Betting on bad health (with inside information)

Personal DNA testing is here. For $1,000 you can send off a DNA sample to an american company and find out your genetic predispositions to a wide variety of illnesses and problems, from male pattern baldness to cancer. The Telegraph is running a story by a woman who has just ordered such a test and has seen her predispositions. The story makes many of the issues quite vivid and shows how one can use the bad news in such tests, say a predisposition to a certain illness, to make special efforts to guard against that illness, or at the very least to be ready for the effect it might have on your life. There is, however, a problem with these cheap, voluntary tests. It is not a problem for the individual taking them, but a problem for society.

As a society, we rely on health insurance to smooth out the costs of healthcare. Without health insurance, people who get seriously ill can be financially ruined by the medical costs, but with health insurance we spread the costs out between all people. Some health insurance is compulsory and run by the government, some is voluntary and run by private companies. Some countries such as the UK have mostly government health insurance while others like the US have mostly private health insurance. Personal DNA testing is a serious problem for private health insurance and is thus a particularly important issue for the US.

The problem is that one can’t privately insure against known things. Insurance, with all its benefits of sharing the costs in a roughly equal manner, can only work in the free market if it is against unknown things. For example, if everyone knew with certainty whether they would get cancer, then we couldn’t insure against it, because those who know they won’t get it won’t pay to insure against it and only those who are certainly going to get it would pay. Even if the insurance agency hadn’t seen the test results, they would know that the only people asking for insurance are those who know they will get it and thus the insurance agency wouldn’t insure them.

This logic works even when things aren’t so black and white. If everyone knows with 90% certainty whether they will get cancer, then only those who have a 90% chance will be prepared to pay a reasonable insurance premium and the insurance company would only offer it at a price greater than 90% of the average cost of treatment. Thus the degree to which we can privately insure against illness (and therefore the degree to which we can smooth costs out across the population) is equal to the degree to which we are uncertain about where illness will strike. Increased knowledge about our genetic predispositions to disease thus lowers the benefits we might get from having a private insurance market.

I would not jump from this to the conclusion that we should stop private DNA testing. It is here to stay and brings a lot of personal benefits. However, the benefits of the current kind of voluntary private insurance will be reduced as the uncertainty about our futures goes down. The way to get the best of both worlds is to thus have compulsory, government insurance from birth. Since there is no way to opt out of government insurance, those lucky enough to have good genes must still pay their share and the costs of illness will be spread out evenly. Countries like the US that are considering moving towards government provided health insurance would do well to bear in mind this new problem for the private system.

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