“Rationally” Choosing to Be Uninsured
posted by Frank Pasquale
NYM has a good piece on low-paid, young New Yorkers who are increasingly taking chances with their health by choosing to be uninsured. Here’s one painter’s off-the-cuff calculations:
“Now I find myself making all these stupid calculations. Like, it would cost me around $3,000 a year to have insurance, right? Okay, isn’t that about what it would cost out of pocket if I broke my wrist? Chances are I’m not going to break my wrist once a year, so why not save the money for that onetime emergency?” Like many I spoke with, [the painter] said he’d happily pay for insurance, if only the cost-benefit analysis tilted more in its favor. “What’s ironic is that I would never live without my cell phone, but I won’t consider buying health insurance. It sounds ridiculous to say that out loud, but the fact is insurance is just too expensive. If it was the same price as my phone”—$150 a month sounded reasonable to him—“I’d buy it in a second.”
This internal struggle reminded me of a recent debate among Republicans on RomneyCare in Massachusetts–namely, the wisdom of an individual mandate to force everyone to have medical insurance, just as everyone who drives has to have car insurance. To the Heritage Foundation, the individual mandate makes free-riders pay for the care they are almost inevitably going to demand (and probably not be able to pay for) at an ER sometime. The libertarians at Cato think that it’s the thin end of a wedge designed to speed us to socialized medicine.
My own take: it’s pretty hard to see the rationality of the painter’s decision. Perhaps, ala a really generous view of heuristics, that hypothesized wrist injury is really a cognitive shortcut that averages out the range of illnesses the painter could have in a given year, and weighs the costs and benefits of insuring against them. But I doubt there’s any data available to back up that characterization. And he doesn’t appear to take into account the range of chronic illnesses that can greatly reduce life expectancy before they ever become emergent.
The only thing that makes the “calculation” at all reasonable is the idea that, as a backstop, the Emergency Medical Treatment and Active Labor Act (EMTALA) forces (many) hospitals to treat critical illnesses. A widespread culture of counting on it may well make individual mandates as porous in health insurance as they are in car insurance (where about 14% of drivers persistently fail to get insurance). In which case, how much should people who fail to sign up for health insurance, and need expensive ER care, be punished? Should they be denied care? Saddled with never-dischargeable debt (i.e., become hospital serfs)? How about their children?
The saddest thing about “forcing the poor to pay something” (via, say, an individual mandate) is the number of children who are still uninsured because of it. Oftentimes the programs demand really trivial premiums or copays…which nevertheless seem too steep (or are too bureaucratically demanding) for parents to make. It’s too bad they can’t just be automatically enrolled.
April 5, 2007 at 3:34 pm
Posted in: Health Law
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Responses (11)
Scott Abeles - April 5, 2007 at 4:46 pm
The painter’s calculations are in fact remarkably rational. Insurance is all about expected value, risk/reward. The painter calculates his own expected value and finds it zero or negative, making it, by definition, rational to decline insurance. One can quibble with the numbers, but not the process. That he “doesn’t appear to take into account the range of chronic illnesses” ultimately matters little. Adding into the equation increasingly unlikely scenarios will not impact the expect value calculation much. But, if he did bother with this additional calculation he likely would have come to the same conclusion – assuming a cost of very serious illness at around $300,000 (seems about right) and the likelihood of encountering such illness at 1 percent (seems way too high), it would still be rational for the painter to decline insurance costing $3,000 per year. The only thing “wrong” with what he is doing is declining to donate his premium to support the older and less healthy. From a societal persepctive that may be “sad,” but it is correct from the individual’s perspective.
Frank - April 5, 2007 at 5:14 pm
I see those points, and I may well be overly risk-averse. But really, wouldn’t the risk be some sum of counterfactuals, rather than just representative ones? So he should be adding up the 1% chance of disaster, plus, say, the 5% chance of something pretty bad, plus, say, the 10% chance of breaking his wrist?
I just don’t see how any of it’s forecastable.
Dave - April 5, 2007 at 5:18 pm
There are other options. I broke my leg years ago while uninsured between jobs, and the resulting 60K charge forced me into bankruptcy Boy, did I wish I had opted for the COBRA insurance! When I recently returned to law school, I looked into insurance options. The standard HMO type options were about $350 a month, or $4,200 a year. What I ended up going with was a catastrophic plan that was $56 a month, or $672 a year, but carried a $4,000 annual deductible, and everything over that had benefits similar to the HMO plans.
For someone who is young and does not have ongoing medical expenses, this is a terrific plan. If I have a bad year with a medical emergency, I will pay a maximum of $4,672 (the deductible plus the premiums). Under the regular HMO plan, I pay $4,200 a year, irregardless of whether I actually go the doctor! The $672 is simply insurance for the unexpected… if something serious does happen, I won’t have to mortgage my future nor risk my eventual admission to the bar.
All of which demonstrates one of the fundamental problems with traditional “insurance”: if people are paying for a plan without a significant deductible, they are incentivized to take advantage of medical services whether they need them or not, which drives up the costs of insurance across the board. If healthcare is to be mandated, catastrophic plans ahoud be a part of the solution for healthy young people.
Steph Tai - April 5, 2007 at 10:34 pm
Frank writes: “I just don’t see how any of it’s forecastable.”
But isn’t that what the actuaries for insurance companies are supposed to do? Forecast the total risks and then tally them up to figure out what rates the company should charge in order to still remain profitable? In that sense, if one assumes (a) the actuaries are doing a decent job at predicting statistical risks, and (b) that younger people are statistically at less risk than older people, then it does seem somewhat rational for a young person to opt out of life insurance.
This is not to say that I agree with opting out of life insurance if one’s reasons are to avoid subsidizing the old people (again, assuming we can so easily differentiate risks). I just don’t think that buying insurance is automatically a rational choice–it depends on other factors such as the rate, the time period that one is planning to go without insurance, one’s approach to doctors, etc. Indeed, one could argue (as suggested by Dave above), that I’m being irrational in enrolling in an HMO plan rather than a catastrophic plan, given that I avoid seeing doctors unless in an emergency, whereas I was more rational over the summer, when I only had a catastrophic plan.
Robert Rhee - April 6, 2007 at 9:29 am
The painter is rational. For a low paid worker, $3000 is a large sum of money. He probably has other needs for this money. Insurance is not cheap. The premium covers not only the actuarial value of his loss, but also expenses and profit of insurers. For the P&C industry, this is approximately 30% of the premium (life and health is probably about the same). This means that the painter is actually paying a little under $1000 to cover the insurer’s expenses and profit. In essence, the painter is saying, “I’m going to self-insure.” He saves the $1000, which goes into his “reserve” for a broken wrist, rather than pay it to the insurer. What he loses is the coverage for the possibility of a catastrophic injury or illness. That’s the gamble. Assuming that he is making rational calculations, he is making investment choices with limited funds in an uncertain world, just the way investors in the markets make choices along a wide spectrum of risk-return profiles. That said, in designing an insurance program, voluntary participation creates a number of problems.
Frank - April 6, 2007 at 9:44 am
I appreciate the defenses of the painter’s rationality, but thanks to Dave’s excellent point above, I now have another question: at what point does the refusal to insure become irrational? Dave got “a catastrophic plan that was $56 a month, or $672 a year, but carried a $4,000 annual deductible.” Would the painter have been irrational to turn down that? (I guess he said he was willing to pay $1800 a year, so I guess if his average expected med. costs were lower than $1200, the answer would likely be no.)
As for Steph’s point: sure, actuaries make these types of calculations, but they make them for populations, not individuals. It just strikes me as incredibly difficult for anyone to forecast their risk of serious illness/injury. Sure, I may only drive 20MPH at 6AM, and my risk-loving pal may drive like a maniac at rush hour. But at some point something might happen to the “ultra-cautious”–slipping on a patch of black ice while walking to the car, or getting blindsided by the maniacal driver! In other words, I just don’t see how any given person can say something like: “I have 0.000003% chance of getting run over by an SUV, 0.0003% of slipping on ice, 0.0000003% chance of falling down the stairs on an empty soda can,” etc. An actuary may well set rates for populations based on the prevalence of such injuries, but I can’t see how anyone would presume to set the risk levels for themselves as an individual.
As for Robert’s points on investment: I am cautious about extrapolating investor behavior to the insurance context. Health is the one thing we have that allows us to enjoy all other things. So it would seem strange to me if someone laid out, say, “expected values” of various policies and investments and was not much more careful about potential losses in the “health portfolio” than in other portfolios.
Of course, there is EMTALA. But I think few people realize the limits of those protections, especially after rules changes under the current administration reducing hospital obligations to such patients.
ECM, Esq. - April 6, 2007 at 2:02 pm
Here is the problem with the cost/benefit analysis: Because society will provide emergency care in truly dire situations (like a heart attack or car wreck), then the painter is not really comparing apples to apples. The “cost” to him of going without insurance (or the “risk”) of going without insurance is subsidized by the other taxpayers in society who pick up the tab for uninsured individuals. Thus, when he says “I can pay $x or go without insurance,” he is not saying “I can pay $x or be left to bleed to death in the street if I am in a motor vehicle accident.” If he were actually required to somehow internalize the “true” cost of going without insurance, then he would definitely opt for insurance at any cost. The problem is that society has made it very easy to not opt for insurance by providing safe-guards that address the externalities created by going uninsured. The fact that i have to pay more for “uninsured motorist” insurance, and the fact that other motorists who drive without insurance know this, gives them greater incentive not to have insurance. Similar case here too.
The solution is a rule that says “if you don’t have insurance or a bond posted somewhere of a signficant value, then you will be left to bleed to death in the street or denied care at a hospital.” Only then can the painter make a rational decision about what is worth more to him, having insurance or being uninsured but keeping the money.
A note re: the bankruptcy post: even the option fo bankruptcy clouds the risk/benefit calculation by giving someone an “out” and a greater incentive not to carry insurance.
Vancouver Ex-pat - April 9, 2007 at 9:54 pm
Regardless of whether the painter’s calculation is rational, in the absence of EMTALA-type laws, shouldn’t a person be free to act irrationally, provided that his or her irrational acts aren’t unduly impacting the rights of others? If so, then given the availability of low-premium catastrophic care policies, the economic rationale for EMTALA quickly begins to erode.
Of course, until our society is willing to confront the primary causes of rising medical costs (artificial restrictions on med school matriculation numbers, regulations that discourage affordable family practice, and patent law reform), then a lot of this is for naught. And socialized medicine has yet to prove sustainable, with the UK quietly raising taxes on a regular basis to cover expenses, and the wait-list for routine out-patient procedures in Canada being measured in months or even years. Taking away one’s choice to self-insure doesn’t seem like a good solution either.
Frank - April 9, 2007 at 10:31 pm
To Vancouver EP: Would you just let the person who failed to buy the low-premium catastrophic care policy die (or be refused care), absent some proof they could afford the care they need?
I think Richard Epstein develops your point of view in his book Mortal Peril, but Tim Greaney’s review of that book gives plenty of reasons to avoid such a scenario.
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