Category: Finance, Insurance.
Many Americans rely on their automobiles to get to work. A single parent, struggling to make ends meet in the suburbs with 100, 000 miles on the odometer, would presumably welcome the guaranteed opportunity for low- priced insurance that would take care of every possible repair on her auto until the day that it reaches 200, 000 miles or falls apart, whichever comes first.
No automobile means no job, no rent or mortgage money, no food. Especially if the insurance is valid regardless of whether she even changes the oil in the interim. And given the importance of reliable transportation, why isN' t the public demanding such coverage? So why aren' t the auto insurance companies writing such coverage, either directly or through used auto dealers? The answer is that both auto insurers and the public know that such insurance can' t be written for a premium the insured can afford, while still allowing the insurers to stay solvent and make a profit. Yet we don' t seem to have these same intuitions with respect to health insurance.
As a society, we intuitively understand that the costs associated with taking care of every mechanical need of an old automobile, particularly in the absence of regular maintenance, aren' t insurable. If we pull the emotions out of health insurance, which is admittedly hard to do even for this author, and look at health insurance from the economic perspective, there are several insights from auto insurance that can illuminate the design, and rating of, risk selection health insurance. Both are risk transfer and sharing devices and I' ll generically refer to both as insurance. Auto insurance comes in two forms: the traditional insurance you buy from your agent or direct from an insurance company, and warranties that are purchased from auto manufacturers and dealers. Because auto third- party liability insurance has no equivalent in health insurance, for traditional auto insurance, I' ll examine only collision and comprehensive insurance- insurance covering the vehicle- and not third- party liability insurance. The following are some commonly accepted principles from auto insurance: - Bad maintenance voids certain insurance.
Bumper to Bumper. If an automobile owner never changes the oil, the auto's power train warranty is void. Collision insurance doesn' t cover cars purposefully driven over a cliff. - The best insurance is offered for new models. In fact, not only does the oil need to be changed, the change needs to be performed by a certified mechanic and documented. Bumper- to- bumper warranties are offered only on new cars. Furthermore, auto manufacturers usually wrap at least some coverage into the price of the new auto in order to encourage an ongoing relationship with the owner. - Limited insurance is offered for old model autos. As they roll off the assembly line, automobiles have a low and relatively consistent risk profile, satisfying the actuarial test for insurance pricing.
Increasingly limited insurance is offered for old model autos. Certain older autos can qualify for additional coverage, either in terms of warranties for used autos or increased collision and comprehensive insurance for vintage autos. The bumper- to- bumper warranty expires, the power train warranty eventually expires, and the amount of collision and comprehensive insurance steadily decreases based on the market value of the auto. - Certain older autos qualify for additional insurance. But such insurance is offered only after a careful inspection of the automobile itself. - No insurance is offered for normal wear and tear. These aren' t insurable events. Wiper blades need replacement, brake pads wear out, and bumpers get dings.
To the extent that a new car dealer will sometimes cover some of these costs, we intuitively understand that we' re paying for it in the cost of the automobile and that it's not really insurance. - Accidents are the only insurable event for the oldest automobiles. With few exceptions service work isn' t. - Insurance doesn' t restore all vehicles to pre- accident condition. Accidents are generally insurable events even for the oldest autos. Auto insurance is limited. With the exception of vintage autos, the value assigned to the auto goes down over time. If the damage to the auto at any age exceeds the value of the auto, the insurer then pays only the value of the auto. So whereas accidents are insurable at any vehicle age, the amount of the accident insurance is increasingly limited. - Insurance is priced to the risk.
The auto insurer carefully examines both when setting rates. - We pay for our own insurance. Insurance is priced based on the risk profile of both the automobile and the driver. And with few exceptions, automobile insurance isn' t tax deductible. Each of the above principles is supported by solid actuarial theory. As a result, the fear of increasing insurance rates due to traffic violations and/ or accidents changes our driving behavior and we sometimes select our automobiles based on their insurability. Although most Americans can' t describe the underlying actuarial theories, most everyone understands the above principles of auto insurance at the intuitive level.
Unsustainable Market. For sure, as indispensable automobiles are to our lifestyles, there is no loud national movement, accompanied by moral outrage, to change these principles. In contrast, similar principles are routinely violated in health insurance. She's busy working, driving to and from work, and driving her kids to school and activities. To demonstrate this, let's return to the same suburban mother from the opening paragraph. She ends each day exhausted, sitting on the couch with fast food.
After a simple injury doesn' t heal for weeks, she turns up at the emergency room and learns she has type II diabetes. She's obese, has a sedentary life, and hasn, a bad diet' t taken the time to go to the doctor in years. Although type II diabetes is controllable, changing diet and exercise habits and properly tracking her condition takes time and effort and she's never quite successful in implementing the necessary lifestyle changes. Whether she has individual or group insurance, her insurance pays for each episode of care, without singling her out for a premium increase, and without charging her any more cost sharing than is charged to the healthiest and most medically diligent insureds. So the initial emergency room visit is only the first of a long list of health care related to non- controlled diabetes and other problems associated with obesity. Her coverage continues until she voluntarily changes insurance companies and/ or employers or becomes eligible for Medicare. Her insurance continues unabated, even though the disease was caused by neglecting her body and she maintains her poor lifestyle even after the disease becomes known.
If she's covered under group insurance she may not even pay any premium. This just wouldn' t happen in auto insurance. As a society, we don' t expect this in private- market auto insurance, but we expect it in private- market health insurance. This scenario is the auto insurance equivalent of guaranteed access to low- priced auto insurance that takes care of every possible repair, including damage already done, until the day the car falls apart so completely it's unsalvageable( death) or reaches 200, 000 miles( Medicare) , regardless of whether she even changes the oil( takes care of herself) in the interim. Furthermore, there's a chorus of national and state interests, which continuously pushes us further away from the auto insurance principles. Prices have been consistently increasing faster than inflation for decades.
The current private health insurance market isn' t sustainable. Each year, insureds use more health care than ever before and more people have no insurance at all. Yet, we' re trying to sustain a private insurance system, which violates the very principles we know are necessary for private insurance markets. Most actuaries and other people in the private health insurance market don' t want national health insurance with its bureaucracy and one- size- fits- all benefits. Yes, health insurance involves the sacredness of human life and is therefore different from auto insurance. It can' t be unlimited.
But if we' re to sustain a private- market solution to health insurance, actuaries need to explain to the larger society, in terms that society understands, the rationale for the following principles: - As sacred as health care is, it's still an economic transaction that has to be balanced by individuals and societies, against other economic choices. Sometimes it will be secondary to other choices. This will provide the best incentive for the control of risk factors. - Although it's hard to draw the line between abuse, self, neglect and ignorance- abuse shouldn' t be insured and we need to draw that line somewhere. - The private market can' t provide unlimited, self- directed health insurance. - Routine care and ongoing treatments of chronic conditions can be pre- funded, can even be subsidized, but they don' t constitute insurable events. - Insurance can' t be expected to keep every human body in pristine condition. On a given day, the mother in, for example our scenario may value her car more than her health. - Insurance premiums should be paid by the individual and tied to controllable risk factors. No amount of health care will prevent everyone's ultimate death. - Comprehensive, non, unlimited- subsidized private- market coverage isn' t possible for people with severely impaired health. - The private health market can provide limited non- subsidized health insurance, such as protection from accidents, to even health- impaired individuals. - Individuals who can afford to do so and who take good care of themselves should be able to buy up to better coverage. Discussion of these principles is lacking from most of the current health insurance debate. People have the option of buying up for everything else in life.
If society can intuitively understand how similar principles apply to health insurance, then they should be able understand the principles in the health insurance context. This commentary is solely the opinion of its author. We need to initiate the debate. It does not express the official policy of the American Academy of Actuaries. Nor does it necessarily reflect the opinions of the Academy's individual officers, or staff, members.
