Tag Archives: insurance

Pre-selected health insurance plans for visitors

A half-year visit to a US university under a J1 visa requires US health insurance. In the University of Pennsylvania, the website of the International Students’ and Scholars’ Office says that they have pre-selected some health insurance plans. According to their cover description and comparison websites, these plans offer significantly less cover than similarly-priced plans not pre-selected by U Penn. My spreadsheet comparing the health insurance options is public. Possibly I have missed some aspects of insurance that justify the price difference. Another explanation is that the pre-selection was done by people who do not themselves use these insurance plans (because they are not visitors to the US) and have little incentive to make an effort to choose the best plan. A more negative and less likely interpretation is that the insurance company is providing incentives (such as kickbacks) for the selectors at U Penn to direct visitors to expensive low-cover plans that are profitable for the insurer.

Insurance in research

Most developed countries have programs to support research and encourage students to choose careers in it. This suggests scientists have a positive externality on the rest of their country that is not fully internalized in their income. Why not support research by paying the researchers its value, assuming the value can be measured? This would internalize the externality, leading to efficient effort provision.
A potential answer is different risk aversion of the organization supporting science and the scientists. If the institution is involved with many different projects, it is diversified and likely to be less risk averse than a researcher who only has a few projects. The arrangement optimal for both sides is then for the institution to offer insurance (at a cost). The researchers get paid a lower expected amount than the value of their work, but with a lower variance. Instead of the scientists taking loans to finance their work, becoming rich if the project succeeds and bankrupt if it fails, they avoid loans and get a fairly constant salary.
There is a tradeoff between incentives and insurance. If the salary does not depend on success, there is no incentive for effort, but perfect insurance. Having researchers take loans and get the full value of their work provides no insurance, but strong motivation. The compromise is that promotion and pay depend somewhat on research success, but not too much.

Lobbying for free insurance

In many countries, farmers have managed to obtain free insurance from the government – if there is a bad harvest (due to drought, flood or anything else), the government compensates the farmers using tax revenue. On the other hand, if the harvest is unusually bountiful, the farmers do not pay a windfall tax to the government (which would reduce the tax bill of other people or provide more public services). There is thus no premium for the insurance that the rest of society provides to agribusiness.
A thought experiment: the insurance for the agricultural industry is bought from some insurance company who has to pay the farmers if the harvest is bad.  The premiums paid to the insurer are taken from the general tax revenues each year. If the insurance company just breaks even (perhaps due to enough competition between insurers, profits are driven to zero), then the movement of money is the same as in the case of “free” insurance by the government.
Agribusiness has managed to pump some money out of other taxpayers with the free insurance. Their success is explained by the classic lobbying theory: if the benefits of lobbying go to a small group, each member of which gets a large sum, then each member of that group has an incentive to put in the effort and money for influencing politicians. If the cost of lobbying is borne by a large group (say the taxpayers), each member of which only pays a small amount, then members of the paying group do not find it worthwhile to make the effort to counterlobby. The savings are too small to be worth the time and money.
If some politician tries to reduce the subsidy to farmers, they are targeted with intense negative publicity. The agricultural industry claims itself to be necessary for “food security” or “feeding the people”. Nevermind that large amounts of food are currently shipped worldwide. Only the import barriers to foreign-produced food are keeping it out of the domestic market. And food security – who takes a country by blockading it into submission these days? A force large enough to surround the country and cut off food import is large enough to take it by storm, which is considerably quicker. Food security really means preventing the rise of food prices. But this is a financial problem and has a financial solution – insurance against a price rise.
If reducing the farming subsidy does not work, a similar effect can be achieved by providing the same subsidy to everyone and raising taxes. Only the administrative costs are higher than in the case of reducing the subsidy. Other industries could argue that they are affected by the weather or other “national emergencies” and deserve compensation from the government. For example, rainy weather reduces ice cream sales and tourism revenues, so the ice cream sellers and the tourism industry could lobby for the same free insurance as the farmers get. If the world price of some natural resource falls, the miners of that could claim an event beyond their control is threatening them with bankruptcy and ask the government for help. If the tastes of the public change so that some form of entertainment is no longer profitable (theatre, opera, classical music), the providers of that can claim to be important for preserving the national culture and the very civilization itself and ask for taxpayer support… wait, that already happens. It is described in the Yes, Minister and Yes, Prime Minister books.
Of course in reality, the subsidies differ across industries, depending on their lobbying prowess. But if the subsidies were proportional to the tax payments of their receivers, they would neatly cancel with the extra taxes levied to finance them. So the government could abolish subsidies by enlarging the set of receivers to include everyone.
By providing free or subsidized insurance, the government is crowding out private insurance – why insure and pay premiums if the government compensates the loss without premiums? This is especially a problem for risks that are common to many voters. For example, a flood is likely to affect the whole neighbourhood, not just one house. In case of flood damage, the people in the neighbourhood can jointly lobby for the declaration of a disaster zone and a public subsidy for rebuilding. So no need to buy flood insurance. With very few buyers, insurance companies stop offering the product.