Tuesday, September 26, 2017

Healthcare and Insurance (2)

Insurance Model
Insurance is very effective for risks with low likelihood and high impact, but it stops working if the risk changes from being low likelihood to extremely widespread. That is why insurance companies have exemptions for extreme events like war and so-called acts of God. If the city is bombed during a war, nearly every house might be burned down. In that situation, sharing the cost does not help. Paying for a thousandth of the cost of rebuilding all the houses is no cheaper than the cost of rebuilding your own house.

Pooling the risk of an event that will affect everyone similarly makes no sense. Insurance cannot deal with a widespread risk because there is no benefit in pooling the costs.

An insurance model does not work for healthcare, because the conditions necessary for pooling risk do not apply. Health claims are not rare, because almost everyone makes claims against their health insurance. If everyone is making regular claims, the insurance model is inefficient, because the bureaucratic costs of handling claims are high, and costs are not really shared. Insurance companies tend to “gold plate” treatments, because that allows them to increase their margins.

With health care, there is very little uncertainty about where the risk will strike. Most expenses will be incurred by the elderly and by people with existing health issues. The probability of a claim is skewed towards these groups.

Forced Sharing of Risk
The problem with medical insurance is that young people have a very low probability of making a claim, while those who are older or unhealthy have a higher likelihood of making a claim. If they pool the risk, younger people will end up subsidizing the old and sick. That makes no sense, so young people would usually be better off not having health insurance.

If only sick or elderly people were insured, they would not be pooling risk, because everyone would be just making claims from each other. If everyone is likely to make a claim, that is a situation of high likelihood and medium impact. This kind of risk is hard to pool, so there is not much point in having insurance. It just adds a costly administrative layer that transfers money between people. They would just be paying administrators to manage expenses they could manage themselves.

To be effective, health insurance needs young and healthy people to subsidise the old and the infirm. People were willing to do that once, but now they have woken up and are opting out. Consequently, free-market medical insurance does not work very well.

Obamacare gets around this problem by making insurance compulsory and preventing insurance companies from refusing to insure the elderly and people with pre-existing conditions. This forces the young and healthy to subsidize the old and sick. This is fine if voters accept that this is what is happening, but they usually do not.

A single-payer system has the same effect. Everyone pays tax at the same rate (more or less) and everyone gets the health care that they need. Again, this means that the young and healthy subsidize the healthcare of the old and infirm.

Single-payer is a misnomer. There is not a single-payer, as everyone pays through their income taxes. Universal payer would be a more accurate name.

The disadvantage of a single payer is that people lose control over how much health care they will receive. Governments rarely budget enough money, so there is never sufficient health services for everyone (Of course, when services are free, the demands expand significantly). Bureaucratic processes have to be put in place to ration scarce health care resources. People who are sick often struggle to persuade bureaucratic gatekeepers that they are sick enough to need care.

The situation is made worse by technology. The range of practical surgical interventions has grown immensely. People are living longer, so everyone needs their knees and hips replaced and their shoulders reconstructed. Some need these several times during their lifetime.
New drugs for cancer and other diseases are extremely expensive. A treatment can sometimes cost several hundred thousand dollars a year, for uncertain outcomes and marginal benefits. This places enormous stress on single-payer systems, because decisions about treatment often become political.

Politicians often get involved in deciding on the value of a life, sometimes on an extra three months of life. In an insurance model, the pressure of technology falls on premiums. In a single payer system, it falls on politicians.

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