The Theory of Insurance

What is Meant by Insurance for Catastrophe 

Sandra Fluke, an advocate for women's health care rights and Georgetown University law student, testified before a Congressional panel on health care reform this week.   She had many things to say but, generally, stuck to the topic that it would be prudent if the government mandated that health care insurance pay for contraceptives.   She might just as well have crucified Jesus Christ on live television.  It probably would have caused less of a reactive furor.

I, thankfully, am smart enough to stay out of this fight.  There's no winning here.   But, as always, I have something relevant to say about the underlying problem.   Having sharpened my rhetorical sword arguing public policy matters for the past couple of decades, Ms. Fluke's defense of subsidized pregnancy prophylaxis, as the medical community would term it, misses the point.  It's not about what specific practices are covered under health insurance but what insurance is there for in the first place.

Economists and political scientists love to throw out complicated terms describing the "market" for insurance.  I hope to stay away from those.  I simply want to reinforce the main reason we carry insurance and place Ms. Fluke's, or her detractors', arguments in the context of it.

Insurance, as it was originally designed, was created to protect against the catastrophically unexpected.  In order to protect both the insured and the insurer against a financial loss too great to bear, the risk of losing something, normally unknowable, was monetized.  Each party in the equation, put a valuation on that loss.  The insurance company is happy because it assumes the loss is unlikely to happen and gets paid for its trouble.  The insured, pays just enough to be happy that in the unlikely event the catastrophe does occur the insurance company will make the pain go away.  Wonderful.

The problem with Ms. Fluke's argument or, to be fair, the argument that Viagra, for example, should be covered under health insurance, whether emanating from a religiously based organization or not, is that neither contraception nor Viagra prevent or cure a problem that is catastrophically unexpected.  In fact, a lot of things we now take for granted as covered under health, auto, home, general liability, professional or other forms of insurance need not be there in the first place.  We simply refuse, mostly because of political pressure, to exclude things from a list of benefits based on their cost-effectiveness.  We now want everything protected under insurance's broad umbrella.  This, friends, is the crux of the problem.

For example, and my wife, a health care policy expert, warned me this was a hot potato, I am going to bring up the subject of breast cancer screening.  There is a belief that in a low risk cancer population, in other words, a group of women who have zero risk factors for breast cancer, there are irrefutable and clear benefits from early breast cancer screening.  But, that's not the case.   In a the general population of women under 45 years old with no cancer risk in the first place, early screening has no impact on outcome.  Whether screened or not, whether cancer is found or not, a woman will survive or die, regardless.  In fact, false positives, it can be argued, cause much distress as women are told that an abnormal finding requires more tests.  Screening, in that population is expensive and, sadly, useless.  Further, a lot of times, it scares the hell out of people it is trying to help!  Don't believe me?  Check out the U.S. Preventive Services Task Force website here:

http://www.ahrq.gov/clinic/uspstfix.htm

The list of medical screenings that are pretty much cost-ineffective would surprise you.  So too would the lengthy list of drugs, including very expensive ones, that do more harm than good!

It is no wonder that our insurance system is now a bureaucratic maze, ineffective, unresponsive and costly.  It should surprise no one that politicians are itching to reform it and bring it under an equally twisted, feckless and wasteful future government run program.  Whenever a huge pot of money swirls around, it attracts many hands.  The fault in this disastrous set up lies not in the fact that we are too stingy with benefit coverage but that we are far too generous.   We have eviscerated the basic premise of insurance's existence.  We desire zero risk even though what we might pay for that happy state either may not eliminate the risk or makes no economic sense.   We all sit in the same chair as Ms. Fluke and argue to a consoling audience that we too must have one hundred percent coverage to inoculate  us from our pain.