Health Care

I’ve been pondering a mammoth post on health care for a while. I’m not sure if I’ve got it in me tonight. Or ever. So here’s a few thoughts. Mainly from my angle as an actuary who manages insurance companies for a living.

Most places that try to privatize health care to some extent do it via an insurance system of some kind. There is an enormous problem with this. Insurance works best when the event you are insuring against (e.g. car accident) is pretty random. It works least when there are different parts of the community who have enormously different risks of the event occurring. If you think about health care, the chance of anyone needing health care is enormously variable, depending on their current state of health. Compare me (moderately fit, only visits to the doctor in the past 10 years for pap smears, except for pregnancy related things) with the family friend Hungry Boy shares his birthdate with (severely autistic, has just started to say a few words at age 3 and a half).

If you’re an insurance company determining a risk based premium, then Hungry Boy’s friend’s premium for medical related care is going to be an enormous premium compared with mine. There are a few random-seeming events in someone’s medical life – a colleague in his mid 30s having a stroke is a good example. But there are a lot more that are pretty predictable looking forward for a year if you look carefully at someone’s state of health.

So insurance without some method of grouping is never going to work well as a way of paying for health care – by having insurance, you’re very close to just asking people to pay the costs of their health care with the intervention of an insurance company to organise the payments.

Here in Australia, the method of grouping is to force insurance companies to charge everyone the same premium, regardless of health status, age, or sex. And to get enough people to take out insurance (including healthy people like me) the government has to massively subsidise it with the tax system, to the point where there is more money going to dental treatment through tax breaks for high income earners than there is actually for people who need dental treatment through the health system.

It does seem reasonable to allow massively rich people (like Kerry Packer) to pay for private health care. But I’m not sure that I can see that the outcomes for society as a whole, including the roughly 50% of people who take out private health insurance, are better than they would be if we took the money spent on private health insurance and used instead in the state system. Seriously rich people could still pay more, but the health of Australians as a whole would probably be better.

I probably need another post to explain why I seem such a socialist in this post (more than I am when you look at my political beliefs as a whole). I do believe that markets add value, but only when there is full information on both sides of the buy-sell spread, which is manifestly not the health care market for the individual patient.

  8 comments for “Health Care

  1. November 10, 2006 at 10:15 am

    I still don’t fully understand the Australian medical insurance system, private versus Medicare etc, and I’ve lived here almost 6 years. After a long complicated carry-on, we have decided to stick with Medicare for the time being, although mainly because neither of us can get our heads round what private insurance would cover us for. A few years ago, I had an operation that was totally covered by Medicare. I was wondering if I had private insurance would I have had to pay? I have also been astonished that Medicare has paid for most of Kiko’s medical treatment, even for his physiotherapy. The only thing we’ve had to pay for is the excess for his private paediatrician, and for his medication, which did come to quite a lot when he was on epilepsy drugs (he’s not anymore), but I heard even private insurance wouldn’t cover that. It seems so confusing to me what private insurance will and will not cover. If I had access to some clear information then I would be able to make an informed choice.

  2. November 10, 2006 at 11:56 am

    I’ve now had (1) a random medical event accompanied by a host of expensive scans, specialists, and (2) a surgical procedure in which I got the *specialist of my choice* — all of which was covered by medicare & moi, none of which was covered by private health insurance. The irony of this was not lost on me as a patient.

    I have private health insurance now because it’s so cheap in the NT and offsets all my physio costs for bad neck from work, etc. (It could be argued that private health insurance is assisting me as a middle class person in access to physios etc that someone from a lower economic status wouldn’t have.) But my overriding reason for private health insurance is to cover me in case I have another random medical event and just in case choice of specialist becomes an issue in that event. But as far as I can see, there’s never any guarantee that you will get the *specialist of your choice* under the private model.

    My reasons for taking out private health care are entirely selfish and fear-driven, but I’m not prepared to let go of the security blanket (speaking as someone who’s had a ‘random medical event’ almost as bad as a stroke). Talk about a faint-hearted socialist!

  3. November 10, 2006 at 8:58 pm

    In the current system, I’m a private health care customer too. Mostly for financial reasons; I’m financially better off taking it out whether I need a doctor or not (which is pretty daft). And in the current system, I’d think pretty carefully about keeping it even if it didn’t make financial sense.

    BUT, that doesn’t mean you couldn’t have a system that was better designed that gave you similar outcomes without needing private cover. If you’re going to spend on health care, does it really make sense to spend the billions in subsidy that the government spends on the well-off?

  4. November 11, 2006 at 8:39 am

    I agree PU as I have recently written at my own blog, I just can’t see how you can get a private system to work that is in any way fair. The subsidies that need to go to private health care here to make it work are ridiculous. Without them it just wouldn’t be worthwhile.

    Its also a mystery to me why they have such things as glasses etc covered. I’m going to use my allowance on glasses every single year since it almost pays for a new set. Surely better just to let me keep the money and buy them myself only when I need them.

  5. November 12, 2006 at 11:06 am

    We’ve been an NHS family pretty much all along but the way dentistry has gone in the UK shows the way other health care might be affected – that is, public healthcare theoretically available but with no practitioners able to afford to offer it due to the rates provided by government. I’ve been paying private rates for dentistry for some year now, though other medical problems are still covered by the NHS.

  6. November 13, 2006 at 8:05 pm

    Steve,
    How do you define fair? I am currently covered privately and, considering my and my family’s state of health we am paying (both my own and through the tax subsidy) a huge amount for coverage that we am not likely to need – but I do want to get coverage for that out of the ordinary event.
    As a result I pay more (probably a lot more) than a strict actuarial calculation warrants. The same would be true for someone on less than I get but who may be fitter than I am and even less likely to suffer an adverse outcome.
    This is, effectively, to subsidise those who are taking less care of their health than I am or have a worse history than I do; a familial history of heart disease, smoking, drinking to excess and taking other risks with their health. Is this fair? Personally, I doubt it.
    I would prefer a model where everyone goes private – but general taxation pays for those who cannot afford it, either for reasons of very high risk (a child with autism for example) or low income. The issue of high EMTR as the benefit is withdrawn as income increases would have to be addressed, but I do not see this as an insurmountable problem.

  7. November 14, 2006 at 5:06 pm

    Ozrisk,

    I don’t disagree that there are injustices in the current system and I hesitate to define fair because I can’t in any tightly defined way. As the post states information asymetries and highly unequal costs amount to real problems with providing health insurance, and I just don’t think the private market would works if not for the subsidies and penalties we attach to it.

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