[FoRK] Adverse selection in insurance

J. Andrew Rogers andrew at ceruleansystems.com
Sun Oct 18 21:48:24 PDT 2009

On Oct 18, 2009, at 8:49 PM, Stephen Williams wrote:
>  Additionally, few insurance companies will agree to insure an  
> individual who is middle-aged or beyond or who has practically any  
> pre-existing condition.

That is because regulations frequently do not let insurance companies  
sell, you know, insurance.  Part of the problem is that 95+% of all  
Americans are deeply ignorant about the concept of insurance, so the  
regulatory destruction of insurance happens without anyone noticing or  
caring. But there is no shortage of people who are upset that  
insurance seems dysfunctional -- they have only themselves to blame.

The choice comes down to actual insurance with real potential for  
adverse consequences in a minority of cases and a gross moral hazard  
that guarantees systemic adverse consequences over the long-term.   
Moral hazards are attractive here for the same reason they are  

> Anyone not working for a company or agency large enough to have a  
> reasonable negotiated group plan is pretty much completely left out  
> of the insurance market unless they are young and have never had any  
> issue in any of a large number of categories.  This especially  
> includes self-employed entrepreneurs, which is ironic since the GOP  
> likes to go on about how health-care reform would hurt small  
> business.  In truth, the current system benefits large companies  
> much more.

Yes, the current system is strongly biased toward large companies.   
This is a regulatory and statutory result, not an intrinsic  
characteristic. The GOP is not necessarily wrong, it really depends on  
the kind of reform we are talking about. Most of the proposed reforms  
are non-constructive travesties of one type or another, since useful  
reform is politically difficult in a way that makes the current  
steaming pile look politically easy.

> If someone doesn't have health insurance, they generally cannot  
> afford it and often cannot get it anyway.  Since they can get  
> emergency coverage in most counties most of the time, sooner or  
> later, it only takes a little fatalism or general avoidance of  
> medicine to make health insurance seem like a bad idea.   
> Additionally, if you have health insurance, you are presumed by the  
> medical system to be able to pay whatever you may incur.  If you can  
> barely afford health insurance, you are likely to then incur copays  
> and deductables that are then beyond your remaining budget.  If you  
> had not had health insurance or any reasonable income, you would  
> have been put in the destitute bin and not had an issue.  If you  
> have health insurance, you'll have bill collection, credit, and  
> other issues pretty much forever.  The net result is that unless you  
> have substantially more income than just covering health insurance  
> premiums, it may not appear to make sense to pay for your own health  
> insurance.

Again, all this is a regulatory result.  This is a natural consequence  
of the mountain of stupid laws and regulations regarding such things  
that essentially force or encourage insurance companies to offer the  
products they currently offer. All of which is compounded by equally  
broken tax laws regarding such things.

Most (all?) states have myriad expensive, stupid things written into  
their insurance laws that are nothing more than rent-seeking by a  
diverse range of special interests.  And people that buy insurance get  
to pay for it whether they want to or not.

> Probably by requiring everyone to be covered, possibly by assigning  
> high-risk individuals randomly as a fair percentage of every  
> company's pool.  I really don't like the latter, however if high- 
> risk were defined with a much higher threshold, it might not be bad.

I'm sorry, I thought we were talking about insurance. My mistake.

One of the more obnoxious policy lies is the use of the term  
"insurance" to denote policies that are in fact redistributive social  
welfare. The term "insurance" has a precise meaning that has nothing  
to do with distributing individual healthcare costs. If you want to  
give high-risk individuals or individuals with pre-existing conditions  
social welfare, say as much and stop using the term "insurance" as a  
politically friendly euphemism for it.

The argument has not been about insurance at all, even the GOP  
proposals are only marginally more about fixing insurance.  The  
argument is over how many Americans are we going to officially add to  
the welfare rolls, but people never like the sound of that so the  
talking heads blather incoherent things about "insurance".

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