An intellectual freedom blog with an emphasis on libraries and technology

Friday, July 13, 2007

Are you a good risk or a bad risk?

Most of us start out as good risks, but we all become bad ones eventually. "Good" and "Bad" here do not have pejorative meanings: they refer to concepts that insurance executives understand very well. In health insurance, those of us born without any serious health problems start out as good risks. As we age, we become more vulnerable to illness, the injuries that only slow us down a bit in our youth can prove catastrophic when our bones become more brittle and we take longer to recover. As our life spans have increased, we come down with diseases that our ancestors did not live long enough to contract. These natural and predictable changes to our bodies make us "bad" risks. Not all young people are good risks. Some have congenital conditions or genetic diseases, or even just genetically based "odds" of having a serious health problem in youth or middle age. But no matter what, we all will become bad risks if we live long enough.

For an insurance executive, you make a profit insuring the good risks and you avoid insuring the bad risks. The premiums private insurance companies offer to young healthy people cost so much less than those they offer to older people that the young healthy ones can not resist the bargain. Also, many young people starting out in life do so under a mountain of student load debt. For most of them the jobs they have usually do not pay very much either. But even when an older person has climbed the ladder and has a higher income (and not everyone does) the premiums for health insurance become astronomical. This is way out of proportion to the greater income that an older person may have. They are bad risks. They must pay more.

The structure of this system, the "rules of the game," dictate that all health insurance companies must do all they can to attract the good risks, not insure the bad risks, and then boot the good risks out of the system as soon as they become bad risks. A company that does not have enough good risks will quickly go out of business. When their competitors lure away the good risks with lower premiums the company will have mostly bad risks left, which cost more than the premiums an ordinary member of the community can afford. But if you keep the good risks pooled with the bad, it all works out. Some of the good risks die (accident or quick killing disease) early enough in their lives to create a "gain" in the pool of funds to which all contribute. New "good risks" entire the pool all the time and the "bad risks" do not live forever. Someone who lives longer and needs more health care than the person "pays" for, benefits from the funds that the unfortunate unlucky good risks contributed before their untimely deaths. In a system that pools both good and bad risks, It's all about sharing risk.

This is not conspiracy theory. By allowing "free market" rules to reign you create a structural problem. Allowing companies to compete for "good risks" and dump the "bad risks" results in lower premiums for the good risks. But if you allow for this segmentation, sectioning off the two risks into separate pools, one pool of risks generates windfall profits while the other can not pay its own expenses. This also flies in the face of sharing risk. We're all part of the same life-cycle - we all become bad risks eventually, even if we start out as "good" ones. Those who decry this criticism with accusations of "conspiracy theory" miss this point, do not understand the nature of sharing risk, or have some other agenda. The structure of the industry, the "rules of the game" compel them to separate the risks.

But what you must keep in mind is that the good risks so seldom get sick or sustain serious injuries that even with the much lower premiums, the insurance company can amass a truly huge war chest containing hundreds of millions of dollars. They can throw millions of dollars at any candidate running against any elected official who stands up to the insurance industry. The good risks' premiums make the for-profit insurance industry so flush with funds that many of them can run dozens of TV commercials a week telling you what wonderful humanitarians they are. But their humanitarian face they show to people with lots of money or to good risks. Other people see a different face. Oh, and the good risks are so good that the insurance companies even have enough funds to pay 6 and 7 figure salaries to their top executives, give bonuses to the claims examiners who deny the most coverage and pay for 4 lobbyists for each member of Congress. What if we used that money to provide health care?

The news of layoffs of Ford Motors in Business Week mentioned the cost of providing health benefits now constitutes a cost the company can no longer afford. We (the U.S.) is no longer competitive because other post-industrial countries have national health care. Their companies do not have to provide health benefits. They have no link between employment and health care. The U.S. is the only industrialized country without a national health care service.

A successful national health care service must utilize what's called the "single payer" model, or some form of it. In the single payer model, the good risks and the bad risks pay the same premiums. The "surplus" from the good risks who seldom face serious illness and heal from injuries more quickly pays for the care of the "bad" risks that we all we become some day. Everyone is part of the same cycle. Instead of political campaign contributions and TV commercials the good risks' premiums go to providing care. This system also keeps the price affordable. When you remove the incentive to charge "what the market will bear" for medical diagnostics and surgeries, etc. the prices come down. For years I have read articles about how uninsured pay more (when they can afford a hospital stay at all). The explanations from the health care industry is that they charge the same for everyone, but the insurance companies and HMOs, PPOs, etc. can negotiate a bigger discount. Think about it. If you don't realize this is insane stop reading now and please don't bother to comment. The "discount" kind of argument is called "Sophistry" and the dishonesty shines through no matter how you phrase it. Put another way: don't think of it as socialism, think of it as the uninsured negotiating a really big discount.

And all the screaming about government inefficiency does not stand up to the facts. Consumer Reports has published lengthy articles about health insurance in which it compared the "overhead" of HMOs with that of Medicare and Medicaid. The overhead measured as a number of dollars per hundred dollars of re-imbursement breaks out as follows: Medicare and Medicaid: $3 per hundred ; HMOs average around $15 per hundred with the most cost-effective one, Kaiser Permanente, holding at about $12 per hundred. Think of all the money we would have to spend on health care if the marketing executives and the upper management had to go find something useful to do. When you see Michael Moore's movie Sicko! look past the grandstanding and the PR stunts while you consider that even the insured do not receive the health care the Insurance companies promise to deliver. Anecdotal, you say? String enough anecdotes together and you have research. And when we talk about efficiency, the private corporation proves very efficient -- at taking our money then not giving us what they promised in return.

The chief criticism of our present system concerns prevention. If a person receives regular check-ups, proper diagnostic procedures and spends enough time with a physician to learn about nutrition and exercise, we can reduce costs. And the policy of only insuring people with jobs will prove self-defeating as well. Imagine a young person just starting out. The person is unemployed, or under-employed. If that person does not receive medical attention for a problem in its early stages then that person enters the insured pool with a serious chronic condition which requires far more resources and money to deal with than had we allowed the person to see a doctor in the first place. If the system no longer forces uninsured people to neglect their health then they will not have only the ER to turn to and have to wait until the condition becomes serious or life-threatening. The ERs are overloaded now because there are so many people without primary health care. That makes the ERs big money pits, which is why hospitals are getting rid of them. There are now half as many ERs in the San Francisco Bay area as there were during the Loma Preita earthquake in 1989. But the population has increased. Nice to know we're prepared.

An MRI in Japan costs less than half as much as one done in the U.S. Grossly overweight patients need a whole different machine - one that is not only larger but also uses more radiation to make a picture. MacDonald's spends hundreds of millions of dollars advertising its food, not as an occasional treat, but as a staple. I can tell you as an insider in the education business that education costs money. If we want people to live more healthy lives those hundreds of millions that MacD's has to throw at advertisement directed very specifically at children would really come in handy.  No exaggeration: MacDonald's spends more advertising to children than the Federal Government does in aid to public elementary schools. Stopping people from eating crappy food costs money. But not as much money as the medical costs obesity incurs. Preventative care saves money.

But a National system can not work if it has to "cooperate" with private insurance. If we let private insurance poach the good risks and then dump them in the government-run part of the system as soon as they start to cost too much, the government-run system will rapidly turn into a money pit and the private companies will continue to stuff hundreds of millions of dollars into their campaign war-chests, ready to crush any politicians who try to implement a single-payer system. If we enter into a system in which each person can only have as much healthcare as they have "paid" for (health spending accounts) then we have no sharing of risk, and that system breaks down eventually too.

Which is why the democrats can not save us. Obama did not even have a health care plan until after a person embarrassed him with a question about one and all the other democrats present had an answer. Now that he has had his staff come up with something, he promises not to do away with private insurance (of course not). Edwards' rhetoric sounds good until you listen carefully. He stresses that no one "with a job" should be without health care. This panders to the element in the U.S. population that goes into apoplexy over the possibility that some lazy someone somewhere is receiving something paid for with the apoplectic's tax money. Edward's "plan" according to a June 14 Associate Press article, includes requiring health insurance companies to spend 85% of the premiums they collect on patient care. Sounds great until you remember that's the average amount that private insurance companies pay already. Phrased the same way, Medicare and Medicaid pay the equivalent of 97%. His plan ignores the reality that the profit private insurance companies gain from poaching the good risks. He promises to "tax millionaires" to pay for his plan. This may prove difficult as millionaires have resources and power they can use to squash a health plan that relies on taxing them. But all this misses the point: if you stop letting private insurance poach the good risks and then dump them into the government paid part of the system later on we will have the money to pay for a universal health care system. Private, for-profit insurance company CEOs may have to sell a summer home or two to get by after their layoffs and the people who actually do the work can join the publicly run system as auditors, fraud investigators and claims examiners. We will still need people to combat fraud and abuse of the system. And if democrats and republicans do not place adequate safeguards in the system then white collar criminals will take advantage of it (and the pundits will all cry about how that proves that government can't run a health care system).

Speaking of critics of national health care who claim that government run programs remain intrinsically inefficient, Michelle Malkin tried to argue that the scandal resulting from the revelations of how badly the Bush Administration's VA hospitals, and Walter Reed in particular, treat Iraq War veterans means that government run health care does not work. I'd like to say that only Malkin could torture logic that badly, but sadly we can expect others to take up this canard. Some interesting facts: Dr. David S.C. Chu, undersecretary of defense for personnel and readiness, and Dr. William Winkenwerder Jr., the assistant secretary of defense for health affairs ran the VA's health care into the ground. According to

... Chu and Winkenwerder had the wrong priorities, focusing on cutting costs while greater numbers of returning soldiers struggled against an increasingly strained military health care system. Both men know how to manage costs: Chu is an economist and mathematician who once worked in an Army comptroller office. And Winkenwerder is a former health insurance industry executive. But their résumés also point to the problem, according to their detractors. "The military tried to run military health care on the cheap -- like an HMO," said Paul Sullivan, who until March 2006 was a project manager at the Department of Veterans Affairs in charge of data on returning veterans. "And the consequences are the medical catastrophe and the bureaucratic nightmare that we see right now."

Anyone can create an inefficient system. That part is always easy. The United States could create a viable, single–payer universal health care system that reduces costs and improves health. This requires oversight and public involvement. If we let a handful of people tell us what can have, we will continue to have a mess. Universal health care does not make a 100% solution. We will always have frauds, bureaucrats and hypochondriacs making the system less than 100% perfect. Instead of focusing on the lack of a perfect solution, consider an improved one. Every other industrialized country has some kind of universal health-care system. We don't we?


  1. Note: I Overall, this was a good article. It is interesting and thought provoking.

    I must disagree with you though. I see the good risk/bad risk pricing criteria to be good for business and it is also fair and just: if you are healthy you pay less. The older you get the more you pay and if you don't want to pay or can't then off the policy you go. It's your problem with coming up with the cash for a policy, a policy that will allow you to get care and spread a portion of the cost over time.

    My biggest complaint against nationalized health care is: why do I have to PAY for someone else's health care? If you are a fat pig who smokes then you get to pay for the consequences of that lifestyle out of your own pocket. If you are a slut and sleep around and get pregnant you can pay for your own abortion and/or STD. Even if through no fault of your own you are injured why do I have to pay for your bad luck? Let your friends, family, and local charity help you out, not set up a huge bloated thieving
    bureaucracy to rob my pockets.

    When I get old and frail it would be unthinkable to burden others with my problems. Let me pay my own way or, if I cannot, let it be my bad luck or be due to me not planning properly for the future. This idea that government should substitute itself for an individual acting responsibly is un-American. Such thinking stinks in my nostrils, the same socialist-nanny state stench wafting down from Canada and from across the Atlantic ocean.

    Okay, sweeping the bile off the podium, I'll get to some points you made:

    Also, many young people starting out in life do so under a mountain of student load debt. For most of them the jobs they have usually do not pay very much either.

    This seems irrelevant. Was your unspoken point "Having national health care would mean one less expense to burden a person paying off a student loan"?

    The young people you are talking about who are college graduates with large student loans to pay off and aren't making much money is a very tiny percentage of the total young people population. I can infer by your inclusion of this statement you are/were one of these persons, or your circle of friends consists of such people.

    To determine which health care option is cheaper you take what one pays now for health care and compare it to the extra taxes one will pay to support National health care. Most likely you will get the same result as you would comparing a public school to a private school: it's cheaper but the quality is mediocre to deplorable, depending on the people in the government running that particular facility. And like the public school system you will have overpaid and useless job positions like Music Therapist as well as the same over-estimation of expenses to keep the Fed money coming in.

    those hundreds of millions that MacD's has to throw at advertisement directed very specifically at children would really come in handy

    The hope/assumption that McDonald's will direct to children money it would have spent on advertising is wishful thinking. The extra wealth would result in higher share prices which would be distributed among investors and result in BIG bonuses to CEOs if not plowed back into the company. This extra money would not go to the government willingly because McD's knows 99% of the money would not go to the children but into the pocket of lobbyists and to political cronies overseeing that particular "collection"

    The chief criticism of our present system concerns prevention...the policy of only insuring people with jobs will prove self-defeating

    A responsible person will make it a priority to allot money to be healthy. In fact, being forced to pay for health care is a big incentive for the unemployed person to get off his/her ass and get a job!

    Michelle Malkin tried to argue that the scandal resulting from the revelations of how badly the Bush Administration's VA hospitals

    You miss M. Malkin's point who did not twist any logic. She brought up the facts: you can't treat sick people if you don't have the money for medicines, beds, personnel, and so forth. The VA is given a fixed amount of money. If more sick people come in you can't ask the government for more money until the next cycle when the money is divvied up. You have to "make do" with what you've got. To get into the government hospital you have to wait until someone dies or is released. Government health care isn't based on supply and demand, it is based upon a predetermined amount of money handed down by the government who ran some calculations concerning how much
    money each hospital will probably need, give or take a few millions.

    It is very similar to the way Soviet Russia determined how much toilet paper to produce and we all see how well that turned out!

  2. bradford,

    Thank you for commenting. You are the first ever.

    I realize that you do not agree with me and nothing I can write will change your mind. All well and good: This is America.

    I only will write clarifications where I think you missed my point or I failed to articulate the point adequately. I won't comment on your hostility towards your fellow human beings except to say I won't comment on it. You speak quite eloquently for yourself in that regard.

    In terms of personal responsibility, I'm all in favor of it. I'm not sure if you fail to understand the concept of sharing risk, or just don't care. I realize that sharing is something Libertarians are notoriously bad at. The idea of risk stems from the fact that no one can predict the future. Venetian merchants invented modern insurance when they decided that it was better to put say 1 one hundredth of one's fortune in a fund for the merchant whose ship is lost at sea than to go it alone and possibly be the one whose ship is lost and thereby face ruin. You mention that you do not want to have to pay for someone else's bad luck. Well, then opt out.

    Even in Canada one can purchase private health insurance and opt out of the nationalized plan. But the Canadians regulate the game. The private insurance providers can not poach the good risks. The point is that if you are going to pool risk at all, you need to keep the good risks in the same pool as the bad. Otherwise the private insurance companies grow rich on the premiums of people who seldom have expensive illnesses then dump their former customers on the government late on. We already have a huge thieving bureaucracy robbing us. It's called private insurance. You may have missed the point of Moore's Sicko! in that even those of us who have health insurance do not always receive the care and services promised.

    My comment about young people starting out under a mountain of debt relates to the strong incentive to opt for the lower premiums of a private insurance plan that poaches the good risks. I had no unspoken point. Sorry about the confusion.

    The statements I made about McDonald's advertisement had nothing to do with the money spent on advertising somehow going to a government sponsored education fund. Re-reading my post I can see how this misunderstanding arose. The point was we need a large amount of money for health education given the amount that a company such as McDs spends to convince people eat their crappy food and thus turn into what you called "fat pigs."

    Although I realize that Libertarians feel an immense hostility toward the whole concept of government. I tend to focus more on particular parts or individuals who commit gross misdeeds or gross inefficiency. We view the relationship between government and business very differently. In terms of health care, the government is actually far more efficient that private industry. According to Consumer Reports, Medicare and medicaid have an overhead of $3 per hundred of reimbursement. The most cost effective HMO (Kaiser) has $12 per hundred and the average is around $15.

    Therefore, a National Health Care service would not require extra taxes. Taking the funds that businesses already spend on private health insurance for their employees and spending it at least 4 times more efficiently, along with providing preventative care to those who presently go to the ER only when the health problem has grown serious (and expensive) will result in lower health care expenditures without raising taxes on individuals.

    Also, in terms of how the government works, a given administration can come to Congress pretty much any time to ask for additional funds for a given agency or purpose. Foreign aid for disasters or famine as well as domestic emergencies do not require the full budget cycle. Congress makes emergency appropriations all the time. As I write this the Senate just approved a $700 billion bailout for the same private parties that created the problem that the money is supposed to solve. Your statement that the VA had to make do with the money alloted it as part of the regular budget cycle is absurd on its face.

    As for whether young people starting out without much money is a large or small percentage, one can examine "Poverty statistics of the United States," which despite its name shows information on the whole population in quintiles and various demographic analysis. Also The Statistical Handbook of the United States also provides verification on the income levels of people by age demographic. I did not base my statements on my own experience, although it is true that such was my experience.

    -- [2plus2equals4]