Insurance and Risk

The health insurance refom debatemakes it worth revisiting some basic questions about insurance. Insurance is about pooling risk and hedging risk. The individual hedges risk with insurance, by asking someone else to absorb the risk for a fee. The insurer pools risks of this kind. So, for example, I pay $x/year rather than face the small but nonzero of losing my house to fire and having to pay to fix it. The reason individuals get insurance is not so much to rationally hedge risk as to transfer intolerable risks to those who can bear them. That is worth repeating. The reason I pay fire insurance is that I can't afford to fix my house. If it burns down, I am homeless. So I am not weighing the value of insurance payments vs. the cost of fixing the house, I am weighing the insurance versus destitution. See the profit potential there, do you? Because of a lack of capital, the risk *to me* of the house burning down is far greater than the risk *to the insurance company*. It need merely pay $200K to rebuild it (or whatever). I and my family would be homeless.

Health insurance is a tougher bargain. The threat of dying from a car accident without being able to afford treatment is too much to bear. You would obviously pay big profits to insurance companies to avoid that. To avoid the worst effects - people dying on hospital steps untreated because they can't pay - the federal EMTALA law requires that emergency rooms treat patients even without payment. The EMTALA law was the worst thing we ever did in one sense, and the best in another. It was merciful in that it saved a lot of lives, but it also (1) created the most expensive and least-effective health-care delivery system for the uninsured you could imagine by treating all serious ailments at the worst possible time and in the most expensive way and (2) removed the very misery that would have prompted health care reform at an earlier date. I have heard Republicans say just in the past few weeks that "everyone gets treatment today." What they mean is that people who end up in emergency rooms are not turned away. The fact that nobody will change this doesn't seem to enter into their minds.

The other reason to have insurance is to protect others against harms you may cause them that you cannot afford to fix. This is liability insurance. If, as a result of a banana peel I negligently leave on my front stoop, the mail carrier becomes a paraplegic, I cannot afford to compensate her for her injuries. So I have insurance. Health insurance would take care of many costs, but it would not, for example, replace the lost income to her family. Disability insurance would help to easy my burden in that situation, or should. If I don't have the insurance, I will suffer and lose what little money i have, but the mail carrier won't get enough compensation forthe injury. This is why American lawyers then sue others (the maker of the concrete stoop, the banana manufacturer) with "deep pockets" and, oddly, why juries let them collect. Someone's gotta pay, right?

Obviously we start asking the question: who should be buying which insurance? New Zealand has experimented with a generalized social insurance where all such risks are paid for out of a single national pool through taxation. For all the "moral hazard" arguments that can be thrown at it, is it really such a bad idea? You would need far fewer lawyers. That's a start...