[FoRK] Adverse selection in insurance

Stephen Williams sdw at lig.net
Sun Oct 18 22:49:25 PDT 2009

J. Andrew Rogers wrote:
> 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.

Everyone who complains about dysfunctional insurance is to blame for it?
> 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 
> everywhere.
>> 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.

What regulations encourage it?  I find that it is more a natural 
consequence of insurance companies having to negotiate with most of 
their clients (large companies / agencies) and of individuals having no 
way to negotiate effectively.  While regulations twist many aspects of 
the situation, that specific problem seems more caused by a lack of 
>> 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.

Absolutely, the state-by-state insurance mess is terrible for all kinds 
of insurance.  I don't know of any benefits, other than perhaps that 
incremental experimentation to fix things is localized and contrastable 
to other states.
>> 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.

I was talking about insurance for high-risk individuals.  Those that are 
already costing a lot are in an different category since they are no 
longer a risk, they are a reality.
> 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".

I agree with that as an issue.  On the other hand, I think it may be a 
bit of a red herring / one off in the sense that we should be reasoning 
about a system as if it had been in place since birth for everyone 
involved.  Presumably, a correct solution will have that quality after 
some years.  At that point, it is real insurance for everyone.  And from 
that point of view, even if someone has already realized a risk, they 
should be accounted for in the "new system" in such a way as would be 
equivalent to where they would have been if the system had been in place 
already.  If we are talking about full mutual insurance in any sense, 
then, in effect, the sentiment that current losers shouldn't be 
"rewarded" amounts to: "It sucks to be you, go away and die quietly."  
If you follow that logic blindly, perhaps only babies born after the new 
plan is in place should be allowed to benefit from it?  If we were 
talking about auto or house insurance, perhaps losses beforehand are 
just too bad.  (Of course, we often invent aid methods even then in 
large cases.)  With live people, it just doesn't apply the same way.

These are probably at the base of most disagreements about health care 

Is health care a right?  To what degree and in what sense?

Do we want true mutual insurance?  How is it limited?  Do we allow 
people to opt out?  Do we penalize them now or later?

Do we penalize people for lifestyle?  (Smoking, what they eat, weight, 
too much alcohol, drugs, etc.)  How?

There are practicality limits on all of these.  The big issues:

How do we keep funding effective medical research in a lucrative way, 
create true competition for appropriate goals such as ever more 
efficient and effective care, while having fair mutual insurance with 
little overhead?


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