What is the real source of the medical adverse selection problem?

Ray Fisman reports on the job market paper of Nathaniel Hendren, an MIT student on the job market this year.  Here is an excerpt from Fisman’s piece:

…sufferers of heart disease and cancer have greater self-knowledge than healthy people in terms of what their likely medical care costs will be. The market for insurance unravels, in Hendren’s model, when patients have a clear view of their future health care costs and people who anticipate lower-cost futures self-select out of insurance coverage.

It’s not about knowing more about your state of health, it is about knowing more about how costly your treatment will be.

Comments

That is one awesome committee

Showing that modern health insurance isn't insurance but is really redistribution and pre-payment?

You assume perfect knowledge, and if you do not have perfect knowledge, or do not and have not ever, been confronted with random events, you are the one person who should self insure. Go for it.

That's not it Bill. I'll never need birth control. I don't need perfect knowledge to know that. I'm not making a political point, it's just an obvious example that anyone should be able to understand. You are forced to be completely ignorant, thus the overall medical economy is much more ignorant than the patient.

I would do an awesome job of creating a bundle of insurance, self-insurance, and high deductible with a medical savings account if only that were allowed in these here United States of America.

Andrew, You need a vascetomy.

Also, Andrew,

Re your comment: "I would do an awesome job of creating a bundle of insurance, self-insurance, and high deductible with a medical savings account if only that were allowed in these here United States of America."

You can do all of those on your own today. Insurance requires pooling and laws of large numbers to work, so the carrier needs a large pool to even out risks and variance: now ask: how will you limit entry into the pool, avoid others more ignorant than you, or those who have conditions but are unaware of them. And, if you are the carrier, you will have to consider this and raise premiums to cover that risk, particularly if it is a small pool.

And, if someone doesn't buy insurance, you still pay with higher hospital charges that are passed on to you.

If you really believe in your own knowledge, you would do what Doc above claims, not participate in redistribution and not buy insurance because it is simple prepayment of the known.

Bill,

You do not have a subtle reading of how the medical economy works.

Yes, it is possible to do what I suggest to some extent, and to that extent I am doing it.

No, I do not need to insure against the likelihood that I will require a vasectomy. One way some people might know that is if they've already had a vasectomy. Other ways people might have "perfect" knowledge is if they want to have kids.

"And, if someone doesn’t buy insurance, you still pay with higher hospital charges that are passed on to you."

Not generally true. Only true if hospitals are required to provide all types of service to those without the ability to pay (not "those without insurance" because plenty of people without insurance have the ability to pay.

It is true that by requiring hospitals to render all care and requiring insurance companies to insure against all potentialities prices get out of hand.

This is what is crazy about what you are saying Bill: you have to know what you are buying. Insurance can't insure against everything and not go bankrupt. So, they have to know what they are selling. So, the customer has to decide what is risk and what is uncertainty. Here you have a story that directly contradicts what you are saying. Customers are winning because of superior knowledge.

And how do we know I'm right? Because the government despite what they say, what they do is charge people $750 a year if they are uninsured. Not that $750 is the right number, but they now that they cannot continue covering the customer's heads-I-win-tails-you-lose option.

Andrew, No insurance company is going to sell an experience rated policy where the pool consists of only one person. Like it or not, you are being grouped with others.

Isn't that exactly what life insurance is? Why does medical insurance have to be different?

Why is this insight considered so remarkable? Couldn't an economist have come up with this idea decades ago just by asking an insurance executive or actuary at a cocktail party?

Nobel prize winners got this exactly backwards in our half-assed slipshod grease job medical boondoggle made only worse by squandering opportunity costs during the Great Recession.

do economists still get invited to cocktail parties?

Someone has to serve the drinks.

I have read lately that American doctors diagnosed with (some?) cancers often decline treatment on the grounds that they are all too aware of how loathsome it is.

Is there an opportunity for an Economics study there? Presumably by their decision they know more about their future health costs than other people do.

Tyler, your last sentence is a false dichotomy.

If B (the cost) is a function of A (your health), then you have to know the state of A *as well as* the function in order to know B.

Yes, I don't really understand the dichotomy. Surely knowing more about your state of health and knowing more about how much your health will cost are very related?

Perhaps the idea is that healthy people tend to underestimate their expected health care costs, making insurance appear to be a poorer value to them than it really is, whereas the sick tend to have a better idea of their expected costs than anyone else, including the insurance companies. If the healthy have a cognitive bias that tends to cause them not to buy insurance, those who are interested in buying insurance are that much more likely to be ill.

It's not that it's not about your health, it's that it's really about knowing if their are treatments available that you can pay for.

Imagine a coin toss. Person's A and B toss coins. They then hide them under their palm. Person C has to insure them against tails. Assume that one gets heads and one tails (law of large numbers). Now Person C has to price the insurance he offers them but A and B don't have to accept the offer. Person's A and B are trying to screw each other and it's Person C's job to stop them from doing that by making sure the trades balance and that people are insuring against risks rather than buying free options. Now add Person G, his job is to make everyone's job harder.

Imagine flipping two coins once a year. One coin determines whether you need health insurance because you are uninsurable, defined by three heads in a row in the past 15 turns. The other coin determines whether you must switch insurers because you lost your job (heads) with insurance denied if you are uninsurable and your COBRA ran out (three heads in a row); if your job coin is heads three times in a row, flip it once to see if you are out of a job with benefits forever.

That more descriptive of the non-free market that most people are in - they can work and thus most get insurance regardless of "insurability" because of government dictates, but once marked uninsured and out of a job for two years, you are in a world that most insurers do not want to be in. Employers have a choice of two to three times more insurers than individuals do....

(errata "Persons", no ')

Here is the money quote:

"Hendren then examines whether those suffering from illnesses that freeze them out of insurance markets are better at predicting their medical futures. Across all three markets, he finds this to be the case. On the prospect of nursing homes, insurable respondents’ predictions are no better than random guesses, after accounting for age, gender, and other things that an insurance company can use to calculate customer risk. They’re not much better at predicting future disability or the arrival of the Grim Reaper. By contrast, across all categories, predictions made by uninsurable respondents do much better than random, and always out-predict their insurable counterparts by significant margins. This backs up Hendren’s theory that the reason insurers won’t cover patients with pre-existing conditions isn’t that they’re too sick—it’s that they’re too knowledgeable about their likely future medical costs."

Bottom-line - the market more-or-less works in separating insurable risks from the adverse selection of asymmetric information. The government is attempting to undo this progress by trying to shoe-horn what should be charitable redistribution into the risk valuation market.

And even more importantly:

"Come 2014, the Affordable Care Act will prevent insurers from discriminating based on pre-existing conditions: cancer victims and stroke survivors will be able to buy insurance at the same price as otherwise similar applicants. Insurance companies may take a hit to profits, but part of the cost will surely be passed on to the lower-cost counterparts to this high-cost pool. Healthy people might be tempted to opt out, but under the new law, they’ll be required to have insurance. This individual mandate is a natural fix to the problem of adverse selection in health insurance: It keeps the lowest-cost participants from opting out, and as a result the market doesn’t unravel."

So, there you have it. Now if you are healthy and would like to use insurance as insurance, you are not going to be allowed under penalty of law to not get taken advantage of. There is nothing left but the death panels and taxes.

http://krugman.blogs.nytimes.com/2010/11/14/death-panels-and-sales-taxes/

Here's how the left works an argument: first they mock it, then it wins.

So, to all you arses who have mocked Hayek...fork you.

Medicare really was the wedge, no?

Most people who are uninsurable were insured prior to becoming uninsurable.

If you are young and leave school but don't get a job with health insurance, you lose your health insurance provided by your dad's company, but if you get seriously injured before getting a job like your dad's with benefits, you are uninsurable. Often parents know from their personal experience no one is invincible, thus they have quickly added their kids back to their policies until their kids are 26. Employer provided health insurance is not free market but dictated by government: insure everyone regardless of uninsurability or insure no one.

If you are working and insured, but become seriously ill and can't work, you become uninsurable even as you extend your employer benefit by 18 months and you must get a job with benefits, or you will be not only uninsurable in the free market, but uninsured as well. Remember, employer provided health insurance is not free market but runs by government dictate.

Some people are born uninsurable with insurance, but will find the free market won't cover them when they must buy free market health insurance. They end up being covered too often by government health insurance.

Because individuals can't predict when they will become insured but uninsurable, collective action, mostly through unions, created laws that eliminated the free market in employee health insurance. In this case, large corporations have the lowest insurance rates even though they knowingly cover by government mandate the uninsurable because the Federal government creates the least free market: large employers can't discriminate in hiring if someone can do the job nor in health insurance because they fall under Federal government dictates.

"It’s not about knowing more about your state of health, it is about knowing more about how costly your treatment will be."

How well served is the free market in health care insurance compared to the government run health care market which 80% of the people are in??

Ie., how many insurers are competing for the non-free-market health insurance business where no one is uninsurable vs how many insurers are competing for business in the free market where the insurer picks its customers?

Why are more insurers competing for business in the non-free-market, where they must pay the medical bills of people who pick them for coverage knowing they must be accepted as a customer, instead of the free market, where they are able to refuse customers who will cost more than they pay??

In the non-free-market of conforming loans, two players controlled the market (Freddie and Fannie) so in the free market where even the uninsurable (they were uninsurable because they couldn't meet income and asset requirements to conform to the non-free-market FHA rules controlling the GSEs insuring their debt) were sought after so vigorously that dozens of banks were fighting for the money-losing uninsurables. The free market players that were big were bailed out by government with cash cash cash (borrow at 0.1% and earn 2% by putting it on deposit) and by the GSEs buying their bad mortgages in convoluted ways to hide the ongoing government bailouts

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