Talk-Along Weblog

April 6, 2010

So I’ve been thinking about this health insurance thing. For some reason, I thought that it would be easier to make a video than to just type out an essay. Here are the results:

Here’s that diagram:

Lessons I learned:

1. It takes a lot of time to talk about even a very mundane and simple topic. I seriously thought this video was going to be three minutes long, at most.
2. Video processing is a pain in the neck.
3. Good diagrams are hard to draw and show.

So, maybe it’s still easier to write an essay than to make a video. But I figure, with Web 2.0 and everything, I should try to be more multimedia.

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One Response to “Talk-Along Weblog”

  1. Rrrobert! Says:

    I like video Bill.

    So first:

    I’m assuming, and I’m pretty sure this is the case, that if you’re not insured when, say, you get in a car accident, you are responsible for all the ensuing medical costs until such time as you’re able to get insured. If the problem were actually as simple as your model, and there was just one kind of sick, for which you could get insurance before actually needing any care, I agree that your video would apply.

    And even in a slightly less simplified universe where people bought insurance based on a straightforward gamble based on known risks, I admit that this would happen. Only bad drivers and sick people would buy insurance.

    The thing is, that’s not how people work. First off, most people are risk averse, in the sense that they shy away even from risks that they know are likely to pay off. So as long as the issue is framed as “risk of getting in a car crash” rather than “risk of paying too much to an insurance company”, they’ll likely want insurance, even if it comes at a somewhat inflated price. This is particularly true of small but catastrophic risks; people (reasonably, in my opinion) prepare for the worst more than expected from rational choice theory, because they really, really don’t like the worst, and they’re not too concerned with “slightly worse off than now”.

    The other thing is, insurance consumers are price takers, not price makers. They mostly demand insurance for their catastrophic risks, but insurance companies have way more information about their risks than consumers do. Consumers don’t actually make their choice based on how likely they are to receive long-term benefits from their insurance; they decide to buy it, then compare prices among suppliers who compete to provide coverage, keeping prices down to roughly their rational expectation.

    Smart consumers might intuit that insurance is a long-run bad deal for them if they don’t have any particular catastrophic risk factors, or simply because so many sick people are in the mix. But since catastrophic risk is particularly salient and scary, most people aren’t going to worry too much about the premium they’re paying for coverage, since they value the peace of mind that comes from having relatively predictable finances in case of an accident.

    That peace of mind is free to provide, so it doesn’t drive up the cost of care (though smart insurance companies might learn to harness it to snag customers). But it adds value to insurance anyway. Which is why I’m not super-worried about gamers. And again, this isn’t a problem if your penalty for non-insurance is adjustable.

    The penalty, by the way, also uses psychology. Since people are loss averse as well as risk averse, they’re particularly avoidant of penalties without salient attached benefits. People think, “I could buy healthcare, and it would cost $400 bucks a month, but at least I would get health care out of it. If I don’t get healthcare, I just pay $93 and don’t get squat.” People might think of it as $93 to save $400, but that would require them to not be subject to the multitude of predictable cognitive stutters to which they are, in fact, demonstrably subject.

    You seem to think that relying on the somewhat less tangible incentives for insurance is defying gravity. It depends on which way gravity pulls; it seems to me that basic psychology ought to have as much “pull” as ultra-simplified economics. Even economically – it doesn’t make any sense to ignore a value people do perceive just because it doesn’t cohere with a model of how they ought to perceive.

    Sure, perhaps some economists will forego insurance and game the system, stifling their risk aversion in favor of the math they know to be true. Many of them will benefit, in the long run, from this action. And more power to them, as long as the penalty pays for their average externalized cost. But some of them will get hit by buses and go bankrupt, and they will make salient examples for the rest of us, who will buy our insurance and sleep soundly at night.

    And if they benefit too much and people start doing this as a routine matter, we can raise the goddamn penalty. Dammit.


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