[FoRK] Adverse selection in insurance

J. Andrew Rogers andrew at ceruleansystems.com
Mon Oct 19 00:58:44 PDT 2009

On Oct 18, 2009, at 10:49 PM, Stephen Williams wrote:
> Everyone who complains about dysfunctional insurance is to blame for  
> it?

In the sense that they applaud or ignore the very actions that create  
the dysfunction. Ignorance of basic economics is no defense.

> 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 regulations.

You might argue that the heavy-handed regulations that currently exist  
are stupid, but they most certainly do exist in vast quantity.  
Furthermore, they essentially mandate that "insurance" is  
extraordinarily wasteful to no obvious end beyond benefiting various  
special interests; large companies can absorb that kind of waste,  
small companies and individuals cannot. I always marvel that the  
regulatory agencies that literally define the market are never held to  
be responsible for the markets they define.

I'm sorry, you are going to have to accept the fact that the industry  
is heavily regulated at multiple levels and that the regulation has  
been an abject failure, very arguably worse than minimal regulation.

>> 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.

High-risk individuals have a straightforward mathematical cost, that  
is promptly ignored by insurance regulations.  It is akin to  
legislating the value of pi.  People do not like the mathematical  
reality, so they pretend they can legislate a new one.  As long as  
governments declare that fiction is the new reality, we will continue  
to have adverse outcomes that seem inexplicable to the innumerate  

This kind of nonsense happens with all insurance, but it is  
particularly bad with medical insurance.

A compelling argument can be made that it would be far cheaper to have  
literal, true insurance without the morass of venal and idiotic  
regulations and then pick up the remainder with straightforward  
welfare.  Unfortunately, the government has decided to redefine  
insurance to be welfare with a dollop of heavy special-interest  
largesse thrown on top. See: current "health care reform" in Congress.

> 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.

Nonsense, we apply this to houses the exact same way we apply it to  
medical care.  The government subsidizes the insurance of people who  
live in high-risk areas who don't want to pay high-risk premiums  
without any regard for whether or not they can afford it.

There is no moral hazard so large that the population will not vote  
for it if they think they can extract free stuff from their fellow  
citizens. It never saves any net money.

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

Health care can't be a right. Health care is a "right" insofar as the  
community feels like delivering it.  It is not as though you are  
guaranteed to get the best health care possible, and in practice it is  
more like a minimum level of service with little investment in  
improving long-term outcomes (e.g. biomedical R&D).

If you get seriously ill in a country with medicine that asserts this  
"right", it is not as though you get teleported to Stanford or Mayo  
for your "right" to a significantly better medical outcome.  As  
nominal rights go, it is a pretty weak fiction in that there is no  
possible way to deliver it even in principle in most countries.   
Rights like freedom of expression are fully functional anywhere on the  
globe without any investment by other people.

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

If it is actually insurance, it doesn't cost you anything if people  
opt out. If it costs money if some class of people opt out, it is a  
sure sign that you've allowed the ignorati to design your regulations  
or at the very least incorporated significant deception.

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

Why not, we micromanage every other aspect of people's lives for  
lesser reasons. You have no right to these choices.

> 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?

Insurance can be fixed by letting it be insurance.  In essence, stop  
mandating that I have to buy insurance that *must* cover 27 flavors of  
cultural anti-science woo that I can consume on a monthly basis if I  
so choose. FFS, the insurance companies have to insure things that it  
makes no economic sense to insure pretty much by definition. Nor do I  
see a reason to be required to pay for all sorts of anti-science  
nonsense as standard coverage items.

At the same time, people have to realize that the proliferation of  
medical technology is increasing the number of things we can spend  
medical dollars on, hence why even countries with socialized medicine  
are seeing costs grow at similar rates to the US.  Medical care used  
to be cheap because medical care used to suck.  It is very easy to  
arrive at the point where it is not possible to supply all possible  
medical care to everyone.

Biomedical R&D is the elephant in the room being vigorously ignored in  
the current debate.  The US does almost all of it, and it is largely  
done by private companies.  The stagnation of biomedical R&D  
investment would have an extraordinary cost in terms of unnecessary  
loss of life. Most industrialized countries have abdicated their  
supposed social responsibility toward the health of their people; it  
is highly ironic that the baser ideals of the for-profit US system is  
producing the vast majority of the advances that benefit the average  
health of humanity.  For all the talk about really caring, no one else  
seems to find the money worth investing.

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