Risk Profiles

RD brought up the discusion of risk profiles in a recent comment on my post about the difference between medical and auto insurance.

RD spoke quickly and was wrong. He claimed the difference between health and auto insurance was the risk profile. His claim was:

"the primary difference is the distribution within the dataset. Auto insurance costs having a fairly even distribution of costs through its dataset and a comparative marginal worst case cost cap, No insurance will pay to fix a car where the cost of fixing is higher then replacement."

The opposite is true. The distribution of claims with auto insurance is absolutely wild compared to health insurance. There is a large number of people who never have a claim against their auto insurance. A person driving a car through a crowd of pedestrians or causing a multicar pile up can rack up millions of dollars in liability in an instant.

Since everyone needs to spend money to maintain their health, there is less of a deviation in health expenses over one's life than with auto insurance.

There is often a great deal of variance per year throughout a person's life, however, the variance in medical expenses over a person's lifetime is not that great ... especially if we were to adopt preventive medicine.

The whole point of the Medical Savings and Loan is that, when you look at people from a whole life perspective, there is not as much variance in expenses as one would first suspect. When I did this experiment before, I discovered that there was a very nice bell curve with most people's life time health expenses sitting between reasonable figures like $300,000 to $600,000. With guidance, all but a few people could self fund their care.

This is not true of auto insurance where there is a wild difference in expenses. Each year only a fraction of people have claims. A small number of claims reach into the stratosphere.

The primary difference between health and auto liability insurance, as far as public policy is concerned, is that auto liability insurance is driven by the court system. Liability go through the court. If not for insurance, health care would be a matter of private contracts between patients and providers. Buying health insurance invites the court system and government into the care of one's health.

I know this for fact because, when I buy health care from my own pocket, I pay a bill negotiated with the doctor. When I use insurance I file a claim against a pool. Paying a bill is different from filing a legal claim. The first involves direct negotiation. The second is controlled by a court.

When I run a widow with an SUV full of orphans off the road, I am not involved in negotiation. I am involved in a court case. The amount paid gets decided by claims adjusters, appraisers and a judge with greater sympathy to widows and orphans than overweight computer dinks.

There is another substantial difference between health care and auto insurance. Auto insurance is about the liability of a single instance. Health insurance involves the whole series of things we do during our life to maintain our health.

I will write a second post on this matter in the near future.

Big Law and Big Insurance

Big law often sues big insurance for big bucks.

Apparently, these big lawsuits have many convinced that big law is there to protect the little people from the abuses of big insurance.

Such thoughts are a big mistake.

A better way to understand this system is to follow the big money.

When there is a big lawsuit with a big claim, a big money moves from big insurance to big law. Big insurance then runs back to the small business and exclaims: "Did you see that big lawsuit? We have to raise your premiums."

In this system, big law gets bigger. Big insurance gets bigger, and small business gets smaller.

There is a symbiotic relation between big insurance and big law.

From the perspective of big law, insurance is manna from heaven. It turns out that, since people are silly emotional creatures, it is really easy to win a big lawsuit.

The difficulties lie in collecting money. It is difficult to collect money from people who don't want to pay up.

Let's say a baby dies during a difficult birth. An empathetic judge and jury will want to award the grieving parents something. No parent should lose a child!

An expensive haired lawyer putting on a good show will jerk tears from the jury and win big bucks in the settlement.

The lawsuit is easy. The problem is that obstetricians don't like paying up. Even worse, people really like baby doctors and will side with the doctor when it comes time to pay.

Big insurance changes this equation. They have big pockets and are happy to pay the settlement as they are able to charge the settlement back through to all doctors.

So, by playing the submissive whipping boy, big insurance creates a mechanism that allows big law to collect the big money (keeping a percent for their efforts).

The final character in the big money show is big politics. Big politics takes money from big insurance and big law. In return, big law passes regulations designed to keep the pot stirring.

And so the symbiotic relation between big law, big insurance and big politics creates a mechanism that brings immense wealth to the few, while impoverishing the many.

Actuarial v. Lifecycle Analysis

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.

Challenge Accepted

During "100 Days" PR blitz of his presidency, President Obama issued a challenge to free-marketeers of the world to provide alternatives to big government health care.

I find the challenge a bit disingenuous as I suspect anything said by Libertarians will be summarily dismissed. However, it is an issue of concern to me. Although the classical liberal foundations of the United States have been rejected by our intellectual and political class, I think it is a fun topic to discuss.

So I will take on the challenge.

Mr. Obama specifically asked people to talk about ways that the free market could cut the cost of health care.

I find that question to be loaded. The question approaches the issue of health care in the negative. While there is merit to examining negative space, approaching the issue from the negative will not provide a positive result.

The negative debate starts with the premise that the amount of health care is a fixed quantity. The negative question asks: What is the best way to ration this fixed resource?

A real debate on health care needs to cast aside any artificial frames created by the political class seeking to manipulate the debate. A real debate should begin with questions about the nature of health care and the role that it plays in the lives of individuals and our community.

Realizing that any and all arguments made by Libertarians will be automatically dismissed by the current regime, I will ignore the framed question and simply write about articles on the role of medicine in our lives and society, and put forward the argument that the free market provides the best mechanism for people to pursue the goal of living healthy lives in a vibrant and diverse community.

I hope that others who see value in the classical liberal tradition that formed the United States take up the challenge as well and discuss in an affirmative manner the reasons why The United States has produced so many improvements in health care through the years.

Here is the YouTube in which Obama threw down the gauntlet:

Insurance and Socialism

Young doctor with stethoscope © arosoft

I want to consolidate ideas from the last two posts:

Socialism is a system where the people surrender ownership and power to the government. The government then establishes an internal bureaucracy to distribute resources. In theory, resources will be distributed by some sort of socially just mathematical equation.

Insurance is a scheme where people voluntarily give up a chunk of their resources. The bureaucracy of the insurance company then redistributes these resources according to an equation that is theoretically socially just.

The basic form of the two concepts is the same. They differ in the amount of coercion used to sell the product.

In practice, insurance firms use a great deal of coercion to sell their products. Most insurance policies are pushed on the public through third parties such as an employer. In some cases, insurance is mandated by the government. For example, you must have auto insurance to license a vehicle or to take out a mortgage.

In recent years we've seen an explosion in weird financial instruments like credit default swaps, government backed reinsurance and other schemes. Many of these schemes take place in the background without consent of the consumer.

Over time, the various insurance schemes meld into a private centralized powerbase which starts acting more and more like the socialist scheme.

Unfortunately, Libertarian pundits seem to concentrate only on one outward attribute of the financial system. Is the financial system owned by the government? Or is it owned by a private cartel?

I think they should be looking more at the form of the system. For example, the private insurance regime has driven up costs and systematically destroyed the ability of individuals to control their health care.

Rather than just debating which powerful group controls the bureaucracy, I think we should have debates about the proper place to make health care decisions. Should the decisions be in the hands of bureaucracy or in the hands of the person seeking care?

Should the distribution of health care be driven by formulas created by some third party or should the decisions be driven by people actively taking part in living their lives?

When we relinguish control to a centralized bureaucracy we find the system becomes consumed by the friction internal to the bureaucracy.

As we look back at the market crash of 2008, we find that the financial system had been churning and churning trillions of dollars worth of activity, without really improving life for the majority of the community. This Enron style economy had all sorts of internal activity which created the illusion of wealth, without creating real wealth.

The centralized bureaucracies of government do not fare much better either. For example, when we look at public schools (including charter schools), we find an excessive amount of the resources the public spends on the school being churned up by internal friction within the adminstration while the academic needs of the students often go neglected.

To make the right decisions, we need to be able to discuss the issue at a level that is more fundamental than the petty concern of which centralized authority should have control? Before answering the question of which centralized authority should control our lives, we should discuss the merits of people controlling their lives v. centralized authorities controling their lives.