Robin Cook's Mistaken Idea about Pooling Risk
I’m on vacation in Hawaii and just finished the first novel I’ve read in months. It’s Marker by Robin Cook. While it’s a real page turner and I enjoyed it, I found the ending, which I began to anticipate halfway through, highly implausible. Still, there’s a grain of truth in it, but Cook totally misses that grain.
SPOILER ALERT for what follows.
The bad guy in the novel is a managed health care organization called AmeriCare that is out–gasp–to make money. AmeriCare pays people to go into hospitals and kill some of their clients once specific genetic markers have been identified, markers that indicate expensive health problems for those clients down the road. I trust you see why I found this implausible.
Still, as I said, it’s understandable that the fictional AmeriCare would not want such customers because those customers could cost them lots of money. But it’s understandable only if the insurance company is not allowed to price for the clients’ risk. Cook even gets that. Towards the end, he has his hero state:
Using single, easily performed tests, people who are destined to cost them significant money can be recognized. The problem is that the large healthcare companies cannot show discrimination, so they have to take them. At that juncture, from a purely business perspective, they should be eliminated.
In other words, Cook understands that the problem is that insurance companies can’t price for risk.
But then he doesn’t advocate allowing health insurance companies to price for risk, the way auto insurance, home insurance, and life insurance companies are allowed to do. Instead, he has his hero state:
Unfortunately, that’s the way the business works and why some level of government oversight is necessary as a general rule in a free-market economy.
The hero makes this statement only two paragraphs after pointing that it is precisely because of government oversight that the insurance company can’t price for risk and that this inability to price for risk is what leads to the problem.
In case anyone thinks this is just a fictional character spouting off, Cook then adds an Author’s Note in which he writes:
The end result will be that the concept of health insurance, which is based on pooling risk within specified groups, will become obsolete. In other words, risk cannot be pooled if it can be determined.
Cook is mistaken. The whole idea of insurance is to pool like risks. And the only way to pool like risks is to determine them.
Cook then jumps to his solution, writing:
I now feel that there is only one solution to the problem of paying for healthcare in the United States, indeed for all developed countries in this economy: to pool risk for the entire nation.
That way, he writes, “we” can “decide rationally how much we should spend on healthcare i general.” Of course, he doesn’t say how “we” should decide rationally–or who “we” is.
For more on insurance, see Richard Zeckhauser, “Insurance,” in David R. Henderson, ed., The Concise Encyclopedia of Economics.