Adverse selection, access to information and the Healthcare crisis

WickedLou9 · 09-12-2008, 09:01 AM

I am finally getting into some of the books that I had intended to read over the summer but never got around to.

The first one is:

Amazon.com: Naked Economics: Undressing the...
Amazon.com: Naked Economics: Undressing the...

I am about half way into this one and I got into a chapter that was pretty relevant to some of the discussions we have had here.

He started talking about adverse selection in various contexts (Adverse selection - Wikipedia, the free encyclopedia). One of which is health care.

To simplify, Insurance companies base thier rates on the average case. If the average male will incur 1500 dollars worth of medical expenses a year, they will charge 1600 for a policy and hope to make a profit. The ones that charge more expenses will balance out the ones who charge less. Pretty simple right?

Well that was then. This is now. Today we have access to ALOT of information that was not available before. We have CAT scans and genetic tests and all sorts of medical information to use. The problem this creates is that we are starting to get a really good idea of who will need alot of medical care and who won't. Adverse Selection is the situation where people who know they won't need 1500 dollars worth of care in a year simply opt out of the insurance because it's a bad deal for them. People who know that they will need alot more than 1500 dollars worth rush out to buy policies. That then changes the population, and the average cost goes way up. Lets say to 1800. So once the rates go up you push more people into the catagory of knowing they won't charge that much and more people opt out. This cycle continues until the insurance industry collapses.
We have done a few things to mitigate this like writing huge group policies for say the UAW, where everyone gets insurance no matter what and it spreads the risk out making it profitable once again.

The problem is that these sorts of big sweeping coverage plans are starting to get really expensive and they are going away. What this leaves us with is the death spiral of adverse selection where rates will continue to go up as people continue to opt out of the system, armed with better and better medical knowledge.

SO what do we do? There are really only two solutions. Leaving it to the private market won't work in this case. We have to either mandate that everyone get a policy so that people can not opt out ( like the Romney Plan) or provide a government health plan for everyone paid for with a tax increase.

What other solution is there? Clearly leaving things as they are now is going to become impossible in the near future. We better do something sooner rather than later.

Angus_Aboot · 09-12-2008, 10:58 AM

The insurance agencies could just set different rates for people with different health care conditions. The only problem there is that some states require that insurance agencies insure all who apply at the same rate.

WickedLou9 · 09-12-2008, 11:10 AM

Originally Posted by Angus_Aboot

The insurance agencies could just set different rates for people with different health care conditions. The only problem there is that some states require that insurance agencies insure all who apply at the same rate.

That creates a problem where those who need health care the most won't be able to afford insurance and will simply wait untill the condition is about to kill them and they will go and get emergency care for free.

Angus_Aboot · 09-12-2008, 11:33 AM

Originally Posted by WickedLou9

That creates a problem where those who need health care the most won't be able to afford insurance and will simply wait untill the condition is about to kill them and they will go and get emergency care for free.

For Free?

WickedLou9 · 09-12-2008, 11:35 AM

Originally Posted by Angus_Aboot

For Free?

Free for them. Not for everyone else. We don't leave people to die in the streets if they can't afford health care. So if you come into the ER bleeding from your ears and you don't have a penny to your name, you still get treated.

Angus_Aboot · 09-12-2008, 11:37 AM

Originally Posted by WickedLou9

Free for them. Not for everyone else. We don't leave people to die in the streets if they can't afford health care. So if you come into the ER bleeding from your ears and you don't have a penny to your name, you still get treated.

That's really the hospitals call.

WickedLou9 · 09-12-2008, 11:42 AM

Originally Posted by Angus_Aboot

That's really the hospitals call.

It's not really. As a society we value human life so no one will ever be denied emergency life saving care because they can't pay. It just doesn't happen. If we suddenly wanted to shed this value sure we could solve some of the health care crisis. Pay or die. If you cant pay and don't have insurance we throw you out into your ass to die in the streets. Most people consider that sort of thing morally repulsive.

Angus_Aboot · 09-12-2008, 11:57 AM

Originally Posted by WickedLou9

It's not really. As a society we value human life so no one will ever be denied emergency life saving care because they can't pay. It just doesn't happen. If we suddenly wanted to shed this value sure we could solve some of the health care crisis. Pay or die. If you cant pay and don't have insurance we throw you out into your ass to die in the streets. Most people consider that sort of thing morally repulsive.

Why is there a law mandating this then?

PetriW · 09-12-2008, 12:06 PM

I really think it should be done via taxes and I've argued so a few times in the past, but then I know how you americans loathe taxes to the point you're willing to pay the double for an insurance so I guess that would work just fine too.
The point should be that everyone pays (aka compulsory fee), and everyone has access. If you're worried about the endless lines to healthcare you can get some private insurance on top. (Hint, 99.9% won't because it's a waste of money if medicare is halfway decent.) Oh and it would probably still be cheaper than the current system.

You clearly can't have a flat fee for everyone either, this would mean minimum wage workers wouldn't be able to afford the fee.
Some nations have solved it using taxes, some have solved it using insurance companies, some have small fees for all visits and some don't cover all areas (like dentistry and optometry).
But common for every other developed nation is that they have universal healthcare and honestly, your system lacks in so many aspects it's embarrasing to see people protect it. It's all about myself before anyone else, all about not paying when young and healthy in some belief that their total cost for healthcare would somehow be lower, all about not paying for those others you don't like.

The basic step in accepting that the american healthcare system is deeply flawed is giving up the notion that you shouldn't have to pay for anyone else. Healthcare should be a basic right as a human being. (The fact that you save money on it should help too...)

WickedLou9 · 09-12-2008, 12:29 PM

Originally Posted by PetriW

I really think it should be done via taxes and I've argued so a few times in the past, but then I know how you americans loathe taxes to the point you're willing to pay the double for an insurance so I guess that would work just fine too.
The point should be that everyone pays (aka compulsory fee), and everyone has access. If you're worried about the endless lines to healthcare you can get some private insurance on top. (Hint, 99.9% won't because it's a waste of money if medicare is halfway decent.) Oh and it would probably still be cheaper than the current system.

You clearly can't have a flat fee for everyone either, this would mean minimum wage workers wouldn't be able to afford the fee.
Some nations have solved it using taxes, some have solved it using insurance companies, some have small fees for all visits and some don't cover all areas (like dentistry and optometry).
But common for every other developed nation is that they have universal healthcare and honestly, your system lacks in so many aspects it's embarrasing to see people protect it. It's all about myself before anyone else, all about not paying when young and healthy in some belief that their total cost for healthcare would somehow be lower, all about not paying for those others you don't like.

The basic step in accepting that the american healthcare system is deeply flawed is giving up the notion that you shouldn't have to pay for anyone else. Healthcare should be a basic right as a human being. (The fact that you save money on it should help too...)

I tend to agree with this approach, and I think all we have to do is look around the world to see other countries who have nationalized health care which costs less than our health care system costs.
I don't think you will actually find that many people in the US that think our system is just fine. It's pretty obvious that it's broken and you will hear candidates from opposite sides of the spectrum talk about fixing it. They generally have different approaches to it though. The Republians tend to favor a market based solution where insurance is compulsory and it's made affordable through tax credits and such. Democrats tend to support a more nationalized system paid for with a tax.
I'm honestly not sure where I stand on this one. I see benefits to both. The free market tends to be more efficient where government systems tend to become massive beurocracy choked sloths. On the other hand, a nationalized system does a much better job of spreading the costs evenly and ensuring that risk is completly pooled amoung the entire population. I think our ultimate goal should be to get the yoke of health care costs off of the American business. Right now we expect our businesses to provide health care and fund a large portion of it. It's one reason why GM is failing. If we could suddenly lift that yoke, I would wager that GM would return to profitability almost overnight. They could stop laying off workers.

PetriW · 09-12-2008, 12:36 PM

Originally Posted by WickedLou9

The Republians tend to favor a market based solution where insurance is compulsory and it's made affordable through tax credits and such. Democrats tend to support a more nationalized system paid for with a tax.

Both have been proven to work just fine really and are in use today.
When it comes down to it it's more about the level of care you wish to provide. No matter how you choose to obtain the money, it's the state which decides cost levels and that determines the service. There's a great documentary about this from Frontline:
FRONTLINE:sick around the world | PBS