Why Health Insurance Isn't Like Car Insurance

Health insurance (for humans) isn't like car insurance, homeowner's insurance, etc in some critical ways. But maybe health insurance could or should adopt some techniques from car insurance, homeowner's insurance, life insurance. This should reduce costs and might well improve the health of many people.

I'm discussing health insurance for people, not veterinary health insurance. Veterinary insurance still has exclusions for pre-existing conditions, annual limits, lifetime limits, etc that were largely eliminated from human health insurance by Obamacare. We don't have ObamaCur, ObamaCat, or ObamaCayuse (horse). Of course as I write this (7/20/2017), we may not continue to have Obamacare either.
Updating this later, we've still got ObamaCare at least until 2018 elections. I do have some thoughts on an alternative to the "individual mandate", again ideas inspired by modes used by other types of insurance.

Why Health Insurance Isn't Like Car Insurance

by Pam Green, © 2017

I've been thinking about this topic for some years. I should have gotten around to writing about it sooner. I did write a bit about one aspect of health insurance back in 2009, for which the link is at the end of this page

Health insurance is in many important ways quite different from car insurance and homeowner's insurance, flood and earthquake insurance. It's also different from life insurance. But perhaps some of the concepts and techniques used in these other types of insurance could be applied to health innsurance and do so in a way that could tend to reduce costs and also improve lifetime health for many people.

the similarities

Insurance premiums are based on actuarially expected losses.

The whole idea of insurance is that the pool of insured clients must pay IN more than the insurance company will pay OUT in claims. The total pay in must not only cover the total pay out but must also cover the company's cost of doing business (overhead, salaries, etc) plus the desired rate of profit (which may be very high in for-profit companies). Additionally, the greater the lag time between the pay IN of premiums to the time of paying OUT claims, the greater the amount of time in which the insurance company gets to use that money, money on which it pays no interest out but which it can invest and potentially reap large income.

Insurance companies are very good at predicting some kinds of losses. The actuarial tables for life expectancy used for life insurance are pretty reliable, and the deviations from these expectancies tend to be that people are tending to live longer than they used to, longer than the tables based on past experience would predict. But for life insurance, if people live longer, that's to the benefit of the insurance company as it increases the years of premiums paid in and delays the time of pay out (and , while one death per person is inevitable, it's always possible that some of these longer lived persons will have ceased to pay premiums and thus no longer be covered).

Actuarial tables for car insurance are probably also fairly reliable. Improved safety feartures in newer cars may tend to skew these expectations towards fewer collisions than the tables predict. However rising medical costs strongly skew the pay outs for insurred-at-fault accidents in which another person is injured but not killed towards higher pay outs than expected.

however :

However for home insurance, the ever more severe manifestations of climate change have created a loss pattern from fires and floods that is way higher than in the historic past. A lot of flood insurance is government subsidized and a lot of people living in high risk areas are too poor to buy flood insurance or haven't seen the need for it. And people who don't live in predictably flood prone areas, ie low risk homes, seldom buy flood insurance at all.

With health insurance, the continually rising costs of health care (some due to new very effective but very costly treatments) has "blown away" any tables based on past experience. There are some steps insurance companies might use to lower these costs by encouraging (rewarding) better self-care and healthy lifestyles. I will discuss these below.

the differences

mandatory or not

For any form of insurance, if that insurance is mandatory , the pool of insured will be large and will include a lot of low risk insureds as well as the smaller percentage of high risk insureds. Where a given kind of insurance is not mandatory, there's a skew towards mostly people who percieve themselves as higher risk choosing to buy insurance. The insurance company's term for this is "adverse selection".. Adverse selection readily becomes a spiral in which a higher risk pool requires higher premiums and higher premiums discourage lower risk people from enrolling.

Car liability insurance is mandated in some (all ?) states and the penalty for not having it is denial or cancellation of one's driver's license. Penalties for being caught driving without a license and especially for causeing a collision when driving without a license can be severe (though probably not severe enough, given the high incidence of uninsured drivers). This means that the pool of insured will have a good ratio of many lower risk to fewer higher risk clients.

Homeowner's insurance, and in high risk areas also flood insurance and / or earthquake insurance, are not legally mandated but every mortgage lender will absolutely demand such coverage to the extent of the outsanding loan balance. The mortgage contract will require the insurance premiums (and also real estate tax) to be paid as part of the monthly payment that pays principal and interest on the loan. So for the vst majority of home "owners" , the purchase of insurance is mandatory. Thus the pool has a good ratio of lower risk to higher risk clients. Also people who actually own their home "free and clear" (without any remaining mortgage) will be very motivated to insure this huge investment, their most costly asset, and also to try to take good care of it and keep it safe.

Health insurance has until recently been semi-mandatory. Employers of large enough numbers of employees have been legally mandated to provide some level of health insurance and to pay part of the costs of that insurance , the employee paying the rest. (In reality the employee is paying the entire amount, because whatever the employer pays to the insurance company is deducted from what the employer might otherwise offer the employee in salary.) Until the passage of ObamaCare in 2009, there was no legal mandate for individuals to buy insurance for themselves, nor for theirr spouses or children. Even under ObamaCare, the penalties for not buying insurance are small relative to the cost of buying it. So really, many people make the decision based on their perception of their own health risks and their income and desire to sspend that income on things they consider more enjoyable or more nescessary. Thus "adverse selection" can be strongly in play. Younger people who are in good health tend to assume they will remain healthy and won't need much medical care. At that age , they usually are not yet earning high income, so they are that much more unwilling or unable to buy health insurannce.

expectation of a claim

Most people will never have a claim on their car liability insurance. They hope never to have a claim because they hope never to be in a collision , whether it's one for which they are at fault or one that is entirely the fault of another driver. They willingly pay the relatively small premium year after year, without ever having a claim. Many insured drivers try to drive in a manner less likely to cause a collision, mostly because they don't want to risk injury to themselves and to their own car, but this also tends to reduce the incidence of claims. When claims for liability for collisions do occur, the amounts may be very large when the result in an injury to another person. Amounts for damage to another's property are relatively low..

The likelihood of a claim for collision damage to the insured's own car or theft or fire etc is also fairly low, though not as low as the risk of a liability claim for seriously injuring another person. The amount of payout for damage to a car, the insured's own car or anyone else's, is limited to the total market value of that car at the instant prior to the accident. This is often only a few thousand dollars or less. Plus many insured persons opt for a high deducible because that minimizes their premium for this portion of their insurance. (Some people don't buy this portion of insurance at all because their car has relatively low value and they feel financially able to pay for repairs or replacement in the unlikely event of an accident , etc).

The amount of payout for injury or death of a person in an insured-at-fault accident can be astronomical, often exceeding the policy limits. (And if the insurance company turns down an offer of settlement for an amount within the policy limits, if at trial the injured party is awarded more than the policy limit, there can be a "bad faith failure to settle" suit in which the insurance company may be forced to pay that greater amount.)

For health insurance, it is essentially certain that almost every insured person will be having claims and thus receiving pay out. Every insured person should be claiming covered preventative care and early detection care just about every year. Additionally quite a substantial percentage of insured persons, even though basically healthy, will have one or more minor illnesses or injuries that are worthy of medical attention, and since these events are covered it , thus costing only a deductible or co-pay, the insured is likely to actually get such care. For people who are not basically in good health, the certaintly of claims and the size of claims will be far greater.

Insurance companies used to be able to get rid of these higher risk people and/or deny or limit claims through the "pre-existing condition" exclusion and through "lifetime limits", but ObamaCare has eliminated those exclusions and limits.

insured's desire to "get back some of what I paid"

Becausse premiums for car insurance , home insurance, etc are relatively low, ie relative to the very high premiums for health insurance, the insured person is likely to be willing to continue coverage without ever getting any "payback" from making a claim.. In the case of life insurance, the insured has to die to collect and the payout will go not to the insured but to the designated beneficiary.

For health insurance, the very large montly premium makes most people feel that they are "entitled" to utilize the covered benefits, to "get as much of their own money back" as possible. For example often they will try to insist on a more expensive drug rather than a generic. They will seek medical care for minor injuries and ailments that would do just as well with common sense home care. They are oblivious to the fact that this will drive next year's premium upwards.

the ability of the indured to reduce their premium

I consider this to perhaps be the most critical aspect of reducing insurance costs.

"Safe Driver" discounts

For car insurance , the prospective insured can do their best to qualify for "Safe Driver Discounts". The drivers who totally prevents themselves from ever getting a Driving Under the Influence charge by totally abstaining from ever getting behind the wheel after drinking any amount of alcohol or using any other impairing substance (which includes marijuana) will maintain a far lower premium than one who gets a DUI. Driving in compliance with all rules of the road, thus avoiding getting any "moving violations" on one's record also keeps premiums low.

For car insurance, a record in which the insured has had no accidents or made no claims will affect future premiums and may be rewarded by a modest rebate. Any year in which a claim is made or an accident known to have occurred is likely to result in higher premium next year. This tends to make insured clients likely to choose to privately pay for minor incidents rather than report them for coverage and then suffer the raised rate for future years. (Those car insurers who advertise "accident forgiveness" for your first acident are almost certainly charging everyone a premium that assumes there will be an average claim. Likewise those who give a rebate for periods in which no claims are made.)

I don't know if life insurance companies ever factor in one's driving record, but it would make sense if they did so since driving accidents can cause severe injuries that will require very costly treatment.. They do factor in whether the insured is a smoker (tobacco) along with other lifestyle factors. Since a DUI is evidence of frequent alcohol abuse, and since alcohol abuse does shorten one's life expectancy, it would make sense to factor this in.

type of car, miles per year, neighborhood, etc

Cars that are expensive and cars that are attractive to thieves are charged higher premiums for coverage against collision, theft, fire. Type of car also affects the liability premium, as some cars are designed to appeal to "hot shot" drivers and some to more sedate drivers. Some cars are more easily damaged in even a very mild impact (and there are government tests and standards for this). Some cars are more expensive to repair for a given damage than others. All these are factored in to the premium.

The gross number of miles the car is driven each year affects the premium. It's only common sense that the more miles, the more oppertunity to get into a collision. The type of use, eg daily commute or other use, is factored in.

The neighborhood in which the car lives can affect risks of theft, and the area in which much driving takes place can also be relevant to risk of other driver's driving badly. Also in a wealthy area, the car the at-fault-insured damages is more likely to be an expensive one and the injured other driver or passsenger more apt to be high earner and thus liability for injuries that reduce that person's earnings will be greater.

"Customer loyalty" discounts

Car insurers offer some discount to clients who have been contiuously insured with them for some number of years. Car and home insurance usually offers a discount if you get both of these from the same company. I don't know if any offer an added bonus for the "triple whammy" of car plus home plus life.

transferable concepts ?

ability of the insured to reduce their premium

"Healthy lifestyle" discount

The basic idea is to encourage and reward choices that tend to healthier lifestyle. Where the person's behavior is under their own control, a matter of their own choice, they should be rewarded for making healthy choices and thus reducing risks of future expensive claims.

Insurers could give a rewarding rebate any year in which the insured person has fulfilled a list of qualifications. For example, the person might check into the MDss office for a quarterly weigh-in to prove that weight is remaining within healthy limits (avoiding both over-weight and substantial under-weight). Those found to be getting into over- or under- range could qualify for some smaller rebate by enrolling in a group program to correct the problem.Perhaps that rebate would be given only if the person actually attended most program sessions and actually achieved some of the intended improvements in their condition.. At the same time the insured could be clipped of a hair smple that is tested for an array of substance abuses (many recreational drugss will show up in the hair for many months). Possibly also blow into a breathalyzer, though that really only shows alcohol level in a small span of hours. Substance abusers who enroll in a remedial program and get clean could also get a reward for successful results..

For some aspects of health, it's hard to devise a quarterly test. For these perhaps simply having the person fill out a questionnaire would have some benefit (there is currently at least one health insurer who gives a reward for this).. Filling out a questionnaire at least encourages the person to be more aware of lifestyle factors, though the truthfulness of the responses is open to doubt. For exercise, one could test by a walking treadmill test, with duration and speed appropriate for that person's age.

rewards for complying with preventative care and testing

Those insureds who actually comply with the aproximate schedule of annual exam, vaccinations, PAP smear (for women in the relevant age group), cholesterol panel, etc etc etc. long list of relevant factors, but these have to be weighted.

There should be encouragement to actually follow a recommended treatment regime, possibly after getting a second independent exam and opinion on the issue.

rewards for controlling chronic conditions

For those with chronic conditions, regular and continued compliance with a regimen that controls the condition and prevents highly costly exacerbations and emergencies should be rewarded. Chronic conditions that if not controlled can result in very expensive consequences would include diabetes, high blood pressure, etc etc. Control is far less expensive for the insurer than is failure to control.

"loyalty discount"

see below under "alternatives to individual mandate". The idea is to increase enrolment of people while they are still basically healthy and keep them healthy.

alternatives to "individual mandate"

why the mandate is problematical

Philosophically one can object to the "individual mandate" to purchase health insurance whether one wants to or not. There's a difference between forcing someone to buy insurance ( such as car liability insurance, homeowner insurance and flood insurance while the home is under mortgage) to protect others from harm one might inflict upon them versus forcing someone to buy something to protect themselves (eg car collision and theft insurance, homeowner insurance and flood insurance when the home is owned free and clear.) Likewise examples of car child seat laws (protect the child) versus car seat belt laws (to protect the adult who who chooses to be belted or not) Philosophically one can argue that people should make their own decisions as to what risks to take, so long as that person must also be the one who bears the consequences. The problem of course is that so often the consequences that should be visited solely on the chosing individual will wind up being paid partly or wholey by others or by society. Thus the person who refuses to buy health insurance (the "I'm young and healthy and invincible" person) but then has a serious accident or illness (or even trivial injury or illness) and goes to the Emergency Room, which cannot refuse to treat him, won't pay his own costs but those costs will be distributed to others.

The other problem with the "individual mandate" is that the penalties for refusing are so very small compared to the costs of complying. Those penalties could be increased until they are aversive enough to be financially convincing. Or the laws for the ER could be changed so that only insured people are admitted. That would result in a lot of deaths and permanent disabilities that could have been avoided, and the costs to society of welfare support for that disabled individual or for orphaned minor children could be even higher than the costs of ER treatment would have been. Plus allowing people to die or become disabled when that could have been prevented is considered by most people to be inhumane and thus unacceptable.

a possible alternative

For some kinds of insurance, it's the practice of some insurers to give a "customer loyalty" discount. Premiums are lower according to the number of years the insured client has been a customer of that particular insurer. For health insurance, a sufficiently large discount for number of years insured by that company could induce "healthy" people to enroll and stay enrolled. A discount based on years continuously insured regardless of the particular company could be even more pursuasive. The benefit to the insurer is that someone continuously insured is more likely to have received continuous preventative and health-maintenance care , plus early discovery of illnesses that are easily and cheaply cured if discovered early but highly expensive if discovered late. Likewise chronic illnesses would be more likely to receive good management and thus remain controlled.

For some forms of insurance, especially insurance for assisted living and nursing home insurance, the yearly premium is set by the age at which the person first enrolls and that price remains unchanged so long as the person remains enrolled. Alternatively, the potential rate of increase from that initial enrollment premium could be limited. This could encourage the "young healthy" to enroll while still young in order to obtain that lower premium that will continue to benefit the person in later years.

the ultimate "fix" for health insurance

either "single payer" or "public option"

I was very dissappointed when in 2009 the "public option" did not pass. That would have provided a competition to the private insurance companies and might have "kept them honest"

If our current system of health insurance is not improved, especially if the GOP does manage to "repeal and replace", with the replacement being worse for many people, then the eventual result will be some kind of single payer universal coverage funded by income tax increase. A Canadian style plan or something of that kind. Or "Medicare for everyone" plan, with everyone paying a premium that might vary with age or a payroll tax (that one hopes would not have a "cap" that leaves highly paid employees and executives paying only on the first $ XXX of their much larger incomes).

The BIG PROBLEM with any kind of single payer system is that that Single Payer will have unrestrained control of what will be covered and what will not be covered. If the payer is the government (presumably federal, but state by state could be even more problematic), then the potential exclusions will change with every change in political wind and power. The areas most vulnerable to this kind of political ideologiy whip-saw are contraception, abortion, and patient-demanded euthanasia. Possibly highly expensive prolongation of dying and machine-dependant "life" of vegetative patients would be subject to budgetary considerations, excluded because of the very high expense. (That might actually benefit most terminal patients.) But at other times, the political winds will blow the other way and any form of assisted dying will be uttterly forbidden and probably criminalized. There might be some prioritizing of coverage of treatments and preventions that yield high "bang for the buck" over those with very low "bang for the buck". (Note : vaccinations probably yield the very highest "bang" , with contraception also very high yield.)

Of course just as private for-profit insurers now offer "Medicare Supplemental" inurance, it's not unlikely that even with a government-as-single-payer system, privaate companies would offer some kind of "supplemental" insurance, to cover either a named list of items not included in the government plan or to cover everything not included in the government plan. More affluent people could afford this choice while the less well off could not.

Of course under our current system, where most people's plan is controlled by their employer, we have the horrors of being subject to the employer setting limits and claiming these are based on the employer's religious beliefs (which may be far different from the beliefs of the employee). In short , we have "Hobby Lobby". The logical corrollary of "Hobby Lobby" would be for the employer to convert to Christian Science, thus disbelief in all medical treatment, sanctioning only prayer as treatment, therefor this employer's "health insurance" would consist of a company chaplain or referral to the church, synagogue, mosque or sacred tree of the employee's choice..


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site author Pam Green copyright 2003
created 7/20/2017 revised 9/17/2017
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