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Not Every Health Condition Is Insurable

Written by David Howden

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6620With all the discussion over the need for healthcare in the U.S., one question is never asked: is a person’s health insurable?

The Austrian economist Ludwig von Mises helped clarify what types of events are open to insurance when he defined two types of probability. Case probabilities are those events for which we know some of the factors that will determine an outcome, but for which there are other factors we know absolutely nothing about. Football matches fall into this category, as do wars. Class probabilities are those events that we know or assume to know everything about a broadly similar category of events, but with regards to any individual occurrence within the category, we know nothing.

Death is an event that falls into this latter category of class probabilities. Death is, paradoxically perhaps, the most and least certain of all events that will happen in your life. Everyone knows that they will die, but no one knows exactly when, of what, where, or why. Yet because everyone dies, we can all be placed into a category that behaves in a similar way. We know a person’s life expectancy at birth, for example, and we can further refine the category by accounting for differences in factors that affect the probability of death, such as smoking.

Life insurance works because insurance companies can play the averages. Some people who own a life insurance policy will die before the insurance company earns enough money on the premiums to pay the death benefit. In this case the company loses money. It offsets these losses with the gains it makes on those who die long past the point where they have broken even on the premiums they have paid relative to the death benefit they will receive.

Discrimination in the life insurance market is not only a fact of life; it is fair. Every policy holder pays according to his odds of death. People are free to undertake risky activities, but they must pay the price. People who choose to live less risky lives — that is to say, avoiding those activities that increase one’s probability of death such as skydiving or smoking — lose out on the enjoyment these activities may provide, but they gain by paying less for life insurance. There are no free lunches in this world.

Health insurance could possibly exist in this way. There are class probabilities for certain diseases, both communicable and not. There are also known risk factors for diseases and ailments. Smokers are more likely to get lung cancer; bull riders are more at risk of suffering broken bones; economics professors might succumb to carpal tunnel syndrome from typing too many articles about health insurance. Depending on one’s lifestyle, different insurance premiums can be assigned to cover an individual against any number of health concerns.

Some types of medical impairments, however, are not open to being insured. They do not belong to any definable class which lends itself to coverage. The causes of Parkinson’s disease, for example, are still hotly debated and there is no clear explanation as to what causes it; it is just the luck of the draw. Some types of cancer also fall into this category. There is always the hope that in the future we will learn more about these ailments so that they can be assigned a class (or even better, cured), but this is not a possibility at this point in time.

“Ought presupposes can” and before answering whether people “ought” to have health insurance we must answer whether they “can” have it.

For some types of ailments health insurance is a viable option. For others, the possibility of coverage just doesn’t exist. One of the cornerstones of Obamacare is that “you cannot be denied coverage for pre-existing conditions.” Not only does this compromise the usefulness of insurance by muddying the definition of a certain class, it actually negates the applicability of the insurance policy. Certain risks are just non-insurable. This is not because of some sinister plot to exclude certain individuals; after all, it is the disease and not the person which is being excluded. But this is just a cold hard economic fact which stems directly from Mises’s distinction between class (insurable) events and case (non-insurable) events.

The recognition that some health risks can be insured must come with a warning: just because health insurance can exist on a limited range of ailments does not answer the question of why it should be mandated. After all, our daily food and water requirements are at least as much a matter of life and death as our daily healthcare requirements, and no one is suggesting that the government mandate coverage for those goods.

Likewise, just because healthcare is expensive is not a necessary or sufficient condition for mandating coverage. There are all sorts of goods and services that are pricey and which insurance coverage to purchase is not mandated. A better question to ask is “why is healthcare so expensive.” Many people have answered that already, whether the blame is to be placed on the obesity epidemic, licensing requirements for physicians, riskier lifestyles among those already covered by mandatory insurance (Medicare and Medicaid), or the bureaucracy of getting new procedures and drugs approved by the government. In any case the insurability of any good or service is ancillary to its cost.

Answering the question of “why” health insurance is needed is fundamentally distinct from the question of “can” we provide health insurance and if so, what ailments are coverable. To the extent that only some diseases and ailments are insurable, health insurance is, at least for now, a somewhat limited undertaking. Obamacare answers the wrong question, and diminishes the usefulness of the health insurance policies that exist through its mandated coverage of pre-existing conditions.

Offering insurance without reference to the specific insurable class, or by purposefully grouping uninsurable risks with an insurable class, removes any economic rationale in determining the appropriate insurance coverage and rates. If you think healthcare pricing seems nonsensical now, just wait until you see what happens when mandated coverage removes any semblance of rational insurance pricing to the healthcare “ insurance” market.

David Howden is Chair of the Department of Business and Economics and professor of economics at St. Louis University's Madrid Campus, Academic Vice President of the Ludwig von Mises Institute of Canada, and winner of the Mises Institute's Douglas E. French Prize. Send him This email address is being protected from spambots. You need JavaScript enabled to view it. . See David Howden's article archives.

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