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Taking The Chance Out of Insurance
People buy insurance — well, used to, at any rate — to mitigate the costs and impact of unpredictable and expensive future events, and to share the risk of being that one-in-a-million unlucky person. Sure, paying monthly premiums is no fun, but it beats getting an unexpected $200,000 bill for life-sustaining surgery.
Of course, insurance is not just a way to pre-pay for services: insurers are smart and — entirely appropriately — try to hedge their bets by estimating the likelihood that they’ll have to pay out and charging appropriately. This requires them to get information about their customers, such as their driving habits, age, family history, educational attainment, credit scores, and whether (and how much) they drink and/or smoke. At least in theory, this allows insurers to charge high-risk people a steeper rate, while offering low-risk clients more competitive prices. And while the predictive quality of this information isn’t good enough to say much about any given individual, it’s more than adequate to work in the aggregate.
Neither the insurers’ desire for information about their customers nor their customers’ general reluctance to share it are new. What is new, however, is the increasing ease and affordability of new streams of data available to insurers that could help them make much more accurate and personalized predictions. As member Merina Smith points out, genetics — including in-utero testing — is one such stream of information:
Genome sequencing is becoming cheaper and it is easy to see that there could be some benefits to genomic sequencing for all newborns. But there is a very dark side. Such information could easily be used for nefarious purposes by insurers, employers, or even schools to pigeonhole or discriminate against children based on their genetic code.
Merina goes on to describe the potential dangers surrounding the practice, particularly if the government gets involved. And while I think the potential benefits deserve more attention too — e.g., someone who knows they’re at greater risk for a given disease can change their behavior to prevent or mitigate the negative effects; also, a poor person with good genetics might be able to afford a policy that would otherwise have been outside his price-range — I think some trepidation is entirely called for.
But genetics aren’t the only source of new information. As Megan McArdle writes, health insurers are now experimenting with electronic devices — such as FitBit — to track its clients’ actual fitness (with their permission), which is much more useful than just knowing whether or not someone belongs to a gym:
[John Hancock Insurance] is rolling out a program in the U.S. similar to ones already deployed in other parts of the world, where your life insurer tracks your fitness levels, then gives you rebates depending on how active you are. Folks who get up in the morning and jog five miles will get rebates; couch potatoes who can barely make it to the kitchen for another soda will be paying more.
…
When this shakes out, we’re likely to find that the biggest discounts are disproportionately going to folks with higher incomes, who are educated and healthier. On an actuarial basis, this makes total sense, because those people are the least likely to die in the near future and cost their insurer a bunch of money. But the necessary corollary is that people who are poorer, less educated and not as healthy are, on top of all their other worries, also paying more for their health insurance.
From McArdle’s piece, I came across this description of how auto-insurers are doing, essentially, the same thing:
Today, Progressive Insurance offers “Snapshot,” a simple device that connects to [their car’s electronics]. The Snapshot device continuously streams vehicle data such as speed, time, VIN number, and G force to Progressive. Consumers who drive fewer miles, drive during daylight or early evening and without sharp braking typically receive lower rates.
Again, I think it’s worth noting both how creepy and potentially beneficial all this is. More accurate and specific information can lead to more choices, fewer inefficiencies, and more opportunity for prevention. It can also make services available to people who might not be able to otherwise afford them; a physically-fit and genetically healthy person who always comes to a complete stop has a lot to gain by scrupulously documenting and sharing his habits.
On the other hand, as McArdle and our own Mendel argue, all this only goes to show that government isn’t the only potential source for totalitarianism.
Published in General, Science & Technology
I have trouble seeing efficiency and choices constrained by prices as anything like totalitarianism. Is it totalitarianism if no other than a single option is cost effective?
You may not have a choice, but if you did, you wouldn’t take it anyway.
I also doubt this situation arises very often.
Also, you could buy insurance for your newborn to hedge against a negative genetic test.
Giving a company permission to track your behaviour is no more “totalitarian” than signing up to be a Neilsen family.
The dangers involved are that the data will be used and disseminated beyond the limits for which the individuals provided consent, but then that would be fraud, not “totalitarianism”.
The only way that private organizations can track individuals’ private information without their consent is with the cooperation of governments.
(Now, of course, sometimes it’s uninformed consent, where the individual didn’t take the time to read the contract. I have next-to-zero sympathy for people in that situation, but I concede that reasonable people can disagree.)
Information is power. Thanks for this post, Tom. We think we live in the information age, and we do, but there is so much more information that could be out there about us. Maybe I’m becoming a libertarian ;-) (don’t think I’d be very welcome!) but I think we need to watch this carefully. Obamacare is all about tracking everybody’s information. Look at what the IRS did with information about conservatives. I think we are more and more going to have to keep tabs on how information is used. Yes–absolutely it can be used for good, but it can also be misused. We need to be watchdogs in this regard. It’s going to require some thought and ethical arguments about what sort of information and uses thereof are ethical.
We will all have chips or monitoring devices in us eventually. Steep unsustainable costs will drive this.
Insurers manipulate and lie. Patients manipulate and lie. Great world.
Unwanted information exposure always is a risk, and it always has been. The snooping technology always has been at least the equal of the hiding technology; today’s tech only speeds the pace of the arms contest.
I have no problem having my genome isolate me to a risk pool of one and the insurance industry (real insurance, the fantasy thing you describe in your post) offering me a policy with a properly risk-adjusted premium, even if I’m the only one who gets that premium, and my neighbor gets a lower premium for his population of one risk pool.
That’s what risk transfer and risk-adjusted pricing are all about (would that the Feds understood that in investing and risk-adjusting derivatives).
The pre-overregulated insurance industry (Obamacare is only the latest in the evolution) also did a pretty good job of lumping together similar enough risks and arriving at a pooled risk adjusted premium for their various risk levels.
Thus: it seems to me that a good-enough-for-now solution would be for a (vastly) deregulated insurance industry to offer pooled risk policies for those who did not want their (genome-specific, for example) detailed information in the hands of an insurer and a different set of policies for those willing to give up that detailed information.
Worries about the government getting its hands on these data are a wash, I think; again, today’s technology has only sped the pace. The only ones we have to blame here is We the People for not having exercised, and for not taking today, tighter control over our employee, the government.
McArdle’s beef?
When this shakes out, we’re likely to find that the biggest discounts are disproportionately going to folks with higher incomes, who are educated and healthier. On an actuarial basis, this makes total sense, because those people are the least likely to die in the near future and cost their insurer a bunch of money. But the necessary corollary is that people who are poorer, less educated and not as healthy are, on top of all their other worries, also paying more for their health insurance.
The answer here, too, is not in controlling an industry, but to force government back out of the way so that economic upward mobility can resume and those who are poorer can move up the economic ladder and improve their education and health.
It also seems to be (I hope I’m misreading here) a suggestion that the successful should be held back because others can’t keep up. That’s in immoral position to take.
But these aren’t the easy, simplistic solutions that the touchy-feely or the government is the solution crowds favor.
As a side note, even pre-existing conditions need not cost as much as they do, except that regulation jacks them up. Pre-existing conditions have time-based risk: they’re not all coming to realization at once. The heart condition is in abeyance, the asthma or diabetes is under control, and so on. The time-risk pool, based on an actual flareup, would be cheaper with actual risk-adjusted premiums chargeable and charged.
Eric Hines
Eric – good thoughts. One problem with your good-enough-for-now solution, though, is what we could call reverse anti-selection. Those willing to share their data will tend to be healthy people who will benefit from doing so. This will over time cause rates to climb for the non-sharers – healthy or not.
Also, is sharing the data irreversible? If I have shared my data and new research finds some nasty consequence of my combination of DNA, can I then buy a policy as one who had not shared my DNA?
How many nanoseconds will it take for the racial entrepreneurs, grievance mongers and busybodies to decide this is the new redlining and generate new regulations. I agree that most of these “voluntary” constraints are not egregious when looked at individually, but in the aggregate they bother me a lot. The auto insurance example is especially troubling to me – I have no problem with giving discounts for safe drivers, even monitored drivers, but how can your credit score be said to impact your driving ability? Maybe your just having a dispute with a merchant or you got embezzled by a business partner, I don’t think that is fair justification for your auto insurer to jack up your rates several hundred dollars a year.
Also, is sharing the data irreversible? If I have shared my data and new research finds some nasty consequence of my combination of DNA, can I then buy a policy as one who had not shared my DNA?
Data can’t be unshared any more than things can be unseen. A law says they have to destroy all records on your demand. How do you know they have? Even if they wanted to, this is the Internet.
As to the second, that’s an ethical question more than a legal one. Is it ethical to withhold information that’s material to an agreement, especially on the basis that it helps you, given that the withholding harms the other party to the agreement?
One problem with your good-enough-for-now solution, though, is what we could call reverse anti-selection….over time cause rates to climb for the non-sharers – healthy or not.
A) I don’t care. That would be part of the good-enough-for-now bit, and the solution can be adjusted as actual facts dictate (I’m speaking ideally here).
B) I’m not sure that would be the case. As costs to the insurer go down from the more precise risk estimating, the pooled risk policies will feel no upward price pressure from the <genome> policy holders. If anything, those folks will feel upward price pressures as their policy sales (might) get called on to subsidize the pooled risk policy purchasers. Especially as the government-is-the-solution gang raise the hue and cry over the unfairly low rates of the former and demand they pass along their good fortune. See, for instance, the impact on relative pricing for auto insurance between men and women drivers.
Eric Hines
Cui bono?
The idea is to spread risk. The further along you go down the road to customizing rates, the farther away you get from the idea of spreading risk.
No, the idea is to pay only for the risk being transferred, not to pay for someone else’s risk, too.
The risk also is spread by all 14 of us with substantially the same genome-driven risk for a particular disease being in a pool, since even that single risk is being spread across time.
That’s the tradeoff between the sellers and the buyers of the risk transfer arrangement.
The decisions depend on the risk(s) being spread or pooled.
Those are best market decisions, not government ones.
Eric Hines
The best and fastest way to bring medical costs down is to make all insurance personal. By that I mean that each individual pays for his own (or his family’s) insurance himself. Get the employer out of the insurance business altogether. This would make the total cost of a person’s healthcare much more obvious and provide an incentive to control it.
The other component of this idea is to provide easily accessible costs for every medical need. Today, you cannot with any degree of accuracy determine what the cost of a medical procedure will be. Want a hip replacement? How much will it cost? Right now, the prices I am seeing range from $11,000 to $130,000. From the cost of a car to the cost of a house. How is one to plan? Well yes, you can look at the total out-0f-pocket cost allowed by the insurer but that is never the total cost.
If prices are available consumers can make informed individual choices and prices will come down through competition.
I know we’re speculating here, but I disagree on B – I think rates would climb for the “non-genome” policies because it’s a zero sum game. It’s different than something like smoking, for example:
I’m not sure there’s a difference to make up. These are two different markets, unlike Obamacare, for instance, that by design attempts to blend “healthy” and “unhealthy” markets into the same pool explicitly so as to have the “healthy” subsidize the “unhealthy.”
Another factor is the nature of your “remaining smoker” pool. Total risk may or may not go down; this is now a relatively less healthy population through the departure of those willing to grunt through the process of quitting–easy for some, deucedly difficult for others–which characteristic may well be associated with a measure of better overall health. And there are now fewer folks across which to amortize the total expected payout, and a higher expectation of payout for each of the remaining smokers.
All of this would tend to argue against my genome risk pool tending to subsidize the pooled risk policy buyers.
Probably ought to deregulate insurers, push the genome bit, and try this out empirically.
Eric Hines
One problem I see is that this information gathering is a one-time event. Supposing the day after I sign up for health or life insurance, I decide to start smoking, learn skydiving, and become a full-time race car driver. Technically, I can do that (although there are probably imited benefits the first couple of years), but I’ve now set myself up for lying on the application. The insurance companies could provide a compelling argument in court that I lied, and then I’d be out of luck because I cannot prove otherwise.
If the government becomes the insurer (health, life, auto – you name it), I can eventually see mandatory reporting of everything – your health, habits, job, travel, risky behavior (other than gay sex – that’s okay!), etc.
By the way, if pre-existing conditions are no longer a problem for obtaining health insurance, then why are any conditions (smoking, obesity, etc.) even considered in the equation?
How insurance uses information is one thing. Perhaps that is an area where personal information about us can be used in a practical and beneficial way. But the problems are so much deeper. The main point is that the dignity and worth of a child or any human person does not depend on any genetic information about him or her. Placing great importance on genome sequencing and what it says about a person is to ignore this important truth. Humans are so much more than their genome, personal though that is. Yet this personal information could easily be used to dehumanize humans if it is used for things like school placement. And I can easily see in this world of third party reproduction an insatiable demand for science to produce children with particular genome sequences, not only commodifying children, but intrinsically valuing one type of person over another.
The point about humans, though, is that wealthy and powerful Ebenezer Scrooge is not more valuable than the poor man’s homeless child shivering around the fire to keep warm. In fact, he is less human because he lacks compassion and any sort of joy in life. The more common genome sequencing becomes and the more it is used to say who we are and dictate our choices, especially when government and bureaucracy become involved, the less we will be able to separate ourselves from it and acknowledge and value those human qualities, like joy and compassion, that have nothing to do with our genetic code.
I have a picture of 26 children given to me when I was working with them as a song leader at church. It’s posted by my desk and I look at it as I work. I know these kids. They have a wide-range of talents and abilities and will no doubt have a widely divergent paths in life, but each one of them is infinitely precious and filled with potential. They won’t all be great scientists or surgeons, but the reason I was teaching them songs, and along with those songs values and ethics, is because I want them above all to be decent human beings who are hard workers, kind and helpful to others, good friends, good parents and overall decent people. No genome sequence is going to tell us anything about this, but yet it is those choices that they freely make that are the most important part of being human. In other words, genome sequences must be kept in their place. They are useful to a very limited degree. Right now the technology is too new and expensive to be used universally, but I could see it becoming intrusive and destructive. It’s something we need to monitor what happens in this arena and resist wrongful use. It’s helpful to have some idea at the outset what amounts to wrongful use.
Merina, any new technology could be used inappropriately. Genes are only about 50% deterministic. That leaves a huge remainder for personal experience and free will. If people act as if genes are all you are, then that would simply be wrong.
Hi Stad – you raise three good points. First, the non-smoker today who becomes a smoker (or skydiver) tomorrow is built into the actuarial assumptions. In fact, they probably also build in the expectation that some people will lie on the application.
You are 100% right on the government as insurer. It has no business running a business and will always mess it up.
Finally, on pre-existing, the only difference now is that insurers cannot deny coverage. The conditions still need to be known so the insurer can predict its future liability.
I see your point if you separate the two groups, as you describe. But I think most insurers would not look at it that way. They would continue to view the population as a whole and just use the information to charge appropriate rates. Just because Obamacare does the same thing, does not mean it’s wrong.
Full disclosure – I do work in the industry but I am nowhere near an actuary so please don’t think I am trying to appeal to authority. From what I do know, though, I would be uncomfortable if the industry were completely deregulated.
What are your school placement worries? Stuff like Down Syndrome? A problem like that is already pretty obvious even without widespread genome sequencing of children. Something like dyslexia? Kids with dyslexia who learn the right kind of coping skills can and do already make it to the Ivies and beyond.
My husband was severely dyslexic as a child. But because he had (for his time) forward-thinking parents willing to address his special needs at an early age, he was able to flourish. Attend grad school at U of C on a scholarship. Work in the Midwest’s equivalent of Wall Street. And he’s not some freak in this respect. I’ve heard countless stories like his from very intelligent, gifted, and mostly successful people. (If anything, conservatives tend to worry that institutions these days are too accommodating of those who aren’t neurotypical.)
We already know a ton of traits like asthma, allergies, dyslexia, etc, are strongly hereditary. We’re already asked to give family health histories. True, we could lie on our family health histories if we thought it would be to our advantage, but do you? I wouldn’t – even family traits I’d rather not admit could be important for medical problem solving. Genome sequencing is largely a refinement of knowledge we’ve already been gathering for a long time – the tendency of traits to be inherited. Nor, as Mike points out, are genes magically deterministic (I myself carry a mutation that did not respond to the standard treatment for that mutation).
That’s my point, Midge. Genome info could be used in lots of places where it has no business being used because human spirit, as in your husband’s case, is able to overcome and is so much more than the genome. It could easily be used to pigeonhole children, for example, by putting them on a certain path at an early age because of their genome. And people already try to manipulate their child’s genome in third party reproduction by “choosing” traits of donors. This is all bad and dehumanizing. Sure, you choose your spouse because you like certain traits and you probably hope those traits show up in your children. My spouse is tall and thin, for example. I hoped my kids would be too. But I was perfectly willing to accept and love just as much the kids who did not turn out to be tall and thin. And I did not pick him for that, but for the whole package that is him,as I accept my children for the whole mysterious package that is them. The more we pick and choose traits of children through science and use it to determine people’s course in life, the more we move into seeing ourselves as “creating” the person rather than allowing the person to create himself or become himself through life experiences that he or she (and parents) choose.
My motto is simply this: never underestimate the ability of progs to misuse information ostensibly “for your own good” but really to increase their power. All I’m saying, let’s keep an eagle eye on this and right now fight against third party reproduction that takes children away from their biological parents.
It is a source of frustration how little information one can obtain about what any given medical visit, test, or procedure will cost. I had that experience recently, and only because I happened to get curious beforehand, so called the doctor’s office and hospital to inquire before keeping my appointment. Turned out this follow-up re-check would have cost me somewhere between $260 and $2,990 out of pocket, after meeting my deductible. And that took a good hour and a half going back and forth between hospital billing office and my insurance carrier to get to the possible range.
How dare they expect me to just show up for this? Well, the doctors involved had no idea whatsoever what any of it might cost, in their own hospital. That is insane.
I told them forget it. I would not submit to such an arbitrary price range when I am not experiencing symptoms of any kind.
In my personal experience (I spent much of elementary school in Special Ed), children are often pigeonholed as “defective” because of lack of information about what’s really bugging them. Once you know what the problem is (or, even if you never figure the problem out, at least learn effective coping mechanisms for it), it’s easier, not harder, to mainstream – to break free of that pigeonhole.
To call my husband’s story the triumph of the human spirit “over” dyslexia is to miss the point, I think. Dyslexia is something that’s coped with, not triumphed over. Clever people can even use dyslexia to their advantage – my husband likes to argue that those who are born without dyslexia are the ones with the birth defect. That’s not a conquering attitude, but an adaptive one.
Dyslexia runs on my side of the family, too. Even without pinpointing a “dyslexia gene”, we know our children (assuming we don’t have to adopt) are quite likely to inherit this trait. If a “dyslexia gene” were located, knowing which children had it might be handy for teaching them coping skills tailored to their unique personhood – possibly, children born with the “birth defect” of lacking the “dyslexia gene” would become bored and frustrated by pedagogy tailored to their dyslexic siblings.
I think you make the mistake of thinking that people (especially “progressives”) use technological advance to necessarily help people and solve their problems. They claim that’s what they want, but they are far more likely to use knowledge for their own ends, and it’s a big mistake to trust their ends. Sure, knowledge can be used for good, but we have to be very, very careful about the combination of bureaucracy and knowledge, especially personal knowledge.
But then is the solution to oppose the bureaucracy or to oppose the knowledge?
I’d rather oppose the bureaucracy.
To say we must curtail knowledge because of bureaucracy is to accept the bureaucracy, not the real-life information we’re able to gather, as the given.
Midge, I never said we had to curtail knowledge or bureaucracy. Both are necessary of course. My point is that we are humans with the ability to make ethical judgments and ethical decisions and to control the use of knowledge and bureaucracy. Right now we live in a world that is ethically impoverished. We need to have these deep discussions to determine what human freedom and dignity are in light of technological developments and how we can protect them.
Good info! I didn’t think the actuaries could build that into their calculations, but it makes sense.
One thing I forgot to mention about the government getting involved in insurance is that at some point, the government will not only make you update your personal information periodically, but will start to make you exercise, make you eat less than XXXX calories per day, make you stop skydiving, make you cease smoking – all under the guise of “we need to keep our costs down”.
Or, the government will raise your premiums to the point you cannot afford to eat lots of food, skydive, smoke (already well on the way there), etc.
Bottom line – I don’t want the government controlling my lifestyle under the guise of “looking out for me”, “controlling insurance costs”, or any other reason. In some ways, we’re already there.