I am part of the problem: being self-employed, I haven’t had health insurance in years – opting to spend my money on other things of more consequence: like paying down my school debt, traveling and creating time to do things I enjoy, like writing these articles.
But I am reminded that it is the young, mobile, and healthy that are taking the biggest risk with not having insurance – and increasing the told cost of health care as they find themselves in the emergency rooms. And to a certain extent, I agree. But against my libertarian tendencies, I want to argue that giving people the choice to opt in and out of insurance actually creates a moral hazard, with a solution that must ignore the individual and solved only with a macro approach.
Let’s begin by looking at what insurance is: insurance is social system that distributes the financial costs of catastrophes across a population. Individuals pay a share into a system and extreme fluctuations in small segments of the population are absorbed.
In order for this system to work, a very large portion of the population must believe that they are risk and want to buy into the scheme. The reality is, though, that the risk of a catastrophe occurring to any single individual is quite small. The chances that your house will burn down: small. Getting in a serious car accident: relatively small. Being struck by some inexplicable disease and having to be hospitalized: very small. In the developed world most people live relatively long lives – and are more often set back by slow onset conditions caused by lifestyle decisions, such as heart disease and stroke. So on an individual basis, you can’t sell insurance on a catastrophe basis, without there being some level of deception.
Moreover, individuals have a hard time accurately gauging their own risks. People rarely have adequate information about their risks to make a rational decision – and if they did, the risks would appear small. Some risks, like getting hurt in terrorist attack or a plane crash are extremely rare, yet most effective in mobilizing fear.
So we’re presented with two basic ideas: we need insurance for known fluctuations in the population, which we would all like to be protected from. But individuals have a hard time gauging their own risks, but still are asked to predict. This asymmetry of information lends itself to abuse and, I think, resembling other morally ambiguous situations, like gambling.
While specific risks to individuals are statistically rare, we know – with certainty – that small segments of the population will be afflicted with all sorts of catastrophes. Since insurance is a tool that works best everyone participates and we cannot expect individuals to ever know their own risks, it makes sense that the industry resembles a public service as apposed to a gambling business.
i think the argument that health insurance isn’t gambling because we can never know what the odds of a multitude of potential disasters are, is a good one. I’d never thought about it that way before. I also like your definition of insurance. In San Francisco however, earthquake insurance is a total gamble. Now is an especially good time to buy in, since we’ve seen an unusually long gap has past since the last big one, no?