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Yakk · 03-03-2006, 11:47 AM

The problem with health insurance.

Why is company-wide health insurance popular?

Because it is cheaper. For fundamental reasons.

Let's suppose we have health insurance that costs 1000$/year.

Bob, Alice and Charles are offered it.

Each has an expected amount/year they will spend on health.

Alice: 1000$/year
Bob: 500$/year
Charles: 1500$/year

So, Bob looks at the coverage, and says "this is a bad deal".

Alice and Charles say "sure, that sounds like a good deal".

Then the insurance company goes "gasp! Everyone who signed up is costing us more than 1000$/year. Our average costs are 1250$/year! Let's raise prices."

Alice hears about the price raise. "Naw, I only spend 1000$/year on health insurance", and drops the coverage.

Now only Charles is signed up for 1500$/year.

The insurance company goes "gasp! Our average costs are 1500$/year! We better raise prices."

This is known as the Lemon Effect -- only the people who the insurance company doesn't want to cover want the coverage.

Then again, the Insurance Company could magically learn what the expected price for each person is, and offer them coverage at the correct price.

This requires the Insurance company know everything about it's clients that the clients know about themselves. How much you smoke. Your family history. Your day-to-day habits. Eventually, your genetic markers and health predispositions.

They also need to be able to change their premiums at will -- or be able to cancel it whenever you have the option to cancel it.

Any asymetry between the information or options the insurance company has and what you have causes "lemon effects", the larger the gap the larger the effect.

By offering insurance to every employee of a company, insurance companies get a population that can be understood statistically. They only need to know as much about the entire company's workforce's health as the company knows about it's workforce's health. (well, not quite -- people can change jobs based off health benefits)

If you can push the insurance up to a national level, the lemon effect goes away entirely, other than people choosing to immigrate based off health concerns.

And that is why group health insurance can be cheaper than individual health insurance, why individual health insurance will never cover everyone, and why government health insurance can be useful.

03-03-2006, 11:47 AM	#44 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	The problem with health insurance. Why is company-wide health insurance popular? Because it is cheaper. For fundamental reasons. Let's suppose we have health insurance that costs 1000$/year. Bob, Alice and Charles are offered it. Each has an expected amount/year they will spend on health. Alice: 1000$/year Bob: 500$/year Charles: 1500$/year So, Bob looks at the coverage, and says "this is a bad deal". Alice and Charles say "sure, that sounds like a good deal". Then the insurance company goes "gasp! Everyone who signed up is costing us more than 1000$/year. Our average costs are 1250$/year! Let's raise prices." Alice hears about the price raise. "Naw, I only spend 1000$/year on health insurance", and drops the coverage. Now only Charles is signed up for 1500$/year. The insurance company goes "gasp! Our average costs are 1500$/year! We better raise prices." This is known as the Lemon Effect -- only the people who the insurance company doesn't want to cover want the coverage. Then again, the Insurance Company could magically learn what the expected price for each person is, and offer them coverage at the correct price. This requires the Insurance company know everything about it's clients that the clients know about themselves. How much you smoke. Your family history. Your day-to-day habits. Eventually, your genetic markers and health predispositions. They also need to be able to change their premiums at will -- or be able to cancel it whenever you have the option to cancel it. Any asymetry between the information or options the insurance company has and what you have causes "lemon effects", the larger the gap the larger the effect. By offering insurance to every employee of a company, insurance companies get a population that can be understood statistically. They only need to know as much about the entire company's workforce's health as the company knows about it's workforce's health. (well, not quite -- people can change jobs based off health benefits) If you can push the insurance up to a national level, the lemon effect goes away entirely, other than people choosing to immigrate based off health concerns. And that is why group health insurance can be cheaper than individual health insurance, why individual health insurance will never cover everyone, and why government health insurance can be useful. __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.