Monday, August 31, 2009

Health insurance and incentive compatibility

A widely linked post, called Unconscionable Math by the blogger known as Taunter discusses why health insurance companies don't try hard to check the facts on insurance applications. (They only check your application for fraud, he claims, when you get sick enough to make really big insurance claims, and then they may be able to decline to pay if they can make the fraud claim stick.)

He draws the analogy to Las Vegas casinos, which he says don't check that gamblers are of legal age unless they win big:

"Years ago I was walking a casino floor with a casino executive. It was an incredibly detailed tour, and we got to talking about pretty much everything that came to mind about crowds and gaming. Now, a clever observer might notice that even the tolerant people of Nevada will not allow alcohol in vending machines – wouldn’t want the little ones to be able to get a Bud Light without a human being verifying their ID. But there we were in the middle of acres of blinking lights, with absolutely no one making sure that underage kids weren’t walking up to a slot machine. Indeed, they don’t card for the table games.
The executive told me you are free to play if you are underage, you just aren’t free to win. You can sit down and pump your money into the slots, and if you look presentable you can drop some chips on blackjack or craps. However, if you should happen to start winning, the pit boss or security team will come over and check your ID. The house edge is 100%." careful with those insurance applications.

1 comment:

MITBeta @ Don't Feed the Alligators said...

It seems to me that, at least in the insurance company example, that if they accept your first and subsequent premium payments, you should be covered. Otherwise they should at least refund your premiums if they determine that you are committing fraud.

That's how it should work, at any rate...