Auto Insurance Principles Should Apply To Health Insurance

Many Americans rely on their automobiles to getindispensable automobiles are to our lifestyles,
to work. No automobile means no job, no rent orthere is no loud national movement, accompanied
mortgage money, no food. A single parent,by moral outrage, to change these principles.
struggling to make ends meet in the suburbs withUnsustainable Market
100,000 miles on the odometer, would presumablyIn contrast, similar principles are routinely violated
welcome the guaranteed opportunity forin health insurance. To demonstrate this, let's
low-priced insurance that would take care ofreturn to the same suburban mother from the
every possible repair on her auto until the dayopening paragraph. She's busy working, driving to
that it reaches 200,000 miles or falls apart,and from work, and driving her kids to school and
whichever comes first. Especially if the insuranceactivities. She ends each day exhausted, sitting on
is valid regardless of whether she even changesthe couch with fast food. She's obese, has a
the oil in the interim.sedentary life, a bad diet, and hasn't taken the
So why aren't the auto insurance companiestime to go to the doctor in years. After a simple
writing such coverage, either directly or throughinjury doesn't heal for weeks, she turns up at the
used auto dealers? And given the importance ofemergency room and learns she has type II
reliable transportation, why isn't the publicdiabetes. Although type II diabetes is controllable,
demanding such coverage? The answer is thatchanging diet and exercise habits and properly
both auto insurers and the public know that suchtracking her condition takes time and effort and
insurance can't be written for a premium theshe's never quite successful in implementing the
insured can afford, while still allowing the insurersnecessary lifestyle changes.
to stay solvent and make a profit. As a society,So the initial emergency room visit is only the first
we intuitively understand that the costsof a long list of health care related to
associated with taking care of every mechanicalnon-controlled diabetes and other problems
need of an old automobile, particularly in theassociated with obesity. Whether she has individual
absence of regular maintenance, aren't insurable.or group insurance, her insurance pays for each
Yet we don't seem to have these same intuitionsepisode of care, without singling her out for a
with respect to health insurance.premium increase, and without charging her any
If we pull the emotions out of health insurance,more cost sharing than is charged to the
which is admittedly hard to do even for thishealthiest and most medically diligent insureds. Her
author, and look at health insurance from thecoverage continues until she voluntarily changes
economic perspective, there are several insightsinsurance companies and/or employers or
from auto insurance that can illuminate the design,becomes eligible for Medicare. If she's covered
risk selection, and rating of health insurance.under group insurance she may not even pay any
Auto insurance comes in two forms: the traditionalpremium. Her insurance continues unabated, even
insurance you buy from your agent or directthough the disease was caused by neglecting her
from an insurance company, and warranties thatbody and she maintains her poor lifestyle even
are purchased from auto manufacturers andafter the disease becomes known.
dealers. Both are risk transfer and sharing devicesThis just wouldn't happen in auto insurance. This
and I'll generically refer to both as insurance.scenario is the auto insurance equivalent of
Because auto third-party liability insurance has noguaranteed access to low-priced auto insurance
equivalent in health insurance, for traditional autothat takes care of every possible repair, including
insurance, I'll examine only collision anddamage already done, until the day the car falls
comprehensive insurance - insurance covering theapart so completely it's unsalvageable (death) or
vehicle - and not third-party liability insurance.reaches 200,000 miles (Medicare), regardless of
Bumper to Bumperwhether she even changes the oil (takes care of
The following are some commonly acceptedherself) in the interim.
principles from auto insurance:As a society, we don't expect this in
* Bad maintenance voids certain insurance. If anprivate-market auto insurance, but we expect it in
automobile owner never changes the oil, theprivate-market health insurance. Furthermore,
auto's power train warranty is void. In fact, notthere's a chorus of national and state interests,
only does the oil need to be changed, the changewhich continuously pushes us further away from
needs to be performed by a certified mechanicthe auto insurance principles.
and documented. Collision insurance doesn't coverThe current private health insurance market isn't
cars purposefully driven over a cliff.sustainable. Prices have been consistently
* The best insurance is offered for new models.increasing faster than inflation for decades. Each
Bumper-to-bumper warranties are offered only onyear, insureds use more health care than ever
new cars. As they roll off the assembly line,before and more people have no insurance at all.
automobiles have a low and relatively consistentMost actuaries and other people in the private
risk profile, satisfying the actuarial test forhealth insurance market don't want national health
insurance pricing. Furthermore, auto manufacturersinsurance with its bureaucracy and one-size-fits-all
usually wrap at least some coverage into thebenefits. Yet, we're trying to sustain a private
price of the new auto in order to encourage aninsurance system, which violates the very
ongoing relationship with the owner.principles we know are necessary for private
* Limited insurance is offered for old model autos.insurance markets.
Increasingly limited insurance is offered for oldYes, health insurance involves the sacredness of
model autos. The bumper-to-bumper warrantyhuman life and is therefore different from auto
expires, the power train warranty eventuallyinsurance. But if we're to sustain a private-market
expires, and the amount of collision andsolution to health insurance, actuaries need to
comprehensive insurance steadily decreasesexplain to the larger society, in terms that society
based on the market value of the auto.understands, the rationale for the following
* Certain older autos qualify for additionalprinciples:
insurance. Certain older autos can qualify for* As sacred as health care is, it's still an economic
additional coverage, either in terms of warrantiestransaction that has to be balanced by individuals
for used autos or increased collision andand societies, against other economic choices. It
comprehensive insurance for vintage autos. Butcan't be unlimited. Sometimes it will be secondary
such insurance is offered only after a carefulto other choices. On a given day, for example,
inspection of the automobile itself.the mother in our scenario may value her car
* No insurance is offered for normal wear andmore than her health.
tear. Wiper blades need replacement, brake pads* Insurance premiums should be paid by the
wear out, and bumpers get dings. These aren'tindividual and tied to controllable risk factors. This
insurable events. To the extent that a new carwill provide the best incentive for the control of
dealer will sometimes cover some of these costs,risk factors.
we intuitively understand that we're 'paying for it'* Although it's hard to draw the line between
in the cost of the automobile and that it's 'notabuse, neglect and ignorance, self-abuse shouldn't
really' insurance.be insured and we need to draw that line
* Accidents are the only insurable event for thesomewhere.
oldest automobiles. Accidents are generally* The private market can't provide unlimited,
insurable events even for the oldest autos; withself-directed health insurance.
few exceptions service work isn't.* Routine care and ongoing treatments of chronic
* Insurance doesn't restore all vehicles toconditions can be pre-funded, can even be
pre-accident condition. Auto insurance is limited. Ifsubsidized, but they don't constitute 'insurable
the damage to the auto at any age exceeds theevents.'
value of the auto, the insurer then pays only the* Insurance can't be expected to keep every
value of the auto. With the exception of vintagehuman body in pristine condition. No amount of
autos, the value assigned to the auto goes downhealth care will prevent everyone's ultimate death.
over time. So whereas accidents are insurable at* Comprehensive, unlimited, non-subsidized
any vehicle age, the amount of the accidentprivate-market coverage isn't possible for people
insurance is increasingly limited.with severely impaired health.
* Insurance is priced to the risk. Insurance is* The private health market can provide limited
priced based on the risk profile of both thenon-subsidized health insurance, such as protection
automobile and the driver. The auto insurerfrom accidents, to even health-impaired individuals.
carefully examines both when setting rates.* Individuals who can afford to do so and who
* We pay for our own insurance. And with fewtake good care of themselves should be able to
exceptions, automobile insurance isn't tax'buy up' to better coverage. People have the
deductible. As a result, the fear of increasingoption of buying up for everything else in life.
insurance rates due to traffic violations and/orDiscussion of these principles is lacking from most
accidents changes our driving behavior and weof the current health insurance debate. If society
sometimes select our automobiles based on theircan intuitively understand how similar principles
insurability.apply to health insurance, then they should be able
Each of the above principles is supported by solidunderstand the principles in the health insurance
actuarial theory. Although most Americans can'tcontext. We need to initiate the debate.
describe the underlying actuarial theories, mostThis commentary is solely the opinion of its
everyone understands the above principles ofauthor.
auto insurance at the intuitive level. For sure, as