Krugman Blames Adverse Selection Problem on Government Regulation

You were right before, and Krugman is right now.

Premiums converge toward actual price of the medical treatment. Perfect insurance agency would recognize with 100% accuracy that I’ll have disease X, and that price of the treatment would be 4000 dollars, and they will charge me with premium of 4040 dollars. Closer to the perfection, less sense insurance agency has.

From leftist point of view, plain solidarity and not risk management is really needed here.

Well, this accuracy can be achieved for almost any easy treatment (cold etc.), because the costs of an aspirin or antibiotica is easily known.
When uncertainity comes in, it is with more dangerous and complicated procedures where you can’t judge the final outcome, because costs rise along the way. Also, you can’t determine when someone will get those kind of diseases, so there is also a time-variance and a statistical uncertainty.

But this gives a fairly good lead on where an insurance is necessary and where not.

“By his own account, adverse selection arises because the natural free-market response – higher rates for higher risk – is illegal.”

He didn’t say that.

He said “…community rating will be unsustainable if individuals can buy insurance from out of state”. Because states have different regs, higher rates for higher risk would be exposed in the market.

It would become legal.

Adverse selection doesn’t encourage competition, it discourages it.

So- health insurance companies have to cover certain things. There is still significant space to compete on quality and on efficiency, and it never happens. No one breaks from the pack because of adverse selection.

The 25 year old Bryan is unwilling to insure the 50 year old Bryan, and given the choice insurance companies would rather insure the 25 year old Bryan. A 50 year old Bryan may have a 15% risk of heart desease yet A 50 year old Bryan with heart desease is uninsurable.

Nonsense. In the real world, if the insurer can reasonably measure the risk, and charge 50 year old Bryan for it, they will. The problem is the real world is prohibited to them. They can’t charge a higher rate for higher risk.

The solution then is to eliminate community rating, knock down state restrictions on out-of-state purchasing of insurance (I find it odd that I can purchase a car from Tennessee or a bottle of wine from California, but not an insurance policy from Wisconsin), and eliminate state mandated coverage. The thing I noticed when I received my first employer provided insurance is that even though I was a single male with no girlfriend, I had to have maternity coverage. Odd, no??

Transition away from employer mandated health insurance and into more consumer driven insurance by finally getting rid of the old 1930’s style tax system.

And gnat,

The entire concept of the “uninsurable” rests on the presumption of government regulations. In reality, no one is “uninsurable.” An owner of a company is usually willing to cover anyone, for a price, that is.

So it all comes down, once again to costs. Forget the idea of increasing competition between insurers by adding a public plan because it won’t address the real issues – cost of delivery systems.

Niccolo

My solution would explicitly recognize that the employer’s share comes out of the employee income and have mandatory contribution to health insurance with minimums (e.g., HSA plus catastrophic coverage). That solves the Bryan-25- doesn’t-like-Bryan-50 problem. The firm acts as administor collecting premiums from the employee and the mandatory insurance requirement moves with the individual. This provides a demand for insurance as distinguished from prepaid healthcare, and may allow an insurance market to development, provided the cost of delivery is predictable. For the later, you have to fix delivery. Today doctors are specialists, are the only participant with the information and can charge whatever they want.

J- If you take the position you do, you have to deal with the problem it causes.

You look at 50 year old Bryan and his 15% potential risk of heart disease. In real life, that means 15% of 50 year olds actually have heart disease. When any of them need to change policies, perhaps due to a layoff, the market prices accordingly for the certainty of large medical bills. They can’t pay. What do you do?

I don’t have to do anything. Or at least I have no moral obligation toward Bryan to do anything, it doesn’t necessarily mean I won’t. I think the question you meant to ask is: What does Bryan do? And I’m not Bryan so I have no idea. But he has to make a choice just like we all do. I think where you run off the rails is that you assume that insurance is somehow fundamentally different than other products and other markets. I agree there are differences, but not fundamental ones. If you get government out of the way, and allow individuals to negotiate and contract with third parties (severing the employer-insurance link, something I failed to mention in my previous post)I’m pretty sure Bryan would have something available to him. But of course we’re never going to find out if some individuals won’t let others try.

We don’t expect life insurance companies to sell million-dollar policies to people with metastatic cancer.

In a financial sense, life insurance and health insurance are not all that different. One pays out before you die and the other pays out after. Both have to factor in uncertainty about when and whether a payout event would occur.

IMHO health insurance should be structured more like a flexible-payout annuity where the consumer agrees to a payment schedule in exchange for a lifetime benefit of up to $X. The insurance company would have only an advisory role in deciding how you spent that money. If you have $500k of benefit and want a drug that costs $100k but improves your chances of survival by 5% over the $10k drug, well, you can have it.

I think some people are confused, thinking about the 50 and 25 year old Brian. Imagine the 50 year-old has heart disease he no longer need insurance he needs money to pay for his health care. Think about health insurance vs disability insurance, in the later you pay and pay, and when you get disabled you stop paying, and get paid. Health “insurance” doesn’t work like that. Once you get sick what are you being insured against, a different sickness. I have seen, on this very blog the idea that if you get a sickness your insurance pays out a certain amount of money which you can use for treatment as you see fit. That isn’t a perfect solution but at least it addresses the problem.

People need to be insured, but they will eventually be sick. If you charge them for insurance 100% for the care they will use while sick its not insurance, its paying for care. The goal of national health care should be to nudge people into paying for their lifetime care needs over a long time horizon, and to redistribute health based on luck. We cannot expect people to do this on their own. Community rating and mandatory insurance are needed, but there is no reason the government must be involved in any part of the administration of health care.

J

The thing I noticed when I received my first employer provided insurance is that even though I was a single male with no girlfriend, I had to have maternity coverage. Odd, no??

Let’s think about this. If you’re getting charged for real for maternity coverage then women must be getting charged less. After all the portion of premiums you are paying for maternity coverage will never come back to you, right?

But almost certainly the premiums are probably the same for either men or women. So what does it mean that you have ‘maternity coverage’? It means absolutely nothing. If your doctor submits a claim against the ‘maternity coverage’ you have we both know its going right to the fraud department.

So what is really happening is that you (and everyone else) is putting money into a big pot that covers a bunch of medical expenses. some of them you know you won’t need (maternity), some you think you probably won’t need (Ebola treatment) and others you can’t be so sure (cancer, diabetes etc.). On the other hand, some things you may need (prostate checks, viagra) your female co-workers will not have much use for.

This is a not quite like risk-based insurance…it’s a bit like going out to lunch with your co-workers and splitting the check evenly because its too much work to figure out what everyone’s cost really is. What you’re doing is less about risk management and more about cost sharing.