Tuesday, April 12, 2005

Insulation vs Catastrophic Coverage

Arnold makes the point nicely when he says that people prefer healthcare coverage that insulates them from the cost of their illnesses when they really ought to prefer catastrophic healthcare coverage that only kicks in if something goes seriously wrong.

He argues that this is irrational, and perhaps this irrationality stems from people disowning their illness, from them feeling that this illness is not really theirs and therefore they should not have to pay for it.

I agree with Arnold that people are irrational when it comes to thinking about healthcare, and that part of this irrationality expresses itself as a preference for insulation coverage over catastrophic coverage. I've certainly felt the urge, to pick the healthcare plan that covers the most stuff when having to make that decision.

I think that people think of themselves as healthy by default, and so discount anything that keeps them healthy (I'm healthy already, why would I need that?) and exagerate the cost of taking on unhealthiness (I'm not going to take that vaccine because it might make me sick!). This comes from the famous behavioral economics experiment that demonstrates how individuals have a very low willingness to pay for a vaccine, but demand a very high price to be exposed to an illness of similar risk, say in a medical trial. In this view, catastrophic coverage may be undervalued because you're never going to get sick, but insulation coverage is valued because you'll be taken care of just in case something does happen.

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