Slate is deeply confused about insurance

[Felch]

http://www.slate.com/id/2228566/

Suffer the Little Children
How Baucus' health care bill panders to the young.
By Timothy Noah

One of the more annoying components to Sen. Max Baucus' just-released "chairman's mark" is its creation of a special category of private health insurance policy to be offered to a group known in insurance circles as "young invincibles." These are people 25 years or younger who don't understand what all this health care fuss is about because they are going to live forever and therefore have no use for doctors. One-third of them carry no health insurance, and they account for nearly one-third of the uninsured.

If health reform is going to include an "individual mandate" compelling people to buy health insurance, as this one does, then it would seem logical to have young invincibles buy health insurance in large pools that include older, typically less healthy people. Insurance, after all, works only to the extent that it can spread risk among a diverse population. But the Baucus bill invites private insurers to create a special category of insurance available only to those people least likely to become ill. The insurance would be catastrophic, i.e., it would cover only the most dire and expensive medical calamities that might befall an invincible. No such provision appears in the other health reform bills.

As Erika Lovley noted recently in Politico, President Obama's enthusiastic supporters among the young aren't particularly enthusiastic about health reform. It will, after all, require them to buy something they probably won't need. Baucus' young-invincibles option is a sop to them. By isolating invincibles from people far more likely to draw health benefits, Baucus guarantees they won't have to pay much in health premiums. The option is also a sop to insurers, who will see this as a fantastically profitable opportunity to sell health insurance to people who almost never get sick. They are in the position of an ice maker who just found out the government is forcing Eskimos to buy ice cubes.

Everybody else gets screwed. By inviting the young to opt out of larger health insurance pools, Baucus guarantees that health insurance will be that much costlier for people over age 25.

The line that really bugged me was, "Insurance, after all, works only to the extent that it can spread risk among a diverse population." That's complete nonsense. Insurance works because insurers use information about the customer to determine a probability that they would need a claim. They then take a large number of people and rely on the law of large numbers to even out the periods of good and bad luck. Diversity has nothing to do with it. Size of population is what matters.

Timothy Noah is basically saying that a car insurance company can only stay in business if it has both good and bad drivers buying policies. Obviously that's horse****. A company might specialize in offering low rates to good drivers, or high rates to bad drivers, or it might go after both markets. But what keeps an insurance company in business is having a large number of clients, so that a rash of bad luck doesn't drive it out of business.

Am I right about this, or am I completely misinformed? And if I'm right, why the hell would Timothy Noah think that diversity is the key to successful insurance?

The proposal looks great to me. Young people are less likely to get sick than older people, but that's why insurance is so great. A relatively low fee means that if I do get into a serious accident, or get seriously ill, I could still afford coverage. Young people need insurance, they just don't need to subsidize insurance for less healthy old people.

[rah]

In the US, If you work for a company that provides health insurance the young people are subsidizing the older people. Since the company is picking up the lions share, it's not as noticable and more younger people take the coverage instead of opting out. This provides some positives.
One, as long as they work for that company they can never be denied coverage.
Two, if they stay there long enough (or change companies that has a similar plan) the money that people would say they subsidized the older people will be returned to them in the form of being subsidized when they're older.
Three, you're insured if you need it.

So yes, plans that have a bigger pool are probably better for everyone. Young people do get old eventually.

[Imran Siddiqui]

Young people need insurance, they just don't need to subsidize insurance for less healthy old people.

They do if the goal is affordable health insurance for all.

[Felch]

In the US, If you work for a company that provides health insurance the young people are subsidizing the older people. Since the company is picking up the lions share, it's not as noticable and more younger people take the coverage instead of opting out. This provides some positives.
One, as long as they work for that company they can never be denied coverage.
Two, if they stay there long enough (or change companies that has a similar plan) the money that people would say they subsidized the older people will be returned to them in the form of being subsidized when they're older.
Three, you're insured if you need it.

So yes, plans that have a bigger pool are probably better for everyone. Young people do get old eventually.

I'm in that situation at my current job. My health insurance is fully covered by the company, so I don't care. If I did have to pay, I'd resent subsidizing my older coworkers who have chronic health problems and higher salaries.

Young people need insurance, they just don't need to subsidize insurance for less healthy old people.

They do if the goal is affordable health insurance for all.

If that goal is so important that it warrants a wealth transfer from poor to rich, then go for it. I don't think that's the case. And I'm damn sure that Mr. Noah is being disingenuous with his arguments.

[Imran Siddiqui]

I'm in that situation at my current job. My health insurance is fully covered by the company, so I don't care. If I did have to pay, I'd resent subsidizing my older coworkers who have chronic health problems and higher salaries.

Well you still somewhat are. Your health insurance is fully covered by your employer, which has an impact on salaries.

[Felch]

Yeah, but it's invisible, so it doesn't bug me. I mean, I understand academically that I'm subsidizing the older workers, but since that's not on my paystub I don't care as much. In a way, it's just another advantage I offer the company. My boss has an economic incentive to retain me because I help keep insurance rates lower than an older employee would. But that's a rationalization after the fact.

What bugs me is the nonsense that Mr. Noah is trying to peddle. He's claiming that separating young people from the broader population hurts everybody. It hurts the broad population because they can no longer piggy back on the relatively healthy young people, but it's a clear win for the 25 and under crowd.

[Imran Siddiqui]

What bugs me is the nonsense that Mr. Noah is trying to peddle. He's claiming that separating young people from the broader population hurts everybody. It hurts the broad population because they can no longer piggy back on the relatively healthy young people, but it's a clear win for the 25 and under crowd.

I think you are reading in an assumption that isn't there. I don't see how you can read it and think that Noah is saying the mandate is a win for the 25 and under crowd. He's just saying its necessary for universal health care to be affordable.

[Felch]

On rereading you may be partly right. I took the sentence "Everybody else gets screwed." to refer to everybody besides the insurance companies.

I say partly right because he doesn't only say that it's necessary for UHC to be affordable. He's advocating a diverse population for diversity's sake.

If health reform is going to include an "individual mandate" compelling people to buy health insurance, as this one does, then it would seem logical to have young invincibles buy health insurance in large pools that include older, typically less healthy people. Insurance, after all, works only to the extent that it can spread risk among a diverse population.

Those two sentences reek. Insurance works by spreading risk throughout a large population. Diversity is only valuable if you're worried about uniformity being its own risk. For example, bananas are almost entirely clones of a single cultivar. If there were a disease that was destroying one banana it would likely affect them all. So an insurance company might want to spread risk throughout many diverse agricultural products, or to hedge against losses through some sort of investment magic. But when you're talking about health insurance for humans, it's a specious argument.

[Imran Siddiqui]

If insurance works by spreading risk throughout a large population, adding "young invincibles" would increase the (insured) population. No?

[rah]

Yeah look what happened to home insurance for hurricane areas. If they could have companies cross state lines they could spread the risk along the entire coast. As it is the pools are so small that costs in Florida are ridiculous.

[Felch]

Adding the young invincibles would increase the population, but the article doesn't say that. It considers diversity to be the goal.

Rah, hurricane insurance, like banana insurance, is one area where I would say that a diverse population of clients helps. What separates those from health insurance is that the calamity is likely to either strike nobody or everybody. In those cases it's worthwhile to spread risks through a diversity. Timothy Noah isn't talking about hurricanes though. With health insurance, catastrophe strike individuals, not regions.

[Solomwi]

If insurance works by spreading risk throughout a large population, adding "young invincibles" would increase the (insured) population. No?

On that note, and maybe my brain isn't quite in gear yet this morning, but wouldn't adding "young invincibles" under the Baucus catastrophic policy still increase the insured population? I get that they'd pay less in premiums than if they bought the same plans the old folks do, which would mute the effect of their inclusion in the pool somewhat, but this seems like a "half a loaf is better than none" situation, rather than keeping them out of the pool altogether, as Noah seems to be complaining about. Am I just overlooking something here, besides the horrific nature of my last sentence?

[rah]

Adding the young invincibles would increase the population, but the article doesn't say that. It considers diversity to be the goal.

Rah, hurricane insurance, like banana insurance, is one area where I would say that a diverse population of clients helps. What separates those from health insurance is that the calamity is likely to either strike nobody or everybody. In those cases it's worthwhile to spread risks through a diversity. Timothy Noah isn't talking about hurricanes though. With health insurance, catastrophe strike individuals, not regions.

Not that dissimilar. If you look at small areas, it works like individuals for health insurance. Some small areas have never been hit and would be like youngsters.

[Felch]

I don't really understand what you're saying. An average hurricane is about 1000 km in diameter. While small areas might have shelter from the storm, it's still a natural disaster of epic proportions. Individual health insurance is not really comparable to hurricane insurance.

[MRT144]

Having a diverse risk pool is essential for a few reasons;

1. A low risk-low premium only pool won't be able to survive a black swan event.
2. A high risk-high premium only pool will have loss reserves depleted faster than premiums will increase and lose members contributing to the pool as the premiums increase concentrating only those able to pay for insurance into the pool. Thus you haven't solved the problem of under-insurance.

Risk concentration is not a good thing and counter to the usefulness of collective insurance.