself. I would argue that auto insurance is maybe the perfect example of an almost perfectly and almost infinitely-stratified system.
On the other end of the spectrum, fire insurance is a pretty good example of old-style ignorant/heterogeneous system. People generally have no idea how likely their house is to burn down (that question largely depends on the quality of the wiring, which is hidden behind walls and hard for a layman to discern).