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Article #74: Auto Insurance Principles Should Apply To Health Insurance

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






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