Where does insurance end, and social insurance begin?

Last updated on: March 26, 2017 at 6:46 pm by Jane the Actuary

Where does insurance end, and social insurance begin? 2017-03-26T18:46:23-06:00 Jane the Actuary

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Insurance: a financial product in which a consumer buys a policy promising payment in the event that some risk occurs, and the insurer prices based on the likelihood of that risk occurring, and its likely severity. Home insurance premiums are based on the risk of that individual house being robbed, or damaged by fire, or storm damage, or the like, and actuaries price that risk based on crime rates in the neighborhood, the proximity of a fire station, the cost to rebuild the house, any valuables disclosed by the homeowner under a special rider, and so on. Car insurance premiums are based on the likelihood of an individual driver having an accident, due to that individual’s past driving record as well as overall history of people in that rate class, e.g., male teens vs. middle-aged moms.

Social insurance is something entirely different.

Social insurance refers to government provision of benefits, commonly funded by payroll taxes, to the general public (that is, without means testing). In the U.S., Social Security and Medicare are social insurance programs. (Medicaid is a welfare program because it’s means-tested.) Other countries have much wider provision via their social insurance programs: medical care for all rather than just the elderly, more extensive disability coverage, including short-term disability, maternity and parental leave programs, and the like.

And what about the definition of insurance that pundits and politicians tend to use? that is, a system of pooling contributions to pay out expenses? That’s what we often hear — that it’s entirely appropriate, for instance, that younger people with fewer claims pay “extra” to subsidize the claims of older people, or that everyone pay extra to fund the costs of sick people coming into the health insurance “system” for the first time, because “insurance is all about sharing costs.”

That’s neither insurance (it’s not based on individual risk) nor is it social insurance (you’re not paying taxes into a system). The closest label I can think of, if it were voluntary, would be a “mutual aid society.”

But what about the structure that Obamacare imposes? No individual assessment of risk, very limited ability to assess the risk by risk classification (smoker vs. non-smoker, plus an age-grading that’s only a portion of what true actuarial valuations would provide for)? And pay-related contributions up to 400% of poverty line?

I suppose you’d have to classify that as a hybrid of insurance and social insurance. Or maybe you’d label that as privately-provided social insurance. It’s kind of a mess, really, and that’s either a Best of Both Worlds or just another reason for the failure of the system.

And the fact that Obamacare is a messy hybrid speaks to the two key but separate questions about which we need, and don’t have, a consensus on healthcare:

Who should pay?

And how should the overall system be structured and the care delivered?

If we say that Americans should pay for healthcare in proportion to their income, then we want a social insurance system; if we say that healthcare is an expense like any other, that individuals should pay themselves for unless they need financial assistance due to poverty, then we want a true insurance system.

Then we can discuss whether a single-payer system’s ability to control costs by setting all reimbursement rates unilaterally, and rejecting coverage that is deemed insufficiently cost-effective, balances out the negatives of such a system — the lack of care when budgets are cut, waits for elective treatment, lack of innovation, and the like. And we can discuss whether delivery of healthcare through a private insurance model can be reconstructed in a way that remedies the current seeming intractable cost increases.

What about Janecare? I suppose that, again, is a variant of “messy hybrid” – the “social insurance” component says that everyone pays taxes and gets out of the system the insurance voucher, but the system is run through private providers who, in principle, ought to be able to provide the innovations in healthcare delivery that we need.

Image: https://commons.wikimedia.org/wiki/File%3ADoctor_examines_patient_(1).jpg; By Unknown photographer [Public domain], via Wikimedia Commons

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