– 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. http://thehealthcareblog.com/blog/2017/01/20/interview-with-mark-pauly-part-1/
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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