Health Insurance EV question

[RobertHunter]

I pay my health insurance premium before all other bills.Also, if you are self employed and have a working spouse I would suggest getting insurance on your own and not through their employer.This way if they ever quit or get fired you still have coverage and you can then add them onto your policy.

[whitelime]

Too busy to read the replies but if no one mentioned it, one of the biggest reasons to get health insurance is that insurance companies get bargained prices. They pay only a fraction of what youd have to pay a doctor directly.

[etizzle]

zeebo-

health insurance is +eUtility because of decreasing marginal utility of $.

You probably know what this is or can figure it out but for those that dont, it just means that a dollar is worth more when you are poor and less when you are rich in terms of utility.

So the money lost is more damaging when you lose a lot of cash due to an operation than the small amount of money you pay for insurance, even if they have the same expected value. i.e. if you lose $100 10% of the time for health reasons and it costs 10$ to be fully insured, you should prefer to fully insure yourself. This is the because the $ vs utility curve is generally modeled as a logarithmic function.

[punter11235]

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This is the because the $ vs utility curve is generally modeled as a logarithmic function.

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I heard about that but dont agree that it is "generally modeled" that way. Do you happen to have links to some sources about the subject because I am really interested in it.
Best wishes

[etizzle]

well, its really actually always modeled that way. I dont really feel like looking for links but an easy one is http://web.mit.edu/14.41/www/PS4_2005.pdf

Check out problem 4. Thats pretty much how it always is in my experience.

[punter11235]

Thank you for that link
My concern is that utility function must have upper bound to be reliable, here is why.
I may be way off here but I suspect that some kind of logarithm function is often chosen becaue logarithm is first function which come to mind when you seek for function increasing slower and slower.

Best wishes

[MentalNomad]

There's some good info in this thread, but a few points:

1. Bill Gates would have insurance. He would have to have insurance because it is required to have a mortgage. He would have a mortgage because he could make more on the money investing it elsewhere than he could by leaving it in the house. (The house will appreciate, and he will earn that appreciation whether or not he has a mortgage -- but he can borrow the money at a low interest rate and invest it quite safely and get more money than that.)

2. The question isn't merely what is the EV of insurance -- we also need to ask about the variance. That's what people are keying in on when the talk about the potential for a huge cost -- critical care carries an enormous variance.

3. There is value to maintaining your economic stability. Perhaps you have enough capital to self-insure; lets say you have $100,000. It's not cash. If you end up in the hospital for a month with critical care need, you may need to pay $50k now and another $50k over the next few months in followup. Is everything fine? You have the money, right?

Well, where do you have the money? Part of it is invested in stocks; is it the right time to sell them? The market is down and you were waiting for specific product announcements for you stocks to peak. . . And part of it is invested in the multi-family house you live in. You can't sell it, you need to live somehwere, and the rental income will support you while you can't play. And part of it was invested in a start-up business some aquaintances were doing. It's a good investment, but the money can't be pulled out right now. . .

After you've cashed everything out, and paid the bills, where are you? Broke. Having enough to survive the event isn't enough -- you need bankroll to make more money, or you need money to invest to earn money. And, after the hit, you no longer have the money to self-insure, and now you need insurance!

So my point: it's not just the risk of having to pay out; it's the disruption caused by the paying. Having to limit your investment options to accommodate the sudden need, as well as the consequence of having to lose all or most of the money in an unlikely event.

Stability is key for planning well -- that's why mortgage companies require insurance!

[BigBaitsim (milo)]

As I understand it, the number one or number two reason people declare bankruptcy is that they have medical bills they cannot afford to pay. Young or not, accidents happen and illness happens. One brief hospitalization can run up tens of thousands in debt. Health insurance is expensive, but given the potential downside of catastrophic financial loss, it is way +EV.

[punter11235]

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Health insurance is expensive, but given the potential downside of catastrophic financial loss, it is way +EV.

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Insurance is always -EV no matter whats your financial situation.
But EV is not good enough criterium to make decisions which are big comparing to your bankroll. So for example if you earn 100k/year you surely should get an insurance but if you eartn 100millions/year you dont need an insurance because you will not get hurt (financially) even by 365 day hospitalization.
Now 100millions is definitely exageration, so the question is on which level of bankroll/salary you can forget about health insurance...

[JayLeno]

Move to Denmark. Here we dont have to pay health insurances - and the doctors dosent have to be affraid that some twisted fool will make a lawsuit cause the doctor broke his ribb while doing heart massage.
We pay tax - alot - but noone have to be affraid to die because they dont have money for an operation or medicin.
We are an industrial country u know....we dont leave people to die in the streets.....