Economic agents ponder the collapse of the pooling equilibrium

by on February 19, 2013 at 4:10 am in Current Affairs, Law, Medicine | Permalink

Robert Pear reports:

 “The new health care law created powerful incentives for smaller employers to self-insure,” said Deborah J. Chollet, a senior fellow at Mathematica Policy Research who has been studying the insurance industry for more than 25 years. “This trend could destabilize small-group insurance markets and erode protections provided by the Affordable Care Act.”

It is not clear how many companies have already self-insured in response to the law or are planning to do so. Federal and state officials do not keep comprehensive statistics on the practice.

Self-insurance was already growing before Mr. Obama signed the law in 2010, making it difficult to know whether the law is responsible for any recent changes. A study by the nonpartisan Employee Benefit Research Institute found that about 59 percent of private sector workers with health coverage were in self-insured plans in 2011, up from 41 percent in 1998.

And:

 Large employers with hundreds or thousands of employees have historically been much more likely to insure themselves because they have cash to pay most claims directly.

Now, employee benefit consultants are promoting self-insurance for employers with as few as 10 or 20 employees.

And from the FT:

The penalty for not providing coverage is $2,000 per worker. According to the Kaiser Family Foundation, a non-partisan policy group, the average annual cost to employers of insurance is $4,664 for a single worker and $11,429 for a family.

(Do note that the worker will find the job less attractive without health insurance., so this may not translate into a net gain for the employer.)

Here is an update on the 50% premium that can be charged to smokers, assuming the repeal movement for that feature does not succeed.

And now let me stress that you should not expect salvation from the (stand-alone) private sector.  DNA sequencing seems to be making real progress, which will make private solutions harder to sustain, a problem which Alex pioneered the analysis of.

Addendum: Here is a good Christensen, Flier, and Vijayaraghavan Op-Ed on ACOs and their problems.

anon February 19, 2013 at 5:21 am

Do note that the worker will find the job less attractive without health insurance.

Many employers have moved away from “sick days” and “vacation days” to looser approaches such as “paid time off” and not tracking any time off, trusting employees to take what they need and also get the job done.

Other changes are coming as (some) employers also begin to treat employees more as independent contractors, and in some cases make them independent contractors.

Employees are a large fixed cost, making it more difficult to respond to downturns and upturns in business.

If more businesses move towards having fewer employees and using more freelancers and independent contractors, the notion of employer-paid benefits will go away.

See Free Agent Nation, elance, getacoder, etc., etc., etc.

http://youtu.be/girbtir3jOs

As Dan Pink says, it is increasingly the case that talented people need an employer less and less as they change the relationship from one of master-servant to one of independent contractors.

Employer paid health insurance (like many employer paid benefits) is a WWII artifact that will eventually disappear.

ThomasH February 19, 2013 at 5:31 am

Many people warned that following the Romney model of mandated employer “provided” health insurance was inferior to a single payer or the Swiss model, but the status quo bias prevailed. But it is an unstable quasi-equilibrium, probably evolving toward the Swiss model.

JWatts February 19, 2013 at 6:57 pm

LOL. Why don’t you just claim that it’s all Bush’s fault while you are at it. ;)

Steve Sailer February 19, 2013 at 5:55 am

“DNA sequencing seems to be making real progress, which will make private solutions harder to sustain, a problem which Alex pioneered the analysis of.”

Pretty slow progress:

http://blogs.discovermagazine.com/gnxp/2013/02/1-out-of-100-benefit-from-whole-genome-sequencing/#.USNaM1p4aec

Ray Lopez February 19, 2013 at 6:12 am

Thanks, interesting stat, and not sure I would want to know my own DNA history, relying instead on family tradition: “Experts caution that gene sequencing is no panacea. It finds a genetic aberration in only about 25 to 30 percent of cases . About 3 percent of patients end up with better management of their disorder. About 1 percent get a treatment and a major benefit.”

Andrew' February 19, 2013 at 8:09 am

Why are we so silly? Risk is eliminated and that’s seen as a problem because of its impact on insurance. Redic. Maybe we could just refresh our understanding of what insurance should be doing.

DocMerlin February 19, 2013 at 9:33 am

+1: Andrew

DocMerlin February 19, 2013 at 9:32 am

“It finds a genetic aberration in only about 25 to 30 percent of cases . About 3 percent of patients end up with better management of their disorder. About 1 percent get a treatment and a major benefit.”
Thats a /massive/ benefit. 1% of the US is 3 million people.

Simone Simoni February 19, 2013 at 10:44 am

These are different sorts of progress. It’s like figuring out which horse to bet on versus making horses run faster.

Ray Lopez February 19, 2013 at 6:08 am

Reading an article by R. Coase now, from the 1980s (when he was 75 years young–he’s 102 today), and he says in a ‘friction-free’, no-transaction-costs environment, the Coase theorem says insurance is non-existent. Anybody care to elaborate how that would work? Do we all contractually agree to chip in a small amount if any one of us gets ill? Bypassing the middleman? What would that do to W. Buffett and Geico?

Hazel Meade February 19, 2013 at 10:36 am

I don’t get how that would work.
Insurance is a financial tool for individuals to manage risk. You make a trade with the insurance company – pay a fixed recurring cost now instead of bearing the risk of a large unexpected cost in the future. You are basically paying the insurance company to carry your risk for you. And your premiums are set according to what the insurance company calculates as the likelihood of your experiencing unexpected future costs. You are more risky, you pay them more.

It has nothing to do with pools or shared costs.

john personna February 19, 2013 at 12:16 pm

That last line was a clunker. An insurance company would never insure just one person, at one person’s risk. It would indeed be a gamble for profit or bankruptcy (just like one worker risking high medical costs). Actuarial science certainly started with the idea that risk for the company was the risk in the pool, and companies have striven to manage their pools ever since. (Preferring non-smokers to sky-divers, etc.)

Hazel Meade February 19, 2013 at 2:24 pm

Of course you wouldn’t insure just one person, because then you would be completely exposed to their risk. You insure multiple people to average out those risks. If you are sane, however, you charge the less risky people less, and the more risky people more. You don’t poke your own eyes out and pretend they are all equal risk.

john personna February 19, 2013 at 3:19 pm

Do you remember what Mr. Rumsfeld said about “known unknowns?” It is a known unknown that you don’t actually know the true risk of each applicant. By aggregating to the pool you insure against the more stable mean outcome. And again, this is where actuaries began.

Hazel Meade February 19, 2013 at 4:04 pm

You don’t know the true risk of each applicant, but you can get a better approximate estimate than simply assuming the risk is the same for everyone in the same age group. it isn’t. And it’s statistically provable that it isn’t. An insurance company would have to be insane to ignore that data.

The ACA institutionalizes actuarial insanity.

john personna February 19, 2013 at 4:15 pm

I think you’ve stuck yourself in a contradiction. You seem to be saying that insurance companies both “must” and “cannot” price for their pool risk.

Hazel Meade February 19, 2013 at 4:47 pm

I think you have no idea what I’m talking about.

Is it impossible to grasp the idea that you can statistically prove that some people are more likely to get certain diseases than others, and you can assign a number to that risk, calculate it’s expected cost and charge accordingly?

Your argument seems to be that unless insurance companies have perfect knowledge of all risks down to the nth decimal place, their only alternative is to have one giant pool and charge everyone the same rate.

derek February 19, 2013 at 10:53 am

All else being equal, we pay for all the medical care we receive during our lives. We can pay it upfront over time, or we can pay it in one chunk when we have an episode. Prices would adjust to ability to pay. We all die eventually, and all incur medical expenses along the way, some less than others. Presumably pooling would assist, ie. you have 10 people, 9 of whom keel over without a fuss, the tenth takes years to die at great expense. That is changing however, the common killers are survivable and most of us are doomed to die after a long period of physical and mental degradation.

Insurance gathers money during the time you are healthy to be available when you aren’t. Then you have the government programs supported by the borrowing power of the US Treasury which pay for things. This creates incentives for meddling by politicians where they can mandate a benefit to their chosen group where it is paid by others, and insurance itself has incentives to overcharge and overtreat.

The greatest friction in the US system is a detachment from the ability to pay. This includes the borrowing done by government.

john personna February 19, 2013 at 12:20 pm

I think if 1000 of us, as seemingly healthy 20 year-olds, join an insurance scheme, we only want to cover the aggregate cost of all of us, going forward. If we all collect for the worst case of any one of us, it is over-commitment of resources.

axa February 19, 2013 at 7:25 am

Just curious, where’s the line between a smoker and non smoker? There are many gray areas. First one, let’s say i’ve smoked for 50 years and today…..I decide to quit and I accomplish it until my last day. Am I smoker or nonsmoker? Also think about a bartender that does not but his lungs are full of second hand smoke, which premium should he pay? What about firefighters?

Just read that insurance companies have a probationary period for non smokers. But after 50 years of smoking, quitting makes a difference?

If smokers have to pay higher premium, it is a really bad antecedent. The next step is overweight people paying more for incresed diabetes and heart problems risks. First they came for the smokers……

Andrew' February 19, 2013 at 7:55 am

“after 50 years of smoking, quitting makes a difference?”

Yes. Smoking is so not bad for you that you can do it for decades and it’s never too late to stop. We are just silly ninnies about that and everything else. Self-insurance…also known as freedom of association…is extremely tantalizing.

john personna February 19, 2013 at 12:28 pm

What would self-insurance look like in this day and age? Do you expect people to have the millions needed for worst-case procedures (cancer treatments, transplants, years of dialysis)? Or are you assuming that the non-rich self-insure for some things and die for others?

(I notice periodic calls on the internet for assistance of writers or their spouses suffering dread diseases. They “self-insured” badly, and now rely on fame for a shot at funding. Similar bad self-insurers without the fame …)

NPW February 19, 2013 at 8:13 am

“If smokers have to pay higher premium, it is a really bad antecedent. The next step is overweight people paying more for incresed diabetes and heart problems risks. First they came for the smokers……”

I fail to see the problem. Take a look at the top 10 killers in the US and their causes. We are most likely to die due to our lifestyle choices than any other cause.

End of life care is, and will continue to be, the primary driver of healthcare costs. Incentives for healthy living in the form of allowing and/or requiring insurance companies to pass on costs to the person directly responsible seems acceptable, once we also accept the idea that the state needs to be involved further into healthcare.

If you are willing to believe that the government can tell the taxpayer how to manage their health…….then you have to accept that the government will tell you how to manage your health.

Andrew' February 19, 2013 at 8:25 am

It depends. Do people who don’t smoke cost less for end of life care? Maybe smokers cost less. Maybe we should encourage everyone who makes 60 to take up smoking, motorcycles and skydiving. This is my same problem with people who want to government to internalize everything. You can never do it. So, it’s just a question of who you screw over.

NPW February 19, 2013 at 8:44 am

Andrew’, not so much. Encouraging everyone to commit suicide would also solve the problem, but that isn’t the point, given that soylent green hasn’t been one of the proposed solutions.

Paraphrased and cut/paste from CDC:

The top killer is heart disease.

•About 600,000 people die of heart disease in the United States every year–that’s 1 in every 4 deaths.

•Heart disease is the leading cause of death for both men and women.

•Coronary heart disease is the most common type of heart disease, killing more than 385,000 people annually.

••Coronary heart disease alone costs the United States $108.9 billion each year.

Risk Factors:

High blood pressure, high LDL cholesterol, and smoking are key risk factors for heart disease. About half of Americans (49%) have at least one of these three risk factors.

Several other medical conditions and lifestyle choices can also put people at a higher risk for heart disease, including:

•Diabetes

•Overweight and obesity

•Poor diet

•Physical inactivity

•Excessive alcohol use

Slocum February 19, 2013 at 9:31 am

Andrew’, not so much. Encouraging everyone to commit suicide would also solve the problem, but that isn’t the point, given that soylent green hasn’t been one of the proposed solutions.

That misses the point. If the people who choose to ride motorcycles, jump out of airplanes or smoke think that the risks are worth it AND such ‘risky’ behavior actually saves money on average (because those people tend to die earlier and/or more cheaply) then what conceivable role could the government have to play?

Or should the government be charged with determining which kinds of risks are OK and which are not? And if so, would anybody be surprised if the acceptable risky behaviors turned out to be things like rock climbing and helicopter skiing (because they’re the SWPL kinds of activities that high-status individuals — including health regulators — prefer) and the unacceptable behaviors turned out to be things preferred by proles (say, smoking and motorcycles)?

Andrew' February 19, 2013 at 9:40 am

One of my proposals is to legalize any and all substances after the attainment of life-expectancy. Sorry ladies.

secret asian man February 19, 2013 at 9:55 am

Slocum: And if so, would anybody be surprised if the acceptable risky behaviors turned out to be things like rock climbing and helicopter skiing (because they’re the SWPL kinds of activities that high-status individuals — including health regulators — prefer) and the unacceptable behaviors turned out to be things preferred by proles (say, smoking and motorcycles)?

In the eyes of the elite, that’s not a bug, it’s a feature.

This is most cynically seen in the LA fast food laws, where the rich, educated whites banned new fast food restaurants – but only in poor, brown neighborhoods. Rich white people are free to eat organic, free range lardo.

They simply do not believe in the humanity of those that are poorer, darker, and less educated. We are merely natural creatures to them, like whales, and like the whales we exist only to be objectified and “saved”. The idea that we have our own hopes and desires, make our own choices, evaluate our own risks and accept our own rewards is as absurd to an urban liberal a whale ordering fair trade coffee.

john personna February 19, 2013 at 12:35 pm

Relatedly. Some greenies did a total lifecycle analysis of environment impact, bicyclists versus cars. The punch line was that frequent bicyclists used more planetary resources … because they lived longer.

Hazel Meade February 19, 2013 at 10:40 am

If smokers have to pay higher premium, it is a really bad antecedent. The next step is overweight people paying more for incresed diabetes and heart problems risks. First they came for the smokers……

That’s what normal insurance IS. If you’re more likely to get in an accident, you pay more for car insurance. If you’re more likely to get sick, you pay more for health insurance.

Why is it moral for GEICO to charge a 25 year old male more in auto insurance, but it’s immoral for Blue Cross to charge an obese smoker more for health insurance?

Andrew' February 19, 2013 at 10:48 am

It’s immoral to the degree to which the price is legally required to be wrong.

Hazel Meade February 19, 2013 at 11:48 am

Under the ACA, all insurance rates are legally required to be wrong. That’s what “community rating” is.

The tobacco exception just allows insurers to charge slightly more correct rates for one (and only one) category of behavior.

NPW February 19, 2013 at 12:32 pm

You could argue, and I’d agree, Obamacare is immoral. However, somehow drawing the line around smoking I find irrational.

At least smoking is a choice unlike age and gender.

Smoking and obesity have a direct causal link to increased medical cost. Insurance should rise as a result. You can argue that the numbers are off. I have no idea. But the basic idea is rational.

Hazel Meade February 19, 2013 at 2:35 pm

I tend to agree that singling out smokers for special persecution strikes me as vaguely wrong. If we’re going to collectivize all risks, then why exclude smokers? It just seems like some vague prejudice that society has developed against smokers in recent years, as part of the anti-smoking campaigns. At some point, anti-smoking advocates started portraying smokers as loathsome people who should be shunned. Maybe this is effective at getting people to stop smoking, but when it bleeds into public policy, and basically gets codified into official discrimination against smokers, it’s crossing a line.

That said, we should add more stuff to the list and go back to an individualized risk model of insurance.

john personna February 19, 2013 at 12:41 pm

In a just-so world, where all medical costs were tied to behavioral choices, this might make sense. But I know I’ve told the tale in these pages of my friend with a congenital heart problem, who got his first pacemaker at age 17. Each time I tell that story market extremists forget it immediately. Or say, screw him, that he is uninsurable before adulthood is just a cost of our perfect system.

Hazel Meade February 19, 2013 at 2:28 pm

It’s not just “behavioral” choices. But also genetics. Some people are born with higher risk factors for certain diseases.
But nobody is “uninsurable” in a free market, it’s just a question of how high the premiums need to be.
if you make it illegal for insuerers to charge a rate that is commensurate with his risk, then they will decline to insure him.

Anything else, and we’re not talking about insurance, we’re talking about charity.
What you want is for the insurance system to operate as a charity that we’re all compelled to tithe into.

john personna February 19, 2013 at 3:23 pm

People who believe in various forms of national health care believe in shared risk. They believe that we each had a risk of congenital disease. It might have been us, even if we did dodge that bullet. And so, Golden Rule, we take care of pacemaker guy as we would like to have been treated, had it been us.

(Similarly, if one of us picks up SARS in an airport, etc.)

Hazel Meade February 19, 2013 at 4:48 pm

Good for you. Go form a health co-op and leave the rest of us out of it. Nobody is stopping you.

axa February 19, 2013 at 2:05 pm

i’m curious to multiply “cancer rates per 100K persons” (http://apps.nccd.cdc.gov/uscs/toptencancers.aspx) with “Average Annual Costs of cancer Care” http://costprojections.cancer.gov/annual.costs.html that’s how you calculate premiums, right? But I’m hungry now, later!

Hazel Meade February 19, 2013 at 2:22 pm

Not exactly. You can vary rates by a person’s individual risk factors. Some people are more likely to get cancer than others. You can tell based on lifestyle, genetics, and family history. So if a person is 30% more likely to get cancer, they pay 30% more for the coverage of cancer treatment. You could even break it down by individual TYPE of cancer. You can get as detailed as the limits of your knowledge allow.
At least that how it worked in the sane, pre-ACA universe.

john personna February 19, 2013 at 3:26 pm

You’d need invasive monitoring for that. What did I have for breakfast this morning? Did I skip my morning bike ride? For a true rate my insurance company would have to know.

… which all leads me to believe you are finding refuge in a fantasy, one where individual risks are fully known. As I say above, known unknowns.

Hazel Meade February 19, 2013 at 4:07 pm

Just because you can’t have perfect knowledge of thr risks, doesn’t mean you can’t get a better estimate of them than “La La La, everyone is equal!”

john personna February 19, 2013 at 4:18 pm

Actuarial tables are “la la, everyone in this demographic is equal.” Just the same, insurance companies have always covered more than one demographic. They’ve always understood their total exposure is related to the sum of their demographic exposures. You know that. You just say they “can’t” do that with a wider pool of applicants and demographics, including importantly more healthy people mandated in. Silly.

Hazel Meade February 19, 2013 at 4:53 pm

john,
If insurance companies have never varied rates according to individual risk factors, why do you suppose they give you that giant health questionaire about your family history of disease, whether you smoke or not, and so forth, when you sign up for it?

The very fact that the term “risk factor” exists is evidence that they understand that individuals have different likelihoods of getting various diseases. There are entire industries that revolve around telling people what their risk factors are. You can go get a DNA test today and get a report back telling you that you are at an increased risk of X, Y, and Z conditions.

Andrew' February 19, 2013 at 9:25 am

“Encouraging everyone to commit suicide would also solve the problem,”

And yet you disagree. Odd.

Andrew' February 19, 2013 at 9:29 am

What’s funny is that most what I say are simply truisms and people still argue. Disease that have no cures are actually probably pretty cheap for the government and insurance. That’s how I know that the government would over-charge smokers. It’s because they are adulterating insurance by peppering it with stuff like social engineering. Over-charge smokers so we encourage them to quit, but do it at a higher than economic rate for what smokers actually cost the system, why? Because “yes, we can!”

NPW February 19, 2013 at 12:20 pm

There is no truisms from you Andrew, just opinions.

Truism:
The leading cause of health issues that require medical intervention is lifestyle choices.
The collective will be paying for the individual.

Opinion: I disagree with the idea that you can hold the idea that Obamacare is good, and the government dictating health choices bad. I disagree with the idea that Obamacare should be managing costs, and managing cost by kicking the cost back to the individual is bad.

Truism:

Encouraging people to commit suicide is not on the list of viable solutions.

Suicide is not the same as a long term medical expense.

Smoking can lead to a long term medical expense.

Opinion: I don’t see a connection between your ramblings and my (CDC’s) facts.

The Obamacare charge might be excessive; I have no idea.

secret asian man February 19, 2013 at 9:46 am

This has nothing to do with cost and everything to do with control.

Lung cancer rates have gone down greatly due to the decrease in smoking. As Gandhi famously observed, the mortality rate around here is still 100%. Those who do not die of lung cancer most certainly will die a few years later of something else, and it is likely to be equally expensive. The cost savings are zero.

We will all die of something. The older we are when we die of it, the more it is likely to cost.

What is going on here is very simple, and entirely non-economic:

Rich, educated whites believe they have the right and obligation to run the lives of poorer, browner people, who the rich, educated whites see as somewhat less capable of decision-making, responsibility assumption, and general humanity.

The health care system is merely a tool to achieve that goal.

Jeff Morgan February 19, 2013 at 2:47 pm

People value QALYs differently, but it’s safe to assume they are worth more than zero dollars.

allan February 19, 2013 at 10:14 am

“Economic agents ponder the collapse of the pooling equilibrium.”

An excellent example of econo-junk speak. What the hell, exactly, does that mean? Probably something like, apologists for capitalism begin to realize that the free market is collapsing in front of their eyes.

Hazel Meade February 19, 2013 at 10:30 am

You should never buy insurance for something you can afford to pay for out of pocket.
That’s one of the reasons why it’s stupid to buy insurance that covers birth control. (It only makes sense if someone else is paying for the insurance).
It’s also why high-deductible plans are a good idea for most consumers. Sadly, the ACA limits deductibles to a level well below what many people could pay out of pocket.

allan February 19, 2013 at 10:42 am

It’s not the pills that are expensive, but the doctor’s office visit. If birth control pills were available over the counter, insurance costs would disappear overnight.

Andrew' February 19, 2013 at 11:13 am

ergo…

Robert Olson February 19, 2013 at 11:13 am

Depends on what kind of BC you get. Not all BC is created equal.

Hazel Meade February 19, 2013 at 11:45 am

The doctor’s visit is only $100. And as a predictable expense, it doesn’t make sence to pay for it with insurance (unless again, someone else is buying your insurance). And even if you do, there’s no reason you can’t pay for the doctors visit with a $20 co-pay and then pay for the pills out of pocket.

The thing is that insurance has to cover the cost of whatever you’re spending so your insurance rates will reflect the costs of your risk and then the insurance company will tack on profit. BC pills are a 100% risk, so your monthly premiums will just rise to cover the price of the pills plus profit. Ergo, it’s cheaper to just buy the pills than to pay the insuers to buy them for you.

As for bulk discounts, etc., there are health discount clubs that insurers offer so you can get the cheaper rate for pills even if your plan doesn’t cover them.

allan February 19, 2013 at 1:26 pm

Doctor’s visit only $100? Where exactly is this doctor located? And even if you could find this magically cheap doctor, what do you do if your take home pay is less than $1,000 per month, rent is $600, food is $300, car expense is $200?

Rich Berger February 19, 2013 at 1:37 pm

Sell the car and move back in with your parents.

Hazel Meade February 19, 2013 at 2:17 pm

You only have to do this once a year.
And if your take-home pay is $1000, what are you paying for health insurance?

Trick question, because as we know people whose take home pay is $1000 probably have someone else paying for their insurance, which gives them an incentive to make it cover as much as possible. (Why not make it cover aspirin? )

But my point is that IF you are paying for your own insurance (which would be a big chunk of that $1000/month), it makes no sense to expand your insurance coverage to include BC. Better to get a checper $50/month catestrophic-only plan, and pay for the BC out of pocket. Add in an extra $10 a month to cover the annual office visit, and you’r paying $80/month for catestrophic coverage +BC. By comparison, a comprehensive plan is going to run you upwards of $300/month.

But again, in this world we are living in, nobody actually pays the cost of their own insurance, so they have an incentive to make other people pay as much as possible and have it cover as much as possible.

JWatts February 19, 2013 at 7:12 pm

“Doctor’s visit only $100? Where exactly is this doctor located?”

Tennessee. Actually, to be honest the last Doctor’s visit was around $130.

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