Article by Tia Goss Sawhney

Abstract:
If we pull the emotions out of health insurance, which is admittedly hard to do even for the author, and look at health insurance from the economic perspective, there are several insights from auto insurance that can illuminate the design, risk selection, and rating of health insurance. This article explores those insights.

Opening Paragraphs:
Many Americans rely on their automobiles to get to work. No automobile means no job, no rent or mortgage money, no food. A single parent, struggling to make ends meet in the suburbs with 100,000 miles on the odometer, would presumably welcome the guaranteed opportunity for low-priced insurance that would take care of every possible repair on her auto until the day it reaches 200,000 miles or falls apart, whichever comes first. Especially if the insurance is valid regardless of whether she even changes the oil in the interim.

So why aren’t the auto insurance companies writing such coverage, either directly or through used-auto dealers? And given the importance of reliable transportation, why isn’t the public demanding such coverage? The answer is that both auto insurers and the public know that such insurance can’t be written for a premium the insured can afford, while still allowing the insurers to stay solvent and make a profit. As a society, we intuitively understand that the costs associated with taking care of every mechanical need of an old automobile, particularly in the absence of regular maintenance, aren’t insurable. Yet we don’t seem to have these same intuitions with respect to health insurance.

Published by:
This article was published in the Jan/Feb 2008 edition of Contingencies:

http://www.contingencies.org/janfeb07/commentary.pdf