Sunday, January 22, 2017


– A short story of RISK

“Fear of harm ought to be proportional not merely to the gravity of the harm, but also to the probability of the event.” 

A certain atmospheric hue cries out to my memories of a long gone past as does a certain smell of a parched earth fed with fresh rain drops. And now it seems that words are pulling at the skein of new-found knowledge and old wisdom in medical care.

Before we get into the weeds, let me direct you to this very well crafted dialogue between a physician Dr. Saurabh Jha and an economist Dr. Mark V. Pauly that I happened to feed on.
This wonderful piece brings with it wisdom from thoughtful minds. Someone who has seen, experienced and then nuanced the human economic behavior into digestible components.

I plan to focus squarely on two concepts outlined in this wonderful dialogue; Community Risk and Individual Risk. Although these are heady concepts that fill an insurer’s mind and an economist’s well-spring of financial models, they also dwell largely into the domain of behavioral economics as coined by Kahneman and Tversky. Essentially, how people make their choices. What Mark Pauly, PhD has nicely captured the consequences of such actions. And learning from these concepts, he pulls the trigger on his own ideas for the future. However, I will leave his ideas of how to advance the insurer model in the future for another time.

We start with Dr. Mark Pauly's statement; “we transfer our angst about the uncertainty of our future, the dice which plays with our lives, to insurers who are in the business of rolling the dice.” And that is the very fount of insuring or transferring risk (known, projected or unknown hazards) for a certain sum of money, called a “premium.” He then moves to the issue of information asymmetry; “The sellers of health insurance can roughly risk rate the buyers by asking questions about their health, recent visits to doctors, family history and tobacco and alcohol use.” Simply, the Insurers can mitigate their financial risk by gathering data on an individual before insuring. Yet information asymmetry abounds when insuring a large cohort, as Peter Bernstein states in his book “Against the Gods,” “The information you have is not the information you want. The information you want is not the information you need. The information you need is not the information you can obtain. The information you can obtain costs more than you want to pay.” And since numbers have no soul, they can be manipulated to our whims and needs, the known risk takes on the “unknown character.

The argument posed by Mark Pauly take us into the mind of the insured and the insurer. Whereas the insurer’s aim is to gain from the collective premium and reduced outlay, the insured has a different purpose in mind; he or she wants a ROI on the premiums when need arises. To that end the insurer tries to aggregate the insured to minimize the risk to self. In the healthcare market that translates to having a large pool of low-risk individuals mixed in with a small pool of high risk individuals. The unused premiums go to pay for the high-risk cohort and any surplus is the Net income for the insurer. But Dr. Pauly makes a case for the flight of the low risk individuals who may not want to subsidize the high-risk ones and thus adverse selection ensues when more high-risk individuals asking for insurance essentially force the insurer to leave the game of risk. Once again here is the wisdom of Peter Bernstein words, “Game theory says that the true source of uncertainty lies in the intentions of others,” and that “This is the essence of risk aversion—that is, how far we are willing to go in making decisions that may provoke others to make decisions that will have adverse consequences for us.” The high-risk individuals' need forcing a high premium on the low-risk individuals force the latter to leave the market place.

What is perhaps more informative is the idea of “Community Risk” which is embedded in the current Affordable Care Act that forces this concept. And Dr. Pauly goes on to state, “We found that when insurers changed to community rating, while the probability that the high-risk were covered increased, it was overwhelmed by the probability that the low-risk, the healthy, didn’t buy insurance.” It would appear the low-risk individuals realized their personal financial risk in the “one-size-fits-all” model and as Peter Bernstein states elegantly, “life is a collection of similarities rather than identities; no single observation is a perfect example of generality.” The model of community risk of insuring the community under a similar actuarial risk drives out the low-risk individuals, creates adverse selection and ultimately the insurers from the market-place.  

We cannot therefore intellectualize our needs to the degree that we cannot find any satiation of our desires. Wild gyrations of reality exist in the imperfections of the outliers as noted by the author Nassim Taleb in his book “The Black Swan.” Therefore, information asymmetry will always exist even within the elegance of mathematical probability models. The consummate model of individual risk still reigns supreme. One size per individual. Or as Kierkegaard states, “The central point about being human is that the unit “1” is the highest; “1000” counts less.” And he goes on to say something more ominous, “Aristocrats take it for granted that a lot of people will always go to waste. But they keep silent about it; they live sheltered lives pretending that all these many, many people simply do not exist.”

If you are not too tired of reading this, let me show you a corollary of the ACA insurer model to  the ACA's forced model of how medicine needs to be practiced. Community Risk as advocated in the Affordable Care Act is akin to Population Medicine as advocated by the ivory towers in our prestigious universities. One size fits all concepts of care are being enforced in the act to minimize cost outlays for high-risk individuals. Age, Performance characteristics, Shared Decision Making, Choosing Wisely, Less is More are concepts evolved through a groupthink model of Community Risk. Prestigious organizations, proclaimed journals edited by the political winds and television “experts” abound sizing up the medical care and suggesting that the United States is wasting resources. And it is! But not in the way they seem to suggest. Their concept of wastage is in patient care. Unfortunately, that is a short-sighted and easy target they focus on so that the populace can identify with ease. Digging deeper into the realm of cost, one finds at a minimum 30-40% of the healthcare costs are steeped in the over-indulgence in regulatory and administrative fiats that govern the healthcare dollar and have nothing to do with medical care of the patient. Sweet benevolence couched in rhetoric is bursting with consequences as Shakespeare said, “as in the sweetest bud the eating cancer dwells.”

Personalized Medicine is being bandied about in Research Circles but it is out of reach for an individual of average means because of the astronomical costs of these selective treatments. The insurers balk at absorbing such risk, since the adverse selection prevents enough of the low-risk premiums to mitigate such needs. Perhaps a larger pool of individual rated risks and the current governmental subsidies for those not well to do, can defray the cost for access to better health? If good medical care is the desired outcome then perhaps that should be considered for all, provided the financial risks for both the patient and the insurer is mitigated with large pools of low, average and high-risk insured.

“May you live in interesting times,” a curse in the Chinese language is upon us. We face an interesting complex of thoughts and ideas steeped in the elixir of ideology. Somewhere in the mix is the solution. The enduring concept of individual risk and thus individual care remains paramount in healthcare. One size has never fit All. It never will. We might follow the foresight of our ancestors in the Latin phrase that graces the One Cent coin, “e Pluribus Unum.” Espousing belief in certainty by the policy wonks is akin to looking at the face of wrath.

“Vast ills have followed a belief in certainty.” 

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