| Many Americans rely on their automobiles to get | | | | indispensable automobiles are to our lifestyles, |
| to work. No automobile means no job, no rent or | | | | there 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 with | | | | Unsustainable Market |
| 100,000 miles on the odometer, would presumably | | | | In contrast, similar principles are routinely violated |
| welcome the guaranteed opportunity for | | | | in health insurance. To demonstrate this, let's |
| low-priced insurance that would take care of | | | | return to the same suburban mother from the |
| every possible repair on her auto until the day | | | | opening 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 insurance | | | | activities. She ends each day exhausted, sitting on |
| is valid regardless of whether she even changes | | | | the 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 companies | | | | time to go to the doctor in years. After a simple |
| writing such coverage, either directly or through | | | | injury doesn't heal for weeks, she turns up at the |
| used auto dealers? And given the importance of | | | | emergency room and learns she has type II |
| reliable transportation, why isn't the public | | | | diabetes. Although type II diabetes is controllable, |
| demanding such coverage? The answer is that | | | | changing diet and exercise habits and properly |
| both auto insurers and the public know that such | | | | tracking her condition takes time and effort and |
| insurance can't be written for a premium the | | | | she's never quite successful in implementing the |
| insured can afford, while still allowing the insurers | | | | necessary 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 costs | | | | of a long list of health care related to |
| associated with taking care of every mechanical | | | | non-controlled diabetes and other problems |
| need of an old automobile, particularly in the | | | | associated 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 intuitions | | | | episode 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 this | | | | healthiest and most medically diligent insureds. Her |
| author, and look at health insurance from the | | | | coverage continues until she voluntarily changes |
| economic perspective, there are several insights | | | | insurance 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 traditional | | | | premium. Her insurance continues unabated, even |
| insurance you buy from your agent or direct | | | | though the disease was caused by neglecting her |
| from an insurance company, and warranties that | | | | body and she maintains her poor lifestyle even |
| are purchased from auto manufacturers and | | | | after the disease becomes known. |
| dealers. Both are risk transfer and sharing devices | | | | This 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 no | | | | guaranteed access to low-priced auto insurance |
| equivalent in health insurance, for traditional auto | | | | that takes care of every possible repair, including |
| insurance, I'll examine only collision and | | | | damage already done, until the day the car falls |
| comprehensive insurance - insurance covering the | | | | apart so completely it's unsalvageable (death) or |
| vehicle - and not third-party liability insurance. | | | | reaches 200,000 miles (Medicare), regardless of |
| Bumper to Bumper | | | | whether she even changes the oil (takes care of |
| The following are some commonly accepted | | | | herself) in the interim. |
| principles from auto insurance: | | | | As a society, we don't expect this in |
| * Bad maintenance voids certain insurance. If an | | | | private-market auto insurance, but we expect it in |
| automobile owner never changes the oil, the | | | | private-market health insurance. Furthermore, |
| auto's power train warranty is void. In fact, not | | | | there's a chorus of national and state interests, |
| only does the oil need to be changed, the change | | | | which continuously pushes us further away from |
| needs to be performed by a certified mechanic | | | | the auto insurance principles. |
| and documented. Collision insurance doesn't cover | | | | The 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 on | | | | year, 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 consistent | | | | Most actuaries and other people in the private |
| risk profile, satisfying the actuarial test for | | | | health insurance market don't want national health |
| insurance pricing. Furthermore, auto manufacturers | | | | insurance with its bureaucracy and one-size-fits-all |
| usually wrap at least some coverage into the | | | | benefits. Yet, we're trying to sustain a private |
| price of the new auto in order to encourage an | | | | insurance 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 old | | | | Yes, health insurance involves the sacredness of |
| model autos. The bumper-to-bumper warranty | | | | human life and is therefore different from auto |
| expires, the power train warranty eventually | | | | insurance. But if we're to sustain a private-market |
| expires, and the amount of collision and | | | | solution to health insurance, actuaries need to |
| comprehensive insurance steadily decreases | | | | explain 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 additional | | | | principles: |
| insurance. Certain older autos can qualify for | | | | * As sacred as health care is, it's still an economic |
| additional coverage, either in terms of warranties | | | | transaction that has to be balanced by individuals |
| for used autos or increased collision and | | | | and societies, against other economic choices. It |
| comprehensive insurance for vintage autos. But | | | | can't be unlimited. Sometimes it will be secondary |
| such insurance is offered only after a careful | | | | to 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 and | | | | more 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't | | | | individual and tied to controllable risk factors. This |
| insurable events. To the extent that a new car | | | | will 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 'not | | | | abuse, 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 the | | | | somewhere. |
| oldest automobiles. Accidents are generally | | | | * The private market can't provide unlimited, |
| insurable events even for the oldest autos; with | | | | self-directed health insurance. |
| few exceptions service work isn't. | | | | * Routine care and ongoing treatments of chronic |
| * Insurance doesn't restore all vehicles to | | | | conditions can be pre-funded, can even be |
| pre-accident condition. Auto insurance is limited. If | | | | subsidized, but they don't constitute 'insurable |
| the damage to the auto at any age exceeds the | | | | events.' |
| 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 vintage | | | | human body in pristine condition. No amount of |
| autos, the value assigned to the auto goes down | | | | health 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 accident | | | | private-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 the | | | | non-subsidized health insurance, such as protection |
| automobile and the driver. The auto insurer | | | | from 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 few | | | | take 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 increasing | | | | option of buying up for everything else in life. |
| insurance rates due to traffic violations and/or | | | | Discussion of these principles is lacking from most |
| accidents changes our driving behavior and we | | | | of the current health insurance debate. If society |
| sometimes select our automobiles based on their | | | | can intuitively understand how similar principles |
| insurability. | | | | apply to health insurance, then they should be able |
| Each of the above principles is supported by solid | | | | understand the principles in the health insurance |
| actuarial theory. Although most Americans can't | | | | context. We need to initiate the debate. |
| describe the underlying actuarial theories, most | | | | This commentary is solely the opinion of its |
| everyone understands the above principles of | | | | author. |
| auto insurance at the intuitive level. For sure, as | | | | |