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Thursday, February 25, 2010


I thought it might be worthwhile to try to clarify what I think is the underlying issue in the health care reform debate. Despite the distortions introduced by electoral politics, there really is, I believe, a fundamental ideological dispute operating here. [I am a bit hesitant to call it a "philosophical" dispute, seeing as how I am a professional philosopher. Anyway.]

Consider first the nature of insurance. Insurance is a gamble, in which you win if the insured against bad thing happens, and lose if it does not happen. Suppose you buy fire insurance for your home. If you do not suffer a fire, then you are out the cost of the premiums. You lose, in a manner of speaking. If you do suffer a fire, you "win", because what you recover as a consequence of your insurance is more than what you paid as a premium.

In order for insurance to be sustainable, total premiums must at least equal total payments to those insured. In order for it to be profitable, total payments must exceed total payments to those insured. Now, speaking somewhat technically, when I buy insurance, I am comparing the certainty of one loss [the cost of the premiums, which I pay up front, or ex ante, as they say in the trade], with the possibility of another loss [from the fire], discounted by its probability. If I anticipate that a total loss from fire will cost me $500,000, let us say, and I estimate that in any given year, I have one chance in five thousand of such a total loss, then the cost to me is the expected value of the total loss ex ante, which is to say $100 [i.e., $500,000 times 1/5000]. So I ought to be willing to pay any premium up to $100 for insurance against a total loss from fire. But people regularly pay more than the expected value of the loss for the insurance. Why?

Here is why. If I have unlimited amounts of money and unlimited time in my life, then it makes no sense for me to buy insurance. I can do better by setting aside $100 a year, and, in effect, insuring myself. Over an unlimited time, my gains and losses will balance out, and I will come out neutral. If I set aside as much as the premiums would cost me, I will come out ahead. That, after all, is what the insurance company does.

But I do not have unlimited money and time, and if I am unlucky enough to suffer a catastrophic loss before I die, the remainder of my life will be miserable. So I buy insurance against that hideous possibility. To put the matter technically, I have, over a certain stretch of possible outcomes, increasing, not declining, marginal utility for money.

OK. So, I decide to buy fire insurance. Clearly, it is in my interest to buy fire insurance whose price is calibrated to the fact that I have a brick home, not a wooden home, that I live within half a mile of a fire department station and a hundred feet from a fire hydrant, and that I have never had a fire before, and hence am probably marginally a safer home owner. Correspondingly, insurance companies will have an interest in wooing my business by offering me discounts for all of these pre-existing conditions or lack thereof. Why should they not? They can calculate, as easily as I can, that I am a relatively unlikely candidate for a catastrophic fire. Equally, it makes sense for insurance companies either to refuse insurance to, or else to demand high premiums from, people living in tinderboxes far from fire departments with long histories of carelessness when it comes to fire.

Clearly, the premiums charged to people in high risk homes can be lowered by including them in a pool of people living in safe well-protected homes. Such an arrangement constitutes a transfer of money from one group of people -- those in safe homes -- to another group -- those in tinderboxes.

None of this is controversial or open to debate. It is simple logic and mathematics.

Now translate all of this into health care. The logic and mathematics do not change. The only serious question is this: Do we want to live in a country in which the fortunate [medically speaking] accept additional insurance costs in order to provide for the unfortunate? Or do we wish to live in a country in which the fortunate are permitted to separate what happens to them from what happens to the unfortunate? Notice that by "fortunate" and "unfortunate" I do not mean "those who do not get sick" and "those who do get sick." That would be looking at the matter ex post. I mean by fortunate "those less less likely ex ante to get sick," and by "unfortunate" I mean "those more likely ex ante to get sick." We are still talking probabilities here, of course. Even the young and healthy sometimes get cancer and have heart attacks. They just do so much less often. And by the same token, even multiple cancer sufferers sometimes go cancer free for the rest of their lives. But that too occurs much less often.

When we clear away all the bafflegab, all the confusion, all the posturing and bickering and procedural wrangling, all the political maneuvering, what we find is that the Democrats want America to be a country in which the fortunate shoulder some of the burdens of the unfortunate. And the Republicans want America to be a country in which they do not. In short, if I may put it this way, the Democrats want America to be a Christian country, and the Republicans want America to be a Godless country.

Who knew?


Unknown said...
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Unknown said...

Or, to put the same analysis in the sanitizing language of "incentives," Republicans believe in "earning" one's ability to buy health insurance, and Democrats believe in rewarding the lazy no-good SOBs who don't really want to work, who then can't afford to buy insurance on their own.

Then, in that language, we can see who is REALLY on God's side, no? And don't forget, the market is God's law, as "natural" as property rights are to Locke!!!

Unknown said...

Then the fortunate cockroach can congratulate himself for his skills, fortitude, and the parable that you retold! :-)

Nelson Goodman said...

Great post generally, but a technical nitpick: don't you mean to say that it is economically rational to buy insurance if you assume *diminishing*, rather than increasing, marginal utility over the relevant range of money?