Saturday, May 09, 2009

Actuarial v. Lifecycle Analysis

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There appears to be two radically different approaches to accounting and funding healthcare. I will call these approaches lifecycle analysis and actuarial analysis.

With lifecycle analysis, one looks at the life of an individual as a whole unified entity. We notice that each person has one birth. They suffer a number of injuries or illnesses then each person has one distinct death.

The typical human life has moments of health and productivity. Humans tend to reproduce during their most productive years. Many people are happy to raise children during these productive years.

In the lifecycle approach to health care, one seeks mechanisms that transfer resources from times of health to times of need. As the immediate family is integral to a person's being, lifecycle analysis treats the natural family as an integral part of a person's life.

Actuarial analysis is a bit like cutting down a tree to discover its age. Actuarial analysis starts by taking a cross section of the population and tallying up interesting statistics such as the number of births, number of illnesses and number of deaths.

With actuarial tables in hand, one can imagine a health care system in which authorities provide healthcare by transferring resources between the people who are judged healthy at the moment and given to those judged to be in need. To make a system work, one need simply devise a mechanism to redistribute wealth.

People have tried to create redistribution systems through both private and public means. On the private side, employers corral workers into employer based insurance. On the public side, the ruling class uses a variety of insurance regulations, taxes or outright socialization.

It is common for people favoring collectivism to push an actuarial view of healthcare as the primary source of information. Conversely, those favoring free market solutions are apt to see merit in lifecycle analysis.

As the different approaches mirror major conflicts in our society, it is tempting to assert that there is some sort of foundational conflict between lifecycle and actuarial analysis.

For that matter, if you happen to be a college student and want an easy "A" in social studies; you could write up a piece claiming to have discovered a foundational dichotomy between the these two perspectives. If you conclude the paper with drivel about socialism being a higher state of evolution; you might even be able to land yourself a cushy job as an overpaid professor.

I should mention, of course, that this game of finding deep sonorous conflicts in different perspectives is the hallmark of the Marxist Material Dialectics.

The classical view holds that there is one truth. The deep conflicts that we see between different perspectives are usually illusions.

While examining the differences between the lifecycle and actuarial views of health care, one is apt to notice that the actuarial view is simply a summation of the lifecycle view.

Actuarial analysis is a derivative of the natural human lifecycle.

There is value in studying derivatives. Such information can help us plan for change. Knowing how many deaths to expect helps a funeral home plan their casket inventory.

Claiming that there is a conflict between these two perspectives is equivalent to saying that there is a conflict between velocity and acceleration.

Depending on actuarial analysis for our health care is a bit like deciding that travelers need only know about acceleration.

If travelers want to know how far they will go; they must know their velocity. On realizing that they won't make their destination in time, they need to accelerate. They might decelerate if they are making good time.

When a group of people are foolish enough to surrender the care of their health to insurance companies and government agencies, they end up creating a system where their entire lives are controlled by derivative information, and end up receiving substandard care.

Progressives are skilled at framing the debate and are apt to claim that the actuarial tables are the true primary source of information on health care, and that the lifecycle view is derivative of the actuarial view.

This question is easy to debunk because lifecycle analysis presents a clear sequential series of discrete events. People have one birth. They have one death. People also tend to have children in whole units. Actuarial tables are full of fractions and irrational numbers. Such tables might say there is 1.81 births per couple, or 8.259 deaths per thousand people.

The study of derivative information provides interesting details about our lives, and can even lead to society wide improvements. The game of pretending that the derivative is a higher level of information and should be used as the primary source for health care decisions leads to suboptimal results.


Scott Hinrichs said...

Our society worships data and research. It has become a religion in an of itself that pervades every facet of the culture. It shouldn't seem odd that some work to make the data say what they want it to say.

y-intercept said...

There doesn't have to be malice in one's action for the statistic driven model to go wrong. The primary problem is that there are several degrees of separation between the data and its source.

There are also problems with the reflexive paradox, which I might get into later.