Massive error bars make underwriters and actuaries cry.

[phantom power]

As we all know, taking this statistical logic to its proper conclusion argues for one giant insurance pool for the entire country. That is, Single Payer.

Actuaries and underwriters love large groups. The bigger the better. Small groups and individuals are almost impossible to accurately price. Big groups allow statistical approximations to approach population realities while the error bars on a small group are massive. Massive error bars make underwriters and actuaries cry.

The following will have some math and more importantly a lot of statistical intuition, so please bear with me.

Let us imagine that Mayhew Insurance company has 1,000 employees in a single group. This is a good size group. The group premiums are precisely enough to cover medical and administrative expenses for the year. Let us also assume that 10% or 100 employees are expensive to cover. The other 900 are in reasonably decent health or in good health. Their premiums cover the expenses of the expensive 10%.

Now let us imagine that some upper level Randian genius decides to emulate the Sears organizational structure. We’ll see how group size changes premium distribution. Each work group has to buy all of their own services in order to promote internal competition (thus destroying the theory of the firm as an institution). That means 20 managers are now buying insurance for their employees independently as a small group. It will be the same 1,000 people getting covered with the same 100 people who are expensive but what happens with rate structures?

Two things will happen. First, the administrative costs will increase. Some tasks are scale invariant while other tasks scale with membership. As I’ve mentioned before, my work is basically scale invariant. It takes me the same amount of time and thus costs if I work on a group of three members or three thousand members. The first group has a cost attribution of several dollars per member while the second group has a cost attribution of pennies. The medical loss ratio of 80% for small groups and individual markets and 85% for large groups recognizes this difference in group structure.

...

Seven groups would see roughly the same premiums that they saw when there was a single 1,000 member Mayhew Insurance group. Seven groups that have very few high cost individuals in it, would see significantly lower premiums than they would under the 1,000 member company wide group. Six groups would see significantly higher prices as they have more than average number of sick people in these small sub-groups. One of these groups would see at least a doubling of premiums.

Slicing and dicing Mayhew Insurance from a single group to 100 groups would produce an even wider spread of premiums dependent on health status. Breaking Mayhew Insurance from one group with a thousand members to a thousand groups with one member creates even more variance. Random noise becomes more important in small group sizes.

http://www.balloon-juice.com/2014/02/06/ungroup-size-queens/#more-148136

[Nye Bevan]

1. Which is why people in small states tend to get screwed under the current system.

I think in NH there is only one insurer participating in Obamacare. Limited networks, monopoly pricing power, and no consumer choice.

[Scuba]

2. Risk sharing while maximizing profits are incompatible.

Maximizing profits demands that risks be minimized, ergo insurance companies love to drop sick people.

I'll continue to advocate for Medicare for All, including dental, optical, hearing aids, mental health and nursing home coverage.

[bvar22]

3. 50 small, state run Public Options would never be able...

...to offer the savings of ONE BIG National Public Option.