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Tuesday, May 13, 2008

Insurance pricing and genetic information

Kevin Drum has a comment on insurance companies not allowed to use genetic information in setting their pricing. He doesn't understand why it shouldn't be allowed.

In setting prices, a company isn't required to use all available information in setting the price. Reasons can be many, from it being too hard, to making the product difficult to understand for consumers, to being bad customer relations.

Airlines have tried for years to segment their market and charge different individuals different amounts for the same exact flight. And where has that gotten them? Airlines rank up there with used car salespeople, spammers, music companies and telemarketers for popularity. Airlines that charge closer to a single price are much more popular, consider SouthWest, although even they have multiple price levels for the same plane.

If we disallow insurance companies from charging more for people with genetic errors, then insurance companies will find themselves in the situation they find themselves in right now, where virtually no one has genetic information. Thus, it isn't that strange that we might require them to stay with current pricing schemes.

Suppose that insurance companies knew exactly how much each individual in the world will cost in terms of health care, over their lifetime. Essentially, if companies charge more to more costly people, and less to cheaper/healthier individuals, then insurance is no longer an insurance product. Everyone pays their own exact cost(s), properly amortized over the years. Insurance becomes a charge-added (as opposed to value-added) product. The insurance companies take some money for their own trouble, and charge you what you should pay anyway. No value to you, except for the amortization service.

By requiring insurance be the same price to all people, the insurance company must charge the average person the average cost + fees for the insurance service. Everyone pays the same amount. Those who are healthier subsidize those who are less healthier, true. But everyone can potentially get insurance, as long as some one picks up the cost.

1 comment:

Meara said...

Keep up the good work.