Sonntag, März 14, 2010

Insurance, Risk and Health Care...

In re-reading Human Action by Ludwig von Mises, the following struck me (from page 107 of the 4th revised edition):

If a man promises to pay at the death of another man a definite sum and charges for this promise the amount adequate to the life expectancy as determined by the calculus of probability, he is not an insurer but a gambler. Insurance, whether conducted according to business principles or according to the principle of mutuality, requires the insurance of a whole class or what can be reasonably be considered as such. Its basic idea is pooling and distribution of risks, not the calculus of probability.

Let us consider what this really means: if everyone within a class is insured, then there is no risk involved anymore, as the pooling and distribution of risks removes the risk factor for the individual.

So far, so good: if anything, this supports the idea of universal health care.

But the approach of the Obama Administration, with the idea that an individual who deliberately chooses not to be insured can pay a penalty fee much smaller than their insurance costs, yet may, at will, choose to acquire insurance when they "need" it, i.e. when they become sick, contradicts this fundamentally.

Consider this (same source, pages 107-109):

Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class. ...

It is a serious mistake to believe that the calculus of probability provides the gambler with any information which could remove or lessen the risk of gambling. ... It is the characteristic mark of gambling that it deals with the unknown, with pure chance. ...

Let us assume that ten tickets, each bearing the name of a different man, are put into a box. One ticket will be drawn, and the man whose name it bears will be liable to pay 100 dollars. Then an insurer can promise to the loser full indemnification if he is in a position to insure each of the ten for a premium of ten dollars. He will collect 100 dollars and will have to pay the same amount to of the ten. But if were to insure one only of them at a rate fixed by the calculus, he would embark not upon an insurance business, but upon gambling. He would substitute himself for the insured. He would collect ten dollars and would get the chance of either of keeping it or losing ten dollars and ninety dollars more.

Can it really be so obvious, or is there something somehow wrong here?

No: it is correct.

The individual member of the pool, the person not a member of the pool, becomes the gambler: someone who lacks health insurance is gambling that they will not need it. If the Obama Administration allows the uninsured to re-enter the pool at any time - specifically by disallowing denial of coverage due to prior conditions (i.e. sickness and disease, accidents that occur during the non-insured periods) and by providing for re-entry into the insurance pool by specifically requiring insurance companies to accept anyone who voluntarily enters into the insurance pool, then they are rewarding gambling in the name of insurance, when the business of insurance specifically excludes those who gamble.

In other words, the approach of the Obama Administration denies the insurance industry the ability to actually operate as an insurance industry, rather than as a gambling bank (which carries the risk inherent in gambling, as opposed to the probability inherent in insurance).

What the Obama Administration fails to understand is this (same source, p.112):

Life itself is exposed to many risks. At any moment it is endangered by disastrous accidents which cannot be controlled, or at least not sufficiently. Every man banks of good luck. He counts upon not being struck by lightening and not being bitten by a viper. There is an element of gambling in human life. Man can remove some of the chrematistic consequences of such disasters and accidents by taking out insurance products. In doing so he banks upon the opposite chances. On the part of the insured the insurance is gambling. His premiums were spent in vain if the disaster does not occur. With regard to non-controllable natural events man is always in the position of a gambler.

(Chrematistic is the study of money. Had to look that one up...)

Hence the idea of the Obama Administration and the others that fervently believe in reform of the health care system is severely flawed if they believe that they can make something inherently risky into something inherently insurable: we can only approach this if you can enforce things like diet, life-style choices, and effectively legislate fitness and a healthy life style.

That way lies madness: it is the attempt to control the uncontrollable. Might as well try to stop the movement of the earth.

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