Free-riding Insurance

Pardon me, while I go off on a bit of a rant. There is a bit of
math content to this, but there’s more politics.

There’s a news story that’s been going around this week about a guy who’s bitterly angry. His name is Luis Lang. Mr. Lang is going blind because of complications of diabetes. The only way to save his eyesight is to get very expensive eye surgery, but Mr. Lang can’t afford it. He doesn’t have insurance, and now that he needs it, he can’t buy it. According to him, this is all the fault of President Obama and the unjust Obamacare insurance system which is denying him access to insurance when he really needs it.

In the US, we’re in the early days of some big changes to our health-care system. Up until a couple of years ago, most people got insurance via their employers. If they didn’t get it through work, then they needed to buy policies on their own. Privately purchased policies were typically extremely expensive, and they came with a “pre-existing condition” exclusion (PECE). The pre-existing exclusion meant that if you had a medical condition that required care before you purchased the policy, the policy wouldn’t pay for the care. It seems that we are aware of the e111 benefits in Europe and are trying to move in that direction.

In the new system, most people still get insurance through work. But the people who don’t get to go to government-run insurance exchanges to buy policies. The policies in the exchanges are much cheaper than the old private coverage used to be, and rules like the pre-existing condition exclusion are prohibited in policies on the exchange. In addition, if you make less than a certain income, the government will subsidize your coverage to make it affordable. Under this system, you’re required to buy insurance if it’s possible for you to buy it with the government subsidies; if you choose to go without, you have to pay a penalty. If you’re too poor to buy even with the subsidies, then you’re supposed to be able to get medicare under an expanded medicare program. But the medicare expansions needed to be done by the states, and many states refused to do it, even though the federal government would cover nearly all of the costs (100% for the first few years; 95% indefinitely thereafter.)

I’m not a fan of the new system. Personally, I believe that for-profit insurance is fundamentally immoral. But that’s not the point of this post. We’ve got a system now that should make it possible for people to get coverage. So why is this poor guy going blind, and unable to get insurance?

The answer is simple: because he very deliberately put himself into a terrible situation, and now he’s paying the price for that. And there are very good reasons why people who put themselves into his situation can’t get covered when they really need it.

First, I’ll run through how he got into this mess. Then, I’ll explain why, as sad as it is for this dumbass, he’s stuck.

Our alleged victim of unjust government policies is around 50 years old. He owns a nice home, and runs his own business. He had the opportunity to buy insurance, but he chose not to, because he has a deeply held philosophical/political belief that he should pay his own bills, and so he always paid for his medical care out of his own pocket. When Obamacare came down the pike, he was strongly opposed to it because of that philosophy, and so he paid the penalty rather than buy insurance, and stayed uninsured. His story is terrifying – and hits close to home since my EHIC card has expired recently, and as I was reading about this – I made a mental check to renew immediately. It’s important to note here that he made a deliberate choice to remain uninsured.

Mr Lang isn’t a paragon of good health. He’s a smoker, and he’s had diabetes for a couple of years. He admits that he hasn’t been very good about managing his diabetes. (I’m very sympathetic to his trouble managing diabetes: there’s a lot of diabetes in my family – my mother, her brother, my grandfather, and every one of his siblings, and his father all had diabetes. I’ve seen members of my family struggle with it. Diabetes is awful. It’s hard to manage. Most people struggle with it, and many don’t ultimately do it well enough before they wind up with complications. That’s what happened to Mr. Lang: he developed complications.

Specifically, he had a series of small strokes, ruptured blood vessels in his cornea, and a detached retina. Combined, these conditions will cause him to go blind without surgery. (This is exactly what happened to my uncle – he lost his vision due to diabetes.) Mr. Lang’s condition has gotten bad enough that he’s unable to work because of these problems, so he can’t afford to pay for the surgery. So now, he wants to buy insurance. And he can’t.

Why not?

To really see why, we need to take a step back, and look at just what insurance really is.

Reduced to its basics, the idea of insurance is that there’s a chance of an unlikely event happening that you can’t afford to pay for. For example, say that there’s a 1 in 1000 chance of you needing major surgery that will cost $100,000. You can’t afford to pay $100,000 if it happens. So, you get together with 999 other people. Each of you put $100 into the pot. Then if you end up being unlucky, and you need the surgery, you can draw on the $100,000 in the pot to pay for your surgery.

The overwhelming majority of people who put money into the pot are getting nothing concrete for their money. But the people who needed medical care that they couldn’t afford on their own were able to get it. You and the other people who all bought in to the insurance pot were buying insurance against a risk, so that in case something happened, you’d be covered. You know that you’re probably going to lose money on the deal, but you do it to cover the unlikely case that you’ll need it. You’re sharing your risks with a pool of other people. In exchange for taking on a share of the risk (putting your money into the pool without knowing whether you’ll get it back), you take a share of the resource (the right to draw money out of the pool if you need it).

In the modern insurance system, it’s gotten a lot more complicated. But the basic idea is still the same. You’ve got a huge number of people all putting money into the pot, in the form of insurance premiums. When you go to the doctor, the insurance company pays for your care out of the money in that pot. The way that the insurance company sets premiums is complicated, but it comes down to collecting more from each buyer than it expects to need to pay for their medical care. It does that by mathematically analyzing risks.

This system is very easy to game if you can buy insurance whenever you want. You simply don’t buy insurance until something happens, and you need insurance to pay for it. Then you buy coverage. So you weren’t part of the shared risk pool until you knew that you needed more than you were going to pay in to the pool. You’re basically taking a share of the community resources in the insurance pool, without taking a share of the community risk. In philosophical circles, that’s called the free-rider problem.

Insurance can’t work without doing something to prevent free-riders from exploiting the system.

Before Obamacare, the way that the US private insurance system worked was that you could buy insurance any time you want, but when you did, you were only covered for things that developed after you bought it. Any medical condition that required care that developed before you bought insurance wasn’t covered. PECEs prevented the free-rider problem by blocking people from joining the benefits pool without also joining the risk pool: any conditions that developed while you were outside the risk pool weren’t covered. So before Obamacare, Mr. Lang could have gone out and bought insurance when he discovered his medical problems – but that insurance wouldn’t cover the surgery that he needs, because it developed while he was uninsured.

Without PECEs, it’s very easy to exploit the insurance system by free-riding. If you allowed some people to stay out of the insurance system until they needed the coverage, then you’d need to get more money from everyone else who bought insurance. Each year, you’d still need to have a pool of money big enough to cover all of the expected medical care costs for that year. But that pool wouldn’t just need to be big enough to cover the people who bought in at the beginning of the year – it would need to be large enough to cover everyone who bought insurance at the beginning of the year, and everyone who jumped in only when they needed it.

Let’s go back to our example. There’s only one problem that can happen, and it happens to 1 person in 1000 per year, and it costs $100,000 to treat. We’ve got a population of 2000 people. 1000 of them bought into the insurance system.

In an average year, 2 people will become ill: one with insurance, and one without. The one with insurance coverage becomes ill, and they get to take the $100,000 they need to cover their care. The person without insurance is stuck, and they need to pay $100,000 for their own care, or go without. In order to cover the expenses, each of the insured people would need to have paid $100.

If people can buy in to the insurance system at any time, without PECEs, then the un-insured person can wait until he gets sick, and buy insurance then. Now the insurance pool needs to cover $200,000 worth of expenses; but they’ve only got one additional member. In order to cover, they need to double the cost per insured person per year to $200. Everyone in the pool needs to pay double premiums in order to accomodate the free-riders!

This leads to a situation that some economists call a death spiral: You need to raise insurance premiums on healthy people in order to have enough money to cover the people who only sign up when they’re unhealthy. But raising your premiums mean that more people can’t afford to buy coverage, and so you have more people not buying insurance until they need it. And that causes you to need to raise your premiums even more, and so it goes, circling around and around.

The only alternative to PECEs that really works to prevent free-riders is to, essentially, forbid people from being free-riders. You can do that by requiring everyone to be covered, or by limiting when they can join the pool.

In the age of PECEs, there was one way of getting insurance without a PECE, and it’s exactly what I suggested in the previous paragraph. Large companies provided their employees with insurance coverage without PECEs. The reason that they could do it was because they were coming to an insurance company once a year with a large pool of people. The costs of the employer-provided insurance were determined by the average expected cost of coverage for that pool of people, divided by the size of the pool. But in the employer-based non-PECE coverage, you still couldn’t wait to get coverage until you needed it: each year, at the beginning of the year, you needed to either opt in or out of coverage; if, in January, you decided to decline coverage, and then in July, you discovered that you needed surgery, you couldn’t change your mind and opt in to insurance in order to get that covered. You had to wait until the following year. So again, you were avoiding free-riders by a combination of two mechanisms. First, you made it so that you had to go out of your way to refuse coverage – so nearly everyone was part of the company’s insurance plan. And second, you prevent free-riding by making it much harder to delay getting insurance until you needed it.

The Obamacare system bans PECEs. In order to avoid the free-rider problem, it does two things. It requires everyone to either buy insurance, or pay a fine; and it requires that you buy insurance for the whole year starting at the beginning of the year. You might think that’s great, or you might think it’s terrible, but either way, it’s one way of making insurance affordable without PECEs.

Mr. Lang wants to be a free-rider. He’s refused to be part of the insurance system, even though he knew that he had a serious medical condition that was likely to require care. Even though he was a regular smoker, and knew of the likelihood of developing serious medical problems as a result. He didn’t want to join the risk pool, and he deliberately opted out, refusing to get coverage when he had the chance.

That was his choice, and under US law, he had every right to make it for himself.

What Mr. Lang does not have the right to do is to be a free-rider.

He made a choice. Now he’s stuck with the results of that choice. As people like Mr. Lang like to say when they’re talking about other people, it’s a matter of personal responsibility. You can’t wait until you need coverage to join the insurance system.

Mr. Lang can buy insurance next year. And he’ll be able to get an affordable policy with government subsidies. And when he gets it, it will cover all of his medical problems. Before the Obamacare system that he loathes and blames, that wouldn’t have been true.

It’s not the fault of President Obama that he can’t buy insurance now. It’s not the fault of congress, or the democratic party, or the republican party. There’s only one person who’s responsible for the fact that he can’t get the coverage that he needs in order to get the surgery that would save his eyesight. And that’s the same person who he can’t see in the mirror anymore.

21 thoughts on “Free-riding Insurance

  1. Chad

    Good article. My only suggestion would be to replace all instances of “government will subsidize” to “taxpayers will subsidize”.

    1. markcc Post author

      Screw that nonsense.

      I get really, really sick of people who like to play word-games about taxes and government spending. You pay taxes to the government, and the government spends the money that they collect. You pay money to the grocery store, and they spend the money on whatever they want. The grocery store cashier gets paid money by the grocery store, and then goes off and spends the money however he/she wants.

      The only reason for removing the intermediary from any of these relationships is because you want to pretend to be harmed by how the recipient of the money spends it. Whether it’s you pretending that you’re somehow being harmed by the government helping people get insurance, or some jackass grocery store owner pretending he’s being harmed when his cashier buys birth control, it’s bullshit.

      You’re part of a society. You pay taxes because you’re a member of that society. And you get a hell of lot of benefits out of those taxes. You don’t get to pretend that somehow, because you don’t like some bit of spending, that it’s totally unfair to you. When you play the word-game of “taxpayers subsidize”, that’s what you’re doing.

      I don’t much like it when the government spends a shitload of money starting a bullshit war. I don’t like it when the government spends money buying ridiculous weapons for police to use on civilians. I don’t like it when the government spends money subsidizing corn ethanol. That’s life. I pay my taxes because I’m an american citizen, and I vote to try (among other things) to influence that spending in ways that I think are right. That’s the way that it works.

      1. Chad

        Well you just lost a reader thanks to your rude and explosive response to an honest comment about an important distinction.

        Citzenship matters, and the ‘government’ is a structure made by and comprising only people–ordinary citizens in this country– not a mythology that can solve all of society’s ills. I pay my taxes with pride, and that is the only reason why the government can implement the programs our elected leaders have written into law. There’s no such thing as ‘government’ money– the government either spends or redistributes taxes, the government answers to taxpayers, and when it spends more than it should have, ultimately only ruins taxpayers. Look to Greece, and try to argue that it is a ‘government’ issue and not one affecting the citizens, the taxpayers, because of its profligacy. If you don’t want the government to waste money (on wars, as you write), then you ought to support reminding us all whose money is actually being spent, and therefore that it deserves to be spent wisely.

        What you dismissively call a ‘word game’, I call ‘giving things their right name’, and it is perhaps the most fundamentally important part of understanding what is true in the world. You sound like a populist politician trying to get away with spending other people’s hard earned money by invoking a third party entity so that it doesn’t feel as though it is the people’s money being spent by the orchestration of the government. Next you ought to convince casinos to use a different type of money other than currency, perhaps chips, so that people will more easily wager and lose it… oh right, that’s exactly the psychology of parting people from their money.

        And that you would pick this point to nitpick when my response complimented your article and didn’t have a tinge of complaint in it regarding how the money is being spent, and that you’re talking about a redistribution program in the first place, is truly unbelievable.

        (And if it isn’t taxpayers subsidizing insurance spending for poor people, then who the heck is? Thank the government?! Heck no, thank the generosity and industriousness of our country’s citizens that we could afford such a program.)

        This kind of treatment is no way to have any kind of meaningful dialogue on a messageboard. I’m actually a real person you know, and I’d think someone who complains about being bullied and depression would appreciate other people’s views.

        1. markcc Post author

          You’re allowed to read, or not read this site – whatever you want.

          I’m also allowed to reply to commenters however I like.

          Over time, I’ve become very sensitive to “dog-whistles”. Dog-whistles are statements that have a hidden purpose. They’re intended to have one surface meaning, and one deeper meaning. The surface meaning is unobjectionable, but the deeper meaning is something awful that they want to be able to say to the people that agree with them, while denying that they’d say such a thing to everyone else.

          Classic dog-whistles are things like “urban” as an alternative to “black”: “urban youth” doesn’t really mean “children who grow up in the city”, it means “those dirty blacks”.

          “Taxpayer funded” is a common dog-whistle from right-wing jackasses. It’s a phrase that’s pulled out to specifically distinguish only certain kinds of government expenditures. You don’t tend to hear about “taxpayer funded war in the middle-east”, or “taxpayer funded ethanol subsidies”. You hear about “taxpayer funded” food stamps and “taxpayer funded” insurance subsidies. It’s commonly used as a dog-whistle for “those liberals are spending your money on those people who don’t deserve it”.

          I don’t know if you meant to use that dog-whistle, but that’s what set me off. Because in American political discourse, that’s what that means. So when you use that phrasing, you’re saying something with a double meaning. You might not be aware of that, but that doesn’t really excuse it. There’s a whole lot of racism in America, and it’s often propagated by people who don’t even know that they’re doing it – but it still does a lot of harm, even though they don’t mean it to.

          When someone says something like that, I call them on it. I’m not going to stop doing that here. I’d rather stop writing the blog. I have no intention of stopping GM/BM, so I’ll just have to deal with losing readers like you.

          1. largo

            Alas to the neurotypically nonstandard whose choice of expressions is guided more by their denotational utility in their own idiolect than by their connotations in their community’s dialect.

            Please be gentle with us.

        2. ScentOfViolets

          Mark is right. You are wrong. Take your dudgeon elsewhere. And if you want to be the arbiter of what’s the ‘right name’? Start your own blog, Dearie.

  2. Dan Riley


    A useful bit of economics jargon: “adverse selection”

    He would be covered if we had single payer. We don’t have single payer because SOCIALISM, so the republicans should get some share of the blame.

  3. Jack

    I’m kinda miss the main point behind all those lengthy words around the story. If the guy used to pay his bills and he got a house and business and whatnot – why don’t he simply pay yet another bill?

    I mean, did he suddenly changed his mind about paying his bills or what? Or is he somehow forbidden to pay for surgery directly from his pocket?

    No idea how much this stuff costs but it’s not some luxury car or junk like that which you can postpone – hell, for the eye sight I’d pretty much sell the last pants I’ve got!

    1. markcc Post author

      The issue is, he can’t afford it. He doesn’t have enough money to pay for the surgery, and without the surgery, he’s unable to work, so he can’t make the money to get the surgery.

      In other words, he’s in exactly the kind of situation that you buy insurance to prevent.

  4. Matti

    Hopefully this guy gets his operation somehow, dumbass or not. If we have the means of giving people care, I believe we should give it whether people deserve it or not. It’s called grace.

    I’m curious whether you think all kinds of for-profit insurance are immoral, or specifically health insurance?

    1. markcc Post author

      I think that health insurance is fundamentally different from other kinds of insurance, for a couple of reasons.

      First, there’s something intrinsically fuzzy about healthcare. If you get into a car accident, then what needs to be done to fix your car is pretty clear. If an axle is ruined, you need to replace the axle. If your house gets flooded, and you’ve got flood insurance, then what needs to be done is pretty clear. But with medicine, it’s not clear. A treatment that works for you might not work for me.

      To be concrete, I’m got some serious stomach trouble. I take a medication called prevacid for it. Prevacid is used primarily to prevent your stomach from producing acid, but it also has a poorly understood anti-inflammatory/anti-spasm effect. When I started taking this medication, my insurance company didn’t want to pay for prevacid: there are other acid-blockers on the market, and they had a deal with the manufacturer of one of the others. For blocking acid production, the two drugs are pretty much equal. But for the anti-inflammatory effect, they’re not.

      For the overwhelming majority of patients, the alternative was fine. For me, it’s not.

      Medicine is full of things like that, where subtle differences between people make big differences in treatments and treatment costs. That lack of clarity about the right choices makes medical insurance inherently more complex that most other insurances.

      The second thing, and the bigger issue, is that there’s a fundamental conflict in for-profit insurance which becomes a problem because of that first point.

      A for-profit insurance company, at least in the current US economy, has a primary obligation to maximize its profits for the benefit of its shareholders.

      The way that insurance works, they get a pool of money from their customers. That money gets invested. Claims by the customers get paid out of that pool. Whatever’s left after the claims are paid is the company’s profits.

      That means that as a for-profit company, they have an obligation to minimize the amount that they pay out in claims.

      That’s true of all insurance companies. My car insurance company doesn’t want to pay out any more than it has to.

      But mix in the ambiguity of medical treatment, and you’ve got a conflict of interest. The insurance company doesn’t want to pay more than they have to. But what they have to pay is tricky.

      Should an insurance company pay extra for my stomach medication? There’s another medication that’s *almost* as good, and it costs them a lot less.

      Much, much worse is when you’re dealing with serious medical conditions. Whether a treatment gets covered is a matter of life and death. Some treatments *shouldn’t* be covered – but how do you decide which ones?

      In for-profit insurance, the primary interest of the business isn’t the well-being of its customers. It’s the company’s profits. They cover patients based on what they’re legally obligated to do; beyond that, they cover treatments based on what maximizes profits. So the balance becomes: how many customers will they lose by not covering some treatment. If the profit they make from those lost customers will be less than the costs of covering the treatment, then as a for profit business, they’re going to choose to not cover it – even if it’s a matter of life and death.

      That conflict – lives versus profit – is what I think is fundamentally immoral.

      Did that make sense?

  5. benjubb

    Universal healthcare is the primary reason I would never consider moving from Canada to the States. I really can’t believe you people accept the system that you have. I expect to be able to get health care whenever and whereever I need it, and at worst all I have to do is flash my driver’s license at the receptionist at the clinic or hospital. And if i’m not working, I have to pay about $100 a month unless I can demonstrate that I’m too poor. This is in BC. In AB, there is no premium at all.

    1. markcc Post author

      I think that for-profit is OK for pretty much everything except insurance.

      There’s nothing wrong with working for a profit. The problem is when there’s a fundamental conflict between lives and profits.

      (On the other hand, I do think there’s something downright obscene about the way we do a lot of medical research in the US. Virtually all basic research is funded by the federal government. Then medical companies take the products of that research, and sell them for incredibly high prices, and justify those prices based on the costs of the research.)

      1. Noel Grandin

        Because that research is very very very basic and the road from there to a working product is about a 1000 times harder and riskier than your average IT startup?

        1. markcc Post author

          That’s what they’d like you to think. But quite often, funds from government research programs under the NIH are used to develop drugs. The drugs are fully developed and clinically tested under government funding. Once they’re approved, they’re marketed and sold at an immense profit.

          1. Noel Grandin

            I don’t doubt that happens occasionally, but not often enough to generalise to the industry as a whole. Read some of the biochemist blogs floating around and you’ll get more appreciation for how incredibly long and winding the road of drug discovery really is.

  6. first approximation

    The funny thing is because this story is getting so much press, this guy has already raised $20,000 on gofundme. Looking at comments from donators, they’re overwhelming liberal and asking him to think about his views. As dumb and repugnant as Mr. Lang is, he does deserve access to healthcare.

  7. Jurgan

    One nitpick: MediCARE is the system for the elderly, while MediCAID is for those who can’t afford private insurance. And, having recently moved from South Carolina to Colorado, I can say that Medicaid can work wonderfully if your state wants it to work.


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