Health insurance remains (and will remain) relevant

By Razib Khan | March 9, 2012 11:39 pm

How a $1,000 test could destroy the health-insurance industry:

As we sequence more genomes, mine more data, and conduct more studies, we’ll find a lot more of these connections. Eventually, genomic testing will be a powerful predictor of future illness. And it raises the potential that young people will get themselves tested and then purchase insurance based off the result. So those with a clean genomic result might go for a cheap catastrophic plan, while those with a high risk of developing pricey illnesses will opt for more comprehensive insurance.

The result would be, in insurance terms, an “adverse-selection death spiral,” as the healthy opt out of expensive insurance, the sick opt into it, and premiums spin out of control.

“For all of human history, humans have not had the readout of the software that makes them alive,” Larry Smarr, a member of the Complete Genomics scientific advisory board, told The New York Times. “Once you make the transition from a data poor to data rich environment, everything changes.”


The idea that personal genomics might render insurance irrelevant makes some logical sense. The only problem is that it oversells the science of prediction in biology, and underestimates the role of randomness in disease outcomes. As longtime commenter with the original handle “biologist” long ago observed highly inbred lineages of model organisms in a “controlled” environment still exhibit a fair amount of random phenotypic variation. Yes, a non-trivial minority of people will find out that they have a high risk of developing a given disease early on enough in adulthood that the acturial tables imply that they’re uninsurable. But even those with “clean” results should probably still purchase some insurance plan to protect against ‘tail risk’. People who don’t smoke do get lung cancer, and people without a family history of heart disease and cancer do get heart disease and cancer.

But this idea that personal genomics will bankrupt health insurance is persistent. Why? I think it’s because some people have strong normative objections to the way health insurance works in the USA. I say this because many of the same people who espouse the power of genomics in predicting disease outcomes might be far more wary of such ‘genetic determinism’ when it comes to other sorts of life outcomes.

This is not to deny that personal genomics does not pose some problems for insurance. Misha Angrist recently told me that it seems clear that people who are aware of their APOE status are purchasing disability insurance on the sly. The only issue here though is that even those without the APOE alleles which heighten risk of mental deterioration earlier than the norm have a non-trivial likelihood of needing insurance against unexpected outcomes.

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  • http://www.isteve.blogspot Steve Sailer

    The American system of employer-provided health insurance stems from General Motors’ attempt during WWII to evade government wage controls by offering health insurance as a fringe benefit. It’s a pretty stupid system.

  • http://blogs.discovermagazine.com/gnxp Razib Khan

    #1, agreed.

  • Tomasz R.

    By the pure force of natural selection the real genetic dieseases should be rare. Eg progeria is 1 per 4 million, and the sufferers typically leave no descendants. A different example is Marfan syndrome, which by genetic defect standards is popular – 1 per 4000, the sufferers live to 40s and over, thus having descendants, and in a sense it can increase the perceived attractiveness of such person because of the increased height. But even such numbers are nothing compared to cancer, diabetes, or heart diesease popularity – which collectively affect majority. All mostly lifestyle dieseases (with environmental pollution, stress and other factors).

    Eating GMOs mixed with chemicals (but little vitamins or valuable minerals), sedentary work and private time, artificial stress – these are all receipes to health dieseaster that have not much to do with specially mutated to genes.

    On the other hand these have huge effect on gene expression. Even such surprising ones as excercise. So perhaps our NORMAL genes don’t assure proper human functioning ouside some evolutionary typical framework. GMOs on the other hand may genetically pollute our gut bacteria, which are part of ourselves too.

  • John Roth

    Adverse selection only matters if the potential insured knows something that the insurance company doesn’t. This is why, for example, large life insurance policies usually require a medical examination and have a several year exclusion for suicide.

    Insurance companies are quite capable of taking care of themselves as long as the government doesn’t keep them from collecting relevant information.

  • http://math-frolic.blogspot.com Shecky R

    “The idea that personal genomics might render insurance irrelevant makes some logical sense. The only problem is that it oversells the science of prediction in biology, and underestimates the role of randomness in disease outcomes.”

    Yes, insurance administrators, actuaries, and the scientists they employ, are pretty much in business to “oversell the science of prediction in biology” — their entire business model is based on doing such, and yes altogether, it is “a pretty stupid system” [and, I suspect, unsustainable in current form].

  • MDB

    This ignores one simple fact, this situation already exists, though it is young and old (and age will ALWAYS be the biggest factor). I always carried insurance not for fear of illness, but in case of accidents. This is a central planning problem, not a real problem and only if there is guaranteed issue. The other thing central planners need to keep in mind, older people are wealthier and are therefore better able to pay for it.

  • http://www.genomesunzipped.org/ Daniel MacArthur

    “Insurance companies are quite capable of taking care of themselves as long as the government doesn’t keep them from collecting relevant information.”

    The GINA legislation does just that – well, it doesn’t actually prevent insurance companies from collecting genetic information (at least I don’t think so), but they can’t act on it when setting health insurance premiums. So the basis for adverse selection on genetic information already exists. It’s worth noting that GINA doesn’t apply to life and long-term care insurance, however.

    In general I agree with Razib that population-scale genomics won’t kill the insurance industry, but I suspect it will hurt it non-trivially.

  • Nate Ogden

    #5 “it is “a pretty stupid system” [and, I suspect, unsustainable in current form].”

    Actually our employer based system has the highest chance of sustainability of any system in the world. Governments come and go, look at how many have changed since WWII. When insurance is provided by the State it is at the mercy of state finances and politics. Look at the problems in Greece, due to a lack of cash they can’t purchase drugs and make capital investments. NHS is slashing services and rationing due to budget problems.

    http://www.swissinfo.ch/eng/business/Recession-hit_nations_owe_pharma_firms_billions.html?cid=32185254&rss=true

    “As austerity measures across Europe lead to healthcare spending cuts, hospitals in Portugal, Italy, Greece and Spain are delaying paying for drugs by up to three years.”

    In the US Medicare has 40 trillion of unfunded problems, if not resolved the system will collapse.

    The employer model we have that is so derided is an annual system, with some minor exception for retiree benefits, there is no debt. Each year they only spend what is budgeted and affordable, this is the definition of sustainability. Across the world all of the supposedly superior systems are paying for today’s benefits with borrowed money, the definition of unsustainable.

  • Nate Ogden

    In regards to gene testing I challege any one concerned to find a single policy that would allow an individual to assume risk for rare genetic illness they know they wont get or to over insure protection for an illness they expect to come down with.

    First, the majority of people have employer policies, remember that stupid system, that doesn’t allow individuals to cherry pick their coverages.

    Second the risk and thus cost to insure against these possibly identifiable conditions is pennies.

    Third adverse selection is a couple decades old, as long as politicians don’t screw it up the industry is more then capable of handling this. For example what is a bigger risk, someone knowing they have a genetic precursor for some illness or someone deciding they want to have a kid next year so they seek insurance. Or need dental work, or braces.

  • Nate Ogden

    In regards to gene testing I challenge any one concerned to find a single policy that would allow an individual to assume risk for rare genetic illness they know they wont get or to over insure protection for an illness they expect to come down with.

    First, the majority of people have employer policies, remember that stupid system, that doesn’t allow individuals to cherry pick their coverages.

    Second the risk and thus cost to insure against these possibly identifiable conditions is pennies.

    Third adverse selection is a couple decades old, as long as politicians don’t screw it up the industry is more then capable of handling this. For example what is a bigger risk, someone knowing they have a genetic precursor for some illness or someone deciding they want to have a kid next year so they seek insurance. Or need dental work, or braces.

  • ST

    Yes and no. An informed minority will take advantage to tailor their insurance policies to their specific needs. But on the other hand all this information provides a great opportunity to scare the not so informed majority of people in to buying very extensive policies. I’d hope that the “stupid system changes”, but I fear it won’t.

  • http://ktwop.wordpress.com/ Krishna Pillai

    Insurance (like betting) consists of pooling contributions from the many to pay the few who suffer (or select) a particular event, the occurrence of which is uncertain. The total contribution of the many must be greater than the actual cost of the few. The skill of the insurer (or the bookmaker) lies in calculating the probability of the occurrence of the event and the consequent cost. Certainty of the outcome (or a very high probability) is incompatible with “betting” on or “insuring” against such an event.
    Just as no bookmaker would accept a bet on a future event which is certain (the rising of the sun tomorrow – say) there will be limited – or no – insurance offered to anybody who has a very high probability of some disease. So we shall probably see health insurance companies increasingly requiring a genetic scan and they will tailor the cover offered and their premiums to suit.
    But all this says is that the concept of health “insurance” is not sustainable in a situation where the future “health events” in a person’s life move from estimates of probability of occurrence into the realm of certainty. Other measures will have to be devised for individuals to manage their health risks.
    Today it is 12 months since the Great Tohoku earhtquake and tsunami of 2011. Japanese insurance companies rarely (if ever) offer earthquake insurance. And from my experience of the Great Hanshin earthquake of 1995, individuals and companies took other measures to try and mitigate the risk of the event (with varying degrees of success).

  • Jacob Roberson

    Most people don’t understand how insurance works. Needs to be said, seems like everyone here understands insurance and it’s skewing your thinking. Also, consider that more information -> smaller classes (worse) but more accurate risks (better, total-system).

  • Nate Ogden

    “So we shall probably see health insurance companies increasingly requiring a genetic scan”

    This is illegal to use the results so health insurance companies will not be requiring one any time soon. If you require the test and deny the person for another reason they can argue it was results from the genetic so you just don’t ask.

    “health “insurance” is not sustainable in a situation where the future “health events” in a person’s life move from estimates of probability of occurrence into the realm of certainty.”

    This would suggest life insurance was not a sustainable industry but we know it is. Your leaving out the time factor. Genetic test only says someone is predisposed to come down with it, that could be next year or 20 years from now. That makes it an insurable event, like life insurance.

  • Mephane

    This is why I prefera health insurance system where everyone pays a certain fraction of their income into a mandatory system,as the issues the original quote outlines do exist in certain systems already even without personaly genomics.

    In Germany, for example, there is a dual system, public semi-mandatory* health insurance with fees entirely calculated based on your income, and private insurance, where fees are determined based on an assessment of a person’s likelihood for a number of diseases, their age, etc. This leads to a situation where people who in their best years happily can afford the private insurance, but when they grow old and typically get ill more often the insurance rates will keep growing, until they might not be able to afford them. Then, by law, the public system is required to take them in.

    So the private insurance companies keep only those that healthy and/or wealthy, but those who are neither (or become neither) will fall through and caught up by the public system. The companies flourish while everyone is moaning about how the public system is thought to be “burning money”, “inefficient”, “overly beaurocratic” and often has to be supported by additional tax money, as they are the ones who have to pay the bill at all times, while private companies always have an opt-out if a customer becomes too expensive (increase fee, if they can’t afford they will have to switch to public).

    (Personally, I consider this scheme is close to fraud; it’s all the for benefit oft he private insurance companies while the ultimate risk has always to be carried by the public insurance.)

    Now if those health risk assessments were augmented by genome checks, it would enforce the current situation even more, as the private companies would treat those with severe defects or high risks for certain diseases with higher fees, too, despite them being entirely healthy.

    *You can leave the public system if you have a private insurance, but you’re at all times supposed to have one of either.

  • Michele Busby

    “The result would be, in insurance terms, an “adverse-selection death spiral,” as the healthy opt out of expensive insurance, the sick opt into it, and premiums spin out of control.”

    I don’t think the reasoning is quite right here.

    He’s saying that “sick” people will have more expensive plans with higher premiums to cover their more expensive illnesses.

    And “healthy” people will have cheaper plans, with lower premiums to cover their lower health expenses.

    That seems to be a wash to me.

    So I looked up this death spiral thing on Wikipedia and what it think what it refers to is really an instance where people get locked into their current health plans because of pre-existing conditions. That is, a panel of patients becomes sicker than average so the premiums go up to cover that. Then, the sick can’t leave because they can’t get insurance anywhere else due to their pre-existing condition, but the healthy can. On average, the panel just keeps getting sicker and sicker so it goes into this death spiral.

    In the case of genome testing, the GINA laws that Daniel talked about prevent health insurance companies from locking you out of an insurance plan because of your genome tests. So as the rates go up the healthy would be expected to leave, yes, but the “sick” will leave too if the rates get too high. And in the case of genome testing many of the “sick” aren’t actually sick. They’re just people who are expecting to get sick, so they won’t actually have higher costs, and they may actually have lower costs because they’re more concerned about their healthcare.

    So this is a little different than the type of “death spiral” that has been described in the literature, in addition to the poor predictability that Rabiz talked about. I think that for it to happen it really does require patients to be locked into their plans.

    Plus there really aren’t as many rock-bottom insurance companies around for “healthy” people to switch to any more because of healthcare mandates, and hopefully there will be fewer soon because they generally suck eggs.

    Also, at least here in MA, most people only choose from four large insurance companies. They are big enough to absorb this kind of risk, and don’t have huge discrepancies in their coverage that would cause you to bounce from one to another. Additionally, most people also don’t have THAT much say in what insurance they get because they are largely negotiated by their employer. I’ve only ever had one to three of the large insurers to pick from.

    So it might be something rinky dink insurers have to worry about but the risk pools are so large for most plans and the coverages are so similar that it seems a little far fetched to me.

    Sorry for the long comment!

  • Michele Busby

    Sorry, even longer.

    Here is the original paper on death spirals. It’s actually pretty interesting.

    http://www.nber.org/chapters/c9822.pdf?new_window=1

    What actually happened wasn’t that the death spiral resulted in the insurer going under. It really just refers to an individual group not having an individual product offered any more. So in this case, Harvard shifted the cost of their insurance coverage to their employees so that they’d be paying more for the PPO plan (old fashioned pay as you go) to the HMO. When they did that the healthy people switched to the HMO and the fee for service rapidly became too expensive and went under. This was complicated though – it had to do with the cost structure changing, not just a gambler’s paradox.

    But Blue Cross didn’t go under – they still offered the HMO product.

    Also, people are pretty good at predicting their future health now, especially since they only have to do it in the near term. FTA:

    Both pregnancy and heart attack rates
    are higher in the indemnity plans than in the PPO, and both are higher
    in the PPO than in the HMOs. The differences are fairly large: After
    adjusting for age and sex, individuals in the indemnity plan have 30%
    more pregnancies and 90% more heart attacks than those in the HMOs.

    I’d never heard of this death spiral thing before today and I worked in the field for 7 years, so I don’t think it’s something that is all too common.

    Sorry this even longer but I think to portend the death of the insurance industry because of genetic testing is really quite silly but maybe the columnist didn’t write the headline.

  • KS

    How about the concept that knowing you have a genetic predisposition to a disease makes you LESS of a risk of actually developing the disease, because you take precautionary steps (eg entering a screening program, modify diet, etc)?

    It will obviously take some time for actuaries (or others) to accrue real life data on relative disease risks of groups with different known genetic profiles, but I wouldn’t be surprised if in the final wash genetic predisposition to diseases where the outcome can be modified by environment does not significantly alter risk of actually developing the disease.

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This blog is about evolution, genetics, genomics and their interstices. Please beware that comments are aggressively moderated. Uncivil or churlish comments will likely get you banned immediately, so make any contribution count!

About Razib Khan

I have degrees in biology and biochemistry, a passion for genetics, history, and philosophy, and shrimp is my favorite food. In relation to nationality I'm a American Northwesterner, in politics I'm a reactionary, and as for religion I have none (I'm an atheist). If you want to know more, see the links at http://www.razib.com

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