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This article in the New Yorker makes a good point – if private insurers are banned from price discriminating on the basis of anything except age, region, and whether or not someone smokes, then what use are they? The argument for private insurers is that they are better managing risk – but the major way to allocate risk is to use price discrimination to stop adverse selection and other risks. If so, then what use are they?

Whilst the point is, I think, very interesting, it is mired in the old American way of thinking of health insurance as non-universal and non-compulsory. You see, back when insurance was non-compulsory then the healthy would be less likely to sign up to insurance and those who were more likely to be prone to be sick would be more likely to sign up to insurance. Whilst insurance companies can look out for certain variables that make you more likely to be sick (such as pre-existing conditions, obesity, whether you smoke) they can’t capture everything. They can’t measure how much I exercise, for example. Therefore, more ‘sick’ people signed up than ‘healthy’ people would sign up, an effect called adverse selection. Adverse selection obviously drives up the cost of premiums and is quite unfair (especially on the healthy people who want insurance).

To counteract this, the insurance agencies tried to get entire pools of people to join that captured both healthy and sick people together. By basically removing the voluntary nature of insurance, it removed the adverse selection effects in that pool. Two easy examples – by combining health insurance with employment you ensure that every worker is covered – both healthy and sick. You get economies of scale and remove adverse selection so premiums fall. Second example: college kids. When I went to UCSD, I was forced to use either their health insurance or to pick my own insurer.

When you have (theoretically) universal health care, there is no need to use price discrimination as a way to discourage adverse selection. Everyone has health insurance. Changing prices between groups (such as fat people and thin people) is just a distributive exercise. Under non-universal insurance, you would shift $10 from fat people and give $9 to thin people because of adverse selection. Under universal insurance you take $10 and give $10. As a matter of equity therefore, you want everyone to have the same price. It’s just fairer.

So actually, aside from the discrimination against smokers (who choose to harm their own health) I’m against discrimination on the basis of age and region. Yes, its true that old people have higher health expenses. But they didn’t choose to be old. As a matter of ethical practicality its not possible to discriminate against those who choose to eat/exercise unhealthily, but perhaps it would be wise to do that too where possible.

Discriminating on the basis of region actually allows indirect discrimination on the basis of race and socioeconomic status. In America, where races are unusually stratified by socio-economic position, there are clearly black suburbs and white suburbs. These positions also correlate with poorer dietary conditions – poor blacks tend to eat fattier food (not because of their race, but because of their poverty and the culture engendered by that poverty). Just as their culture discourages blacks  ‘acting white’ by being intellectual and going to college, it also discourages them from eating white. Allowing price discrimination on the basis of region is yet another hurdle to breaking the poverty cycle.

Of course region discrimination doesn’t exist because Congress hates black people, its just an accidental offshoot. It would be impossible to prevent region discrimination. Smaller insurers only focus on a few cities near where they are. Different places have different hospitals, different abilities to pay for insurance etc. You want people to be able to offer cheaper insurance in Harlem than in the OC (a good side-effect of region discrimination) but you have to take the good with the bad.

In this respect, private insurance is vastly superior than the government at allocating prices between regions. They have localised knowledge of the geography. They have specialised knowledge of insurance. By appropriately tailoring incentives, you can try to maximise the good and minimise the bad.

In the glaringly bright optimism of my mind, I see insurers who specialise in offering ‘poor insurance’. Whilst the majority of insurers concentrate on getting higher coverage in the richer areas, there are so many insurers competing for the same suburbs that at some point it becomes more profitable for them to chase the poorer suburbs. Whilst price discrimination is banned, it sounds to me like you can still offer different policies in different regions. So you may want to create an insurance contract that encourages the insured to exercise. Perhaps you can offer a half-price premium, if the insured is willing to have a pedometer surgically inserted into their rectum. (Or perhaps something less invasive like creating a discount voucher system with Subway :P).

One of the great tragedies of the 20th century is that after being freed from slavery, African-Americans created their own bonds of culture that discourages them from acquiring those qualities that help them succeed. It encourages young black children to speak ghetto, and thus unable to communicate effectively in the professional world. Teasing of nerds is amplified in poorer schools, depriving them of the opportunity to attend college. It encourages them to eat fattier foods. Perhaps insurance is the way to break at least one of these self-imposed cultural bonds. Or perhaps insurers will find it cheaper to lobby the government than to genuinely compete for their business. My bet’s on the latter.

Oh and to answer my initial question – yes they are. The government is not perfect, humans are not perfect. Why put all your eggs in one basket? Perhaps the government model will work, perhaps it won’t. But by having multiple insurance companies, some of those models will work, some will not. You’re diversifying your risk. And as I argued earlier, you’re taking all that risk off government balance sheets and onto private balance sheets. You’re spreading it further afield by allowing international insurers to absorb that risk. You’re allowing it to be reinsured by other multinationals.


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