Thursday, April 14, 2011
Insurance and the fundamental axiom of reaction
Ever notice how much more vociferous the arguments about health insurance are these days than those about auto or home insurance? Sure, there are a few ongoing controversies in home and auto, like whether you can use credit ratings to proxy for other variables that you're forbidden from using by the federal government since the civil rights act, but by and large, these insurance markets actually work. The main reason is that, well, they're actually insurance. Generally in these markets you pay about 1.3 to 1.5x your actual actuarial risk (insurance usually has in the neighborhood of a 70% payout on average and needs that to have 'normal' levels of profitability in the present day US market) to transform your risk distribution from something with unpleasant spikes to a manageable monthly payment. Such transactions have a very long history---some of the first insurance was for the transportation of crops to market downriver---farmers would distribute their loads among the various boats such that if, say, 10% of the product was lost, their own losses would reflect that rather than the possibility of a larger personal loss. Of course there's some moral hazard involved, and social conventions have to be cobbled together to mitigate that, lest farmer Joe's screwup of a boat pilot son get to take the helm. Insurance actually works when the hazards involved are fairly unpredictable to the insured but the distribution of such hazards is well understood. It doesn't work at all well when people try to use it to have one group of people PREDICTABLE IN ADVANCE subsidize another. This is where the fundamental axiom of reaction comes in. Sure, it might suck badly for you if, you have, say, type 1 diabetes, and insuring your family has an expected cost of 25K instead of 12k per year, and the non-reactionary would propose to force the insurance company to ignore this fact, smearing your additional risk over the rest of their subscribers. Insurance companies predictably respond by refusing to cover pre-existing conditions or refusing to insure you at all. The reactionary is of course familiar with this---it is not possible to make political decisions that don't suck for someone, and frequently, you can only make things worse by meddling with them and creating complex situations that suck in a complex manner instead of simple situations that suck in a simple manner. Unnecessary complexity is a poison in any society, and is in fact about the most regressive form of taxation (hitting the lower half of the bell curve disproportionately) around, with the possible exception of inflation. A reactionary would tell you two things: 1) There's a difference between the 'deserving' and the 'undeserving'----many conditions---for instance type 2 diabetes, are largely self-inflicted. If you get into the business of smearing the risk of the self-inflicted conditions over the rest of the population, you shouldn't be surprised at all when they react with rather jack-booted efforts to stomp over the behaviors in question. 2) If you, as a population, believe that the monetary part of the 'suck' of a condition should be borne by society as a whole, the way to do this that sucks the least is just to do a governmental transfer payment. See statement 1 again as to the predictable reaction of the rest of the population if the consensus on this decision isn't heartfelt. Resources, in health care or otherwise, aren't unlimited. The hard cold truth is that some mechanism of making trade-offs will be used---be it price, waiting in lines, political connections, lottery, or the like. You can not escape this fundamental axiom of reality, at least not until the Second Coming, when insurance will be the least of your worries.