Thursday, November 18, 2004

More Insurance

Okay, so let's try to think about health insurance which combines lots of issues that other types of insurance markets have but also adds in a few complicated wrinkles, which we'll try to add on one at at time...

Imagine everyone begins adulthood as an identically healthy 18 year old. Every year you have some probability of developing an illness, with an associated financial cost. Starting there, we have the fire insurance model discussed below. Add one more wrinkle - for every year you age, the probability of getting an illness (or more generally the overall average illness cost) goes up just a little bit. Now we're still in the fire insurance model, only your insurance premium goes up a little bit each year. We don't have the car insurance/adverse selection problem because your illness probability is simply a function of your age. Every person of a given age gets charged an identical rate. Okay, what's the problem with this? Well, nothing, except for the fact that by the time people reach age 65 or so, their insurance premium is going to be hitting the stratosphere.

My conservatarian friends will say, so what? If you didn't save enough money in anticipation of this, then tough titties. No money, no insurance, no medical care. And, that's one way to view things I suppose, though not the way I want our society to operate. Even if we make all the right decisions in life, bad luck (such as becoming mostly unemployable after getting a few limbs shot off in Iraq) can obviously impact our ability to earn enough money to afford to cover our medical expenses in our old age.

So, first option is to just let people die. What are some other options? One is to have some sort of universal insurance for old people, which we have. Another would to have same but means test it to some degree. A third would be to encourage/require people to purchase lifetime insurance plans, which they'd start paying into when they're young. Advantages would be that payment schedules could be smoothed over a lifetime and contracts could be written so that policies couldn't be cancelled due to the development of a chronic condition (more on that below, that's an "outside the current model" situation). Disadvantages would be that not all people would be able to afford to pay these premiums, the policies could presumably be cancelled due to temporary inability to pay, and perhaps most importantly your health insurance company could go bankrupt about the time you hit 60, or the contract invalidated by a Republican judicial appointee, leaving you rather screwed. For various reasons, expectation of the enforcement of such long term contract arrangements can't really be guaranteed.

more later, as we add on some more wrinkles to make this a bit more realistic...