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Thursday, March 11, 2010
The Value Of Ignorance
One of the preeminent trumpet calls of the "health care reformers" is the demand that insurance companies not reject a prospective purchaser with "preexisting conditions." In other words, Smith, an applicant with heart disease, cancer, or AIDS would have to be considered as acceptable for coverage as Jones, an applicant in perfect health. The "reformers" would undoubtedly bridle at the suggestion that Smith pay an increased premium for those conditions, or accept that expenses arising from those diseases receive limited or no reimbursement.
Quite a lot of Americans whose "compassion" organs swell and stiffen at the sight of any sort of suffering don't realize that that provision alone would constitute an irrecoverable step toward government-only single-payer medical care. But then, quite a lot of Americans don't understand the nature of insurance.
Insurance doesn't lower the cost of the exigencies it covers. Quite the contrary: it increases them, in some cases rather sharply. Consider automobile insurance as a typical case. Without insurance, insuree Smith pays repairman Davis directly for his labor and the materials he needs. With it, Acme Insurance pays the greater part of Davis's bill, while Smith pays Davis a "deductible." That certainly seems more favorable to Smith than the former situation. But to make that possible, Smith must pay insurance premiums that will cover:
- Davis's labor and materials;
- Davis's costs in dealing with the insurance company;
- A portion of the salaries of Acme Insurance's employees;
- A profit to Acme Insurance's stockholders.
No, he doesn't do that directly, nor does he do it alone. The process is an aggregated one, summed over all Acme's policyholders and extended through time. Nor is the effect uniform; some Smiths will "make out," over time, because they have a significantly higher than average number of insured accidents. Inversely, some Smiths will pay far more in premiums than their cost to Acme in payouts, because they have few or no insured accidents. But overall, Acme must take in a significant amount more than it pays out to be a viable business.
This pattern applies to all insurable human contingencies.
Now ponder the factors Acme's representatives must consider in deciding whether or not to sell a policy to Smith, and at what premium to price it:
- How old is Smith? (Accident frequency correlates inversely with age of driver.)
- What does Smith drive? (High performance cars get into more accidents per capita than standard cars.)
- What's Smith's driving record? (Past performance doesn't guarantee future performance, but it's a damned good guide.)
- How much driving per year does Smith do? (Accident frequency is roughly constant per mile driven.)
- Where does Smith do the bulk of his driving? (Some routes and some neighborhoods are "black dot" zones where accidents occur more frequently than elsewhere.)
- Does Smith have any objectively detectable conditions that might reduce his competence behind the wheel? (Epileptics, the survivors of heart attacks, and persons with multiple-personality disorder are disfavored for accident insurance.)
All these things help Acme to determine whether Smith falls within the statistical envelope on which its policies and premiums are based -- in other words, whether Smith is a "good risk."
The critical consideration in all the above is available knowledge. Acme cannot know that Smith will get into a series of expensive crashes; it must attempt to estimate the likelihood from the factors listed above. What Acme can know is the statistical pattern that applies to Smith's "cohort:" the group he occupies on the basis of age, car, driving record, miles driven per year, and so forth.
If Acme could predict, with perfect accuracy, that this coming year, Smith would get into a crash with million-dollar consequences, it would rightly refuse to insure him. Conversely, if Smith could predict with perfect accuracy that he would not be involved in an accident of any sort, he'd be a fool to buy insurance...though doubt it not, Acme would be happy to sell it to him.
Thus, the insurance industry depends both on knowledge and ignorance: knowledge of the statistics pertinent to the policies sold and the accidents covered, and ignorance of which specific insurees will fall victim to insured hazards in the foreseeable future. If either party knows too much about what's likely to befall the insuree, they won't be able to strike a deal. To improve its odds, Acme probes Smith's relevant characteristics. If it appears too likely that Smith would cost Acme more in payouts than he'd pay in premiums, it will decline to insure him.
There are clear parallels between auto insurance and medical insurance. The foremost is between Smith's driving record in the former case and Smith's medical record in the latter one. Certain preexisting medical conditions virtually guarantee large costs in the future. If Smith is afflicted with degenerative circulatory disease, or cancer, or AIDS, he's guaranteed to cost someone a bundle. Acme will rightly refuse to insure him against costs accruing from them; it simply knows too much about his probable future to bet against odds that steep. To deny Acme the right to withhold coverage for those conditions is to demand that Acme operate as a charity rather than as a profit-making business.
This is integral with the Left's demand that "health care" be deemed a "right." One cannot legally deprive another of his rights; thus, medical care providers in a health-care-is-a-right regime are compelled to labor over any sick person regardless of his ability to pay them for their products and services. If any payment is to be rendered, it must be by the State, out of its tax coffers, for no profit-making business could survive under those constraints.
A health-care-is-a-right regime both destroys the medical insurance industry and conscripts anyone foolish enough to go into medicine. Cost control proceeds first by the State's decree of a schedule of fixed prices for medical goods and services, and later, as shortages of medicines, medical devices, and medical-care providers develop, by rationing.
Medical innovation grinds to a halt. What intelligent, hardworking man would willingly labor to develop advanced medicines, prosthetics, and techniques if it would mean a life enslaved to the State? To add insult to injury, as the State has a powerful incentive to deflect criticism of its policies onto private parties, doctors, nurses, hospitals, and medical researchers are made to bear the brunt of public displeasure.
This is but one of the many irrefutable arguments against the federalization of medical care through medical insurance. The consequences sketched above aren't just likely; they're utterly guaranteed. Indeed, Americans can see them in effect in every nation on Earth that's allowed the nationalization, in any style, of its medical-care sector.
It's been said many times that Europe's flaccidity with regard to its military defense has been made possible by the benevolent American giant, which outspends all the rest of the world on military preparedness and will leap to the aid of its beleaguered friends even without being asked. The same is true of medicine. Europe has ruined its medical-care sector through nationalization. In consequence, Europe has no medical innovation activity of significance, and well-to-do Europeans flock to America for treatments unavailable or unreliable in their homelands.
If we foolishly follow Europe into medical servitude, whose innovation and dynamism will buttress the health of Americans?
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