| Many Americans rely on their automobiles to | | | | automobiles are to our lifestyles, there is |
| get to work. No automobile means no job, no | | | | no loud national movement, accompanied by |
| rent or mortgage money, no food. A single | | | | moral outrage, to change these principles. |
| parent, struggling to make ends meet in the | | | | |
| suburbs with 100,000 miles on the odometer, | | | | Unsustainable Market |
| would presumably welcome the guaranteed | | | | |
| opportunity for low-priced insurance that | | | | In contrast, similar principles are routinely |
| would take care of every possible repair on | | | | violated in health insurance. To demonstrate |
| her auto until the day that it reaches | | | | this, let's return to the same suburban |
| 200,000 miles or falls apart, whichever comes | | | | mother from the opening paragraph. She's busy |
| first. Especially if the insurance is valid | | | | working, driving to and from work, and |
| regardless of whether she even changes the | | | | driving her kids to school and activities. |
| oil in the interim. | | | | She ends each day exhausted, sitting on the |
| | | | couch with fast food. She's obese, has a |
| So why aren't the auto insurance companies | | | | sedentary life, a bad diet, and hasn't taken |
| writing such coverage, either directly or | | | | the time to go to the doctor in years. After |
| through used auto dealers? And given the | | | | a simple injury doesn't heal for weeks, she |
| importance of reliable transportation, why | | | | turns up at the emergency room and learns she |
| isn't the public demanding such coverage? The | | | | has type II diabetes. Although type II |
| answer is that both auto insurers and the | | | | diabetes is controllable, changing diet and |
| public know that such insurance can't be | | | | exercise habits and properly tracking her |
| written for a premium the insured can afford, | | | | condition takes time and effort and she's |
| while still allowing the insurers to stay | | | | never quite successful in implementing the |
| solvent and make a profit. As a society, we | | | | necessary lifestyle changes. |
| intuitively understand that the costs | | | | |
| associated with taking care of every | | | | So the initial emergency room visit is only |
| mechanical need of an old automobile, | | | | the first of a long list of health care |
| particularly in the absence of regular | | | | related to non-controlled diabetes and other |
| maintenance, aren't insurable. Yet we don't | | | | problems associated with obesity. Whether she |
| seem to have these same intuitions with | | | | has individual or group insurance, her |
| respect to health insurance. | | | | insurance pays for each episode of care, |
| | | | without singling her out for a premium |
| If we pull the emotions out of health | | | | increase, and without charging her any more |
| insurance, which is admittedly hard to do | | | | cost sharing than is charged to the |
| even for this author, and look at health | | | | healthiest and most medically diligent |
| insurance from the economic perspective, | | | | insureds. Her coverage continues until she |
| there are several insights from auto | | | | voluntarily changes insurance companies and |
| insurance that can illuminate the design, | | | | or employers or becomes eligible for |
| risk selection, and rating of health | | | | Medicare. If she's covered under group |
| insurance. | | | | insurance she may not even pay any premium. |
| | | | Her insurance continues unabated, even though |
| Auto insurance comes in two forms: the | | | | the disease was caused by neglecting her body |
| traditional insurance you buy from your agent | | | | and she maintains her poor lifestyle even |
| or direct from an insurance company, and | | | | after the disease becomes known. |
| warranties that are purchased from auto | | | | |
| manufacturers and dealers. Both are risk | | | | This just wouldn't happen in auto insurance. |
| transfer and sharing devices and I'll | | | | This scenario is the auto insurance |
| generically refer to both as insurance. | | | | equivalent of guaranteed access to low-priced |
| Because auto third-party liability insurance | | | | auto insurance that takes care of every |
| has no equivalent in health insurance, for | | | | possible repair, including damage already |
| traditional auto insurance, I'll examine only | | | | done, until the day the car falls apart so |
| collision and comprehensive insurance - | | | | completely it's unsalvageable (death) or |
| insurance covering the vehicle - and not | | | | reaches 200,000 miles (Medicare), regardless |
| third-party liability insurance. | | | | of whether she even changes the oil (takes |
| | | | care of herself) in the interim. |
| Bumper to Bumper | | | | |
| | | | As a society, we don't expect this in |
| The following are some commonly accepted | | | | private-market auto insurance, but we expect |
| principles from auto insurance: | | | | it in private-market health insurance. |
| | | | Furthermore, there's a chorus of national and |
| * Bad maintenance voids certain insurance. If | | | | state interests, which continuously pushes us |
| an automobile owner never changes the oil, | | | | further away from the auto insurance |
| the auto's power train warranty is void. In | | | | principles. |
| fact, not only does the oil need to be | | | | |
| changed, the change needs to be performed by | | | | The current private health insurance market |
| a certified mechanic and documented. | | | | isn't sustainable. Prices have been |
| Collision insurance doesn't cover cars | | | | consistently increasing faster than inflation |
| purposefully driven over a cliff. | | | | for decades. Each year, insureds use more |
| | | | health care than ever before and more people |
| * The best insurance is offered for new | | | | have no insurance at all. Most actuaries and |
| models. Bumper-to-bumper warranties are | | | | other people in the private health insurance |
| offered only on new cars. As they roll off | | | | market don't want national health insurance |
| the assembly line, automobiles have a low and | | | | with its bureaucracy and one-size-fits-all |
| relatively consistent risk profile, | | | | benefits. Yet, we're trying to sustain a |
| satisfying the actuarial test for insurance | | | | private insurance system, which violates the |
| pricing. Furthermore, auto manufacturers | | | | very principles we know are necessary for |
| usually wrap at least some coverage into the | | | | private insurance markets. |
| price of the new auto in order to encourage | | | | |
| an ongoing relationship with the owner. | | | | Yes, health insurance involves the sacredness |
| | | | of human life and is therefore different from |
| * Limited insurance is offered for old model | | | | auto insurance. But if we're to sustain a |
| autos. Increasingly limited insurance is | | | | private-market solution to health insurance, |
| offered for old model autos. The | | | | actuaries need to explain to the larger |
| bumper-to-bumper warranty expires, the power | | | | society, in terms that society understands, |
| train warranty eventually expires, and the | | | | the rationale for the following principles: |
| amount of collision and comprehensive | | | | |
| insurance steadily decreases based on the | | | | * As sacred as health care is, it's still an |
| market value of the auto. | | | | economic transaction that has to be balanced |
| | | | by individuals and societies, against other |
| * Certain older autos qualify for additional | | | | economic choices. It can't be unlimited. |
| insurance. Certain older autos can qualify | | | | Sometimes it will be secondary to other |
| for additional coverage, either in terms of | | | | choices. On a given day, for example, the |
| warranties for used autos or increased | | | | mother in our scenario may value her car more |
| collision and comprehensive insurance for | | | | than her health. |
| vintage autos. But such insurance is offered | | | | |
| only after a careful inspection of the | | | | * Insurance premiums should be paid by the |
| automobile itself. | | | | individual and tied to controllable risk |
| | | | factors. This will provide the best incentive |
| * No insurance is offered for normal wear and | | | | for the control of risk factors. |
| tear. Wiper blades need replacement, brake | | | | |
| pads wear out, and bumpers get dings. These | | | | * Although it's hard to draw the line between |
| aren't insurable events. To the extent that a | | | | abuse, neglect and ignorance, self-abuse |
| new car dealer will sometimes cover some of | | | | shouldn't be insured and we need to draw that |
| these costs, we intuitively understand that | | | | line somewhere. |
| we're 'paying for it' in the cost of the | | | | |
| automobile and that it's 'not really' | | | | * The private market can't provide unlimited, |
| insurance. | | | | self-directed health insurance. |
| | | | |
| * Accidents are the only insurable event for | | | | * Routine care and ongoing treatments of |
| the oldest automobiles. Accidents are | | | | chronic conditions can be pre-funded, can |
| generally insurable events even for the | | | | even be subsidized, but they don't constitute |
| oldest autos; with few exceptions service | | | | 'insurable events.' |
| work isn't. | | | | |
| | | | * Insurance can't be expected to keep every |
| * Insurance doesn't restore all vehicles to | | | | human body in pristine condition. No amount |
| pre-accident condition. Auto insurance is | | | | of health care will prevent everyone's |
| limited. If the damage to the auto at any age | | | | ultimate death. |
| exceeds the value of the auto, the insurer | | | | |
| then pays only the value of the auto. With | | | | * Comprehensive, unlimited, non-subsidized |
| the exception of vintage autos, the value | | | | private-market coverage isn't possible for |
| assigned to the auto goes down over time. So | | | | people with severely impaired health. |
| whereas accidents are insurable at any | | | | |
| vehicle age, the amount of the accident | | | | * The private health market can provide |
| insurance is increasingly limited. | | | | limited non-subsidized health insurance, such |
| | | | as protection from accidents, to even |
| * Insurance is priced to the risk. Insurance | | | | health-impaired individuals. |
| is priced based on the risk profile of both | | | | |
| the automobile and the driver. The auto | | | | * Individuals who can afford to do so and who |
| insurer carefully examines both when setting | | | | take good care of themselves should be able |
| rates. | | | | to 'buy up' to better coverage. People have |
| | | | the option of buying up for everything else |
| * We pay for our own insurance. And with few | | | | in life. |
| exceptions, automobile insurance isn't tax | | | | |
| deductible. As a result, the fear of | | | | Discussion of these principles is lacking |
| increasing insurance rates due to traffic | | | | from most of the current health insurance |
| violations and/or accidents changes our | | | | debate. If society can intuitively understand |
| driving behavior and we sometimes select our | | | | how similar principles apply to health |
| automobiles based on their insurability. | | | | insurance, then they should be able |
| | | | understand the principles in the health |
| Each of the above principles is supported by | | | | insurance context. We need to initiate the |
| solid actuarial theory. Although most | | | | debate. |
| Americans can't describe the underlying | | | | |
| actuarial theories, most everyone understands | | | | This commentary is solely the opinion of its |
| the above principles of auto insurance at the | | | | author. |
| intuitive level. For sure, as indispensable | | | | |