Tuesday, March 30, 2010

Why is insurance such a difficult concept?

Do people not understand what insurance is?

With all this talk about health insurance costs, I find it hard to believe that most of public grasps the idea of spreading out risk - which is the entire idea of insurance.

Everyone knows the argument to force health insurance companies to cover pre-existing conditions, but there is no push to get car insurance to cover accidents that occurred before the policy was signed.

How many people are upset that their health insurance only covers catastrophes, and not routine checkups? Meanwhile, no car insurance company covers oil changes. If they did, you would see mechanics raise the price of an oil change. They know the customers won't shop around as carefully if they are shielded from the price.

The idea of insurance is simple. If there's a group of 100 people that are afraid a Very Bad Thing will happen to them, and the Very Bad Thing will take $1,000 to fix, but it will only happen to one percent of the people in the pool, than everyone can pay $10 into a pool, and the unlucky person will use that money to fix the Very Bad Thing. The risk is spread out to everyone, so no one individual bears the full cost.

It's a little more complicated than that in practice- there are operating costs to pay for the insurance program and profits to justify running it. Those profits are a lot lower than people realize. Some people are riskier to insure than others and plans don't cover just one Very Bad Thing, they cover different combination of problems. There's a lot of math, but the reductionist model still gets the basic idea down.

With health insurance, women tend to use more money from the pool. Insurance companies balanced that out by charging them more. It's the opposite with auto insurance, as men have more accidents than women, and insurance companies charge them more as a result.

But one of those is about to change. The New York Times reported this week, when it reported that health insurance companies can no longer charge men and women different amounts.

Or as the article put it, discriminate:

"In the broadest sense, the new health care law forbids sex discrimination in health insurance. Previously, there was no such ban, and insurance companies took full advantage of the void."
The article goes on to say that while a lot of changes in the new health care law won't happen until 2014;

"...some changes should actually happen much sooner, because the law’s overarching ban on sex discrimination takes effect immediately. The legalese outlawing sex discrimination is not easy to find or to parse, but it refers to existing laws, like the Civil Rights Act and Title IX, to say that the same protections apply to people seeking health care and insurance."
This is not discrimination, this is mathematics. Do health insurance companies discriminate when they charge smokers more? Do life insurance companies discriminate when they charge older people more? Do car insurance companies discriminate when they charge more to people with bad driving records?

Without a trace of surprise, the New York Times article does not mention if car insurance companies should charge men the same as women. It even acknowledges "women used the health care system more than men," which means women use more health insurance dollars than men do. Instead of challenging this decision with any opposition sources, the article repeats the activist slogan, "Being a woman is no longer a pre-existing condition."

I've seen a lot of anti-science on both the left and the right this decade, but this is the first case of an anti-math bias I've ever seen.


  1. I'm not sure who you talk to, but people I talk to (I work in a health care field) are not upset because their health insurance does not cover routine check-ups, but rather upset that they cannot afford health insurance at all, or the only health insurance they can afford has a deductible that they can't.

  2. As far as your distillation of the business of health-insurance, you're spot on. The part I take issue with is your equating an automobile with a human life.

    I hate to sound all liberal and lovey-dovey, mostly because that invites ad hominem dismissal of my point, but I think this is the overarching disconnect in the debate about health care.

    You're right, it would be ridiculous from a business standpoint for car insurance companies to cover pre-existing accidents. However, that's exactly why I don't think insurance companies should be allowed free reign to dictate health care costs: because good business and human welfare rarely mix well.

    Yes, it's true and should be obvious, especially to the New York Times, that insurance companies weren't displaying a gender bias by charging women more. But economics aside, should women--or the elderly, or an already sick person--really be required to pay higher premiums simply so a large company worth millions of dollars doesn't have to take a loss?

    Your argument isn't factually wrong, but it's putting the right of a company to maintain its profit margins on par with the right of an individual to affordable health care. And even as a healthy young male with no preexisting conditions that I know of, that just sounds pretty awful to me.

  3. Thank you for the very thoughtful response.

    I think you're losing sight of the issue. People who are risky to insure will use up more money from the insurance pool. Forget about profits for a moment and just think of the other people in the insurance pool.

    They are the ones who will take a loss. They are the ones putting money into the pool, and if risky people don't have to pay any more than the other people, the non-risky people will be driven out.

    A reasonable person could make a case for taking care of the infirm or elderly. It may possible to construct a good system to take care of those people, but that is not a form of insurance.

    Once you take out the idea of people paying according to their relative risk, than you are no longer talking about insurance. Like I said before, that may turn out to be a good system, but it just isn't fair to call that insurance or treat it like such.