Saturday, January 28, 2012

Genetic Testing and Insurance: One Datum

Reductions in the cost of genetic testing and improvements in what we know about what it tells us produce obvious benefits; if you know you are  likely to have some particular medical problem, you may be able to take precautions against it. But they also have at least one potential downside. The more is known about the chance of bad things happening to us, the less able we will be to insure against them.

A solution to this problem that is sometimes proposed is to permit individuals to have their genes tested but forbid insurance companies to require testing as a condition of insurance or to use the information it produces. The problem with that is adverse selection. If the customer knows his risk and the insurance company doesn't, high risk and low risk customers are charged the same price, making insurance a good deal for the former and a bad deal for the latter. Insurance companies, realizing that most of those who choose to buy their insurance are bad risks, will charge accordingly, driving more of the low or average risk customers out of the market. In the limiting case, insurance is bought only by high risk customers, at a high risk price. A famous description of the problem is Akerlof's article "The Market for Lemons."

If we allow both insurance companies and their customers to make use of genetic information, then both high risk and low risk customers can buy insurance, but at different prices. The risk of having genetic variants that make you more likely to suffer some expensive medical problem is uninsurable, although you can still insure against the risk that, given those genes, the problem will actually appear.

The theoretical analysis of the problem is straightforward; interested readers can find one version in Chapter 6 of my Law's Order. But the theory does not tell us how large the problem is. That depends on empirical facts, in particular on how much the information provided by genetic testing affects the expected cost of insuring someone.

As it happens, I recently came across a datum relevant to that question, as a result of having my own genes tested by 23andMe, a company that does mail order genetic testing. It turned out that I had a genetic variant that implied a moderately increased risk of meningioma, the second most common type of brain tumor.

The information came a little late to be useful. Last summer, while I was part of a group on World of Warfare, one of the other players noticed that I had stopped responding. He called the house. My son took the call, came into my office, and found me half conscious on the floor. The diagnosis at the local hospital was meningioma, a benign (i.e. non-cancerous) tumor inside my skull but fortunately outside my brain. It was large enough to put pressure on my brain, so required surgery. I got surgery, all went well, and I am now fully recovered, aside from a visible scar and a tendency of my scalp to itch.

According to 23andMe, 35,000 Americans a year are diagnosed with meningioma, and in most cases the tumor is small enough not to require surgery. Assume that 10,000 of those, like my case, do, making the annual probability for a random American 1/30,000. Further assume that the average cost is $100,000. That's the right order of magnitude—I saw the figures for what it cost my insurance company, but don't have them ready to hand at the moment. The average cost to the insurance company of that particular risk is then about $3.

Finally, assume that my "moderately increased risk" means twice the average risk, which seems if anything a high guess. It follows that in a world where insurance companies had and used that data, my medical insurance would cost me, or my employer, three dollars a year more than in a world where the data was not available.

There are, of course, lots of other risks that my health insurance insures against. For some my genetics are presumably favorable, for some unfavorable. It would require much more information than I have to estimate how much the cost of insurance would vary from one person to another if all of that information was available and used. But at least the single datum I happen to have suggests that the effects might be small.


Richard Allan said...

You could conceivably insure some genetic risk by buying insurance for a child before it's conceived. Seems like a proposal from science fiction, though.

brenoalmpq said...

" World of Warfare" or Warcraft?

Dramatic post was expecting some really bad news after reading the "little late". Nice you managed to turn the whole episode in a lesson.

David Friedman said...

I've made Richard Allan's suggestion for reducing the problem in the past. It's only a partial solution, since the parents' genotypes are known and give some probabilistic information on the child's.

To Breno--World of Warcraft, of course. Maybe I'm not as fully recovered as I thought.

But I think I made typos like that in the past as well.

Anonymous said...

The average to cost to *all* insurance companies is $3.00 per annum in direct medical costs. But since not all Americans are insured by one company, and since admin and other costs will push that total cost upwards...

Your analysis in not only deeply flawed, but suspect.

SheetWise said...

You've seen the bill, and that appears to be a reasonable analysis considering the way things are currently arranged -- but the way they're currently arranged, the providers hit up everyone who has the ability to pay their bill with the expenses of those who don't. So the cost of the procedure is really inflated.

I'll bet your state also requires your insurer to provide you with coverage for substance abuse, chiropractic care, and a long list of other services -- including pregnancy -- that you will probably never use. The cost shifting that already takes place is so bizarre that the only way to find out what a procedure really costs is to offer cash payment.

From what I can tell, we've had socialized medicine for decades -- what we're arguing about now is whether or not it's fair that the people who pay the bills get a line pass.

Anonymous said...

Depends on the disease, of course. Moderately elevated risk of a moderately expensive disease is one thing, but high or certain risk of developing a very expensive disease is another thing entirely.

For example, my mother has familial ALS. The specific gene causing it hasn't been pinpointed, but it's clear from the inheritance pattern that I have roughly a 50% chance of developing it myself sometime in the next 10-30 years. This would make insurance prohibitively expensive if I had to disclose this.

Brandon Berg said...

I've made Richard Allan's suggestion for reducing the problem in the past. It's only a partial solution, since the parents' genotypes are known and give some probabilistic information on the child's.

This is arguably more feature than bug. People who are at high risk of conceiving a child with a serious genetic disease should probably not have children, at least not without embryonic screening. If the high cost of insuring against that condition dissuades them from taking that risk, so much the better.

Henry Troup said...

IThe big scary genetic items are things like Huntingdon's where the gene is both highly determinative and of well known heritability.

But a codicil to your thought-how much should the insured be willing to pay for access to the genetic tests? That's a fairly standard decision under uncertainty equation.

William B Swift said...

Your link to Market for Lemons is broken.

Allan Walstad said...

In a free society, people can help those in need voluntarily. Even with the current level of government coercion and confiscation, charitable giving is considerable. So yes, by all means let both insurance companies and their customers use the available information. Let people be free generally to pursue their goals and purposes in the medical arena (short of committing fraud or coercion). That includes helping the less fortunate.

Raphfrk said...

The assumption being that DNA testing isn't that accurate.

If the cost of insuring a person after DNA testing is rarely more than 10-20% higher, then adverse selection is not as big a deal.

It would be interesting to see what the distribution is.

If the knowledge gained by DNA testing reduces health costs, by earlier detection of potential problems, then on average insurance costs could go down.

Also, if DNA test accuracy increases slowly over time, then the transition could be handled more easily. It would also likely hit a brick wall, in terms of the effect of more info.

Green World said...

One issue is how much the insured themselves will be willing to pay out of their own pocket. Also, one should simply consider the possibility of people paying for it themselves. Bet you will see many people going to have this done outside of the USA for a fraction of the costs and just pay out of their own pocket.

Final Expense Quote said...

And the result is to make risks which the would-be insured has information about and the insurance company is not permitted to have information about to some degree uninsurable.


Thomas Blankenhorn said...

David, what does your analysis imply for a medical system with socialized health insurance? My impression is that in, say, Canada, genetic testing would be an unqualified boon:It tells people what they're dealing with so they can prepare and react early. Yet it doesn't present an adverse-selection problem because there's no selection. You have unwittingly argued that genetic testing will make the economic case for Obamacare comparatively stronger.

Anonymous said...

The cost of life insurance following positive DNA tests for hereditary cancer is four fold the cost of those without the genes for hereditary cancer.

This is despite the knowledge these individuals have annual cancer screening tests that detect cancers which are removed or treated before becoming life threatening.

Therefore, most live past the age of 65 when most individuals drop their insurance policies due to increased risk.

In fact, many with hereditary cancers have better odds of survival than the average person, as one in every three persons gets cancer and those with hereditary cancers are a better risk!