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0 pointstptacek16y ago0 comments

Uh, isn't this --- respectfully --- ass backwards? The benefit of going national is that you greatly expand the risk pool. All I know about insurance I got from listening to Robert Schiller's financial markets class on iTunes, but, I'm pretty sure that's how insurance is supposed to work.

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yummyfajitas16y ago· 2 in thread

Work out the numbers and you'll see why it isn't. The variance in health care payouts over a pool of N people is proportional to sqrt(N), whereas the mean is proportional to N (see the central limit theorem).

For a family of N=1 to N=4, sqrt(N) is of the same order of magnitude as N. This is bad, since you can't reasonably predict how much you need to pay. This is why insurance makes sense for me (N=1) or a family of N=4.

Once N=10,000, sqrt(N) = 100, so the variance is only 1/100 of the mean. At N=100,000, it's only 3/1000 of the mean. Every factor of 10 increase in the insured pool lowers the standard deviation by a factor of 0.316=1/sqrt(10).

tptacekOP16y ago

That's a good point.

But you've ignored adverse selection. Many of the people commenting here have no insurance coverage, because they're 22 and it is irrational for them to pay for coverage they're not mandated to have.

I see that if people were i.i.d., the difference between BCBS's risk pool and Medicare's risk pool would be irrelevant. But they aren't.

yummyfajitas16y ago

I don't need people to be i.i.d. Statistical independence along with some minor technical conditions are sufficient.

http://en.wikipedia.org/wiki/Lyapunov_condition

http://en.wikipedia.org/wiki/Lindeberg%27s_condition

Lumping in seniors with 22 year olds does not reduce the variance any more than lumping in 22 year olds with more 22 year olds does.

Statistical variance is not a major contributor to the cost of health insurance. You are simply wrong on this point.

Additionally, adverse selection has nothing to do with a variable risk pool. Adverse selection is a problem caused by asymmetrical information: if you know you are sick, you might lie to your insurance company about preexisting conditions to gain insurance. Adverse selection also has nothing to do with a variable risk pool.

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