Cost clustering and high cost risk pools

My Iowa post last week got a whole lot more attention than I thought it would have and provoked several great conversations. One of the questions was about how to deal with this extreme corner case and if a high cost risk pool made sense for this use case. This is the perfect example for a high cost pool.

And then there was a great discussion on how to design such a program.  And this leads to a discussion about clustering.  Bigger risk pools are more efficient and effective at spreading risks, so we’re going to talk about clustering for a bit.

Let’s imagine a hypothetical high cost risk pool of the top 1,000 individual claim years in the country.  The average claim will be $5,000,000 for the year. Let’s simplify things and say 990 are randomly distributed by population and 10 are a non-random cluster that we can insert into any state at any time.  The first run through is with fifty one state (and DC) based high cost risk pools.  We’ll look at two states, California and Wyoming, for this run.

California has about 10% of the population.  California should expect to see 99 people in this hypothetical pool plus an expectation that one of the ten non-random people would be expected to be in California.  Their expected high cost risk pool budget is $500 million.  Now if all ten of the non-randomly clustered people are in California, they increase the expected pool costs by 9%.  California is big enough and rich enough that a surprise $45 million dollar medical expense does not destroy their budget.

Now Wyoming should expect to see between 1 and 2 people qualify for the high cost risk pool.  Let’s assume the Wyoming state government is very cautious and they allocate $10 million for the high cost risk pool.  That works great in a normal year.  But if the travelling roadshow of catastrophic medical expenses arrive in Cheyenne, the state is now on the hook for twelve qualified individuals.  They are 500% over budget now and the state budget is underwater.

This thought experiment is amazingly unrealistic.

Even if we are to assume that extreme medical cost cases are randomly distributed, we should expect several states to be surprised at the number and expense that they face as Pennylsvania could reasonably expect to see anywhere from 45 to 51 qualifying individuals from the scenario above in any given year just do to random chance.

More importantly, we know that diseases are not randomly distributed.  My ongoing freak-out about Zika is based on the fact that this is a concentration of very high need and high cost individuals on states with low Medicaid funding.  Genetic disorders are tightly clustered due to both the combination of most people live near their families rather than being randomly distributed and localized clusters of diseases have led to local medical-industrial clusters of medical knowledge and treatment.  For instance, maple syrup urine disease is a common genetic disorder among Amish families, so there is a good deal of knowledge on treating that disease clustered in Lancaster County, Pennyslvania and Holmes County, Ohio.  Sickle cell disorders are overwhelmingly a disease of African Americans, so it is more common in Mississippi than Montana.

From a financial perspective, there is a chance that there is enough sample size that although one state will have more of one genetic disorder it washes out as another disorder it is light in is dis-proportionally prevalent in another state so the cash flows balance out.  That is an empirical question that I don’t know enough to answer.  But even if genetic disorders balance out, localized outbreaks like Zika won’t balance out.

State based high cost risk pools would remove some of the falling knife incentives that I described in Iowa but they will be underfunded and overwhelmed at times of high need.  National level pooling is far more efficient and effective.

Going out west where I belong

With all the excitement around Jon Ossoff, let’s not forget about the special in Montana. You can give to Rob Quist here.

Goal Thermometer

Open Thread: Erik Prince Is Just Full of Ideas!

Hey, remember Erik Prince, friend-of-Putin and Seychelles tourist? Bloomberg Politics has another profile — “Blackwater Founder Prince Said to Have Advised Trump Team”:

According to people familiar with his activities, Prince entered Trump Tower through the back, like others who wanted to avoid the media spotlight, and huddled with members of the president-elect’s team to discuss intelligence and security issues. The conversations provide a glimpse of Prince’s relationship with an administration that’s distanced itself from him since the Washington Post reported earlier this month that Prince had met with a top aide to Russian President Vladimir Putin in the Seychelles in January.

That island encounter was the latest in a series of conversations between Trump advisers and Russians that have come to light as U.S. investigators probe allegations that Russia interfered with the presidential election…

A Prince spokesman in London said… in a prepared statement: “Erik had no role on the transition team. This is a complete fabrication. The meeting had nothing to do with President Trump.” The statement also questioned whether Prince’s activities were being monitored. “Why is the so-called under-resourced intelligence community messing around with surveillance of American citizens when they should be hunting terrorists?”

Yet over a two to three month period around the election, Prince met several times with top aides as the incoming government took shape, offering ideas on how to fight terror and restructure the country’s major intelligence agencies, according to information provided by five people familiar with the meetings. Among those he conferred with was Flynn, a member of the transition team who joined the administration and was later dismissed, some of the people said. He discussed possible government appointees with people in the private sector, one person said. Prince himself told several people that while he was not offering his advice in any official capacity, his role was significant.

The meetings occurred in Trump Tower, the administration’s transition office in Washington and elsewhere, according to people familiar with them. In one informal discussion in late November, Prince spoke openly with two members of Trump’s transition team on a train bound from New York to Washington. He boarded the same Acela as Kellyanne Conway and they sat together. Joining the conversation at one point was Kevin Harrington, a longtime associate of Trump adviser Peter Thiel who is now on the National Security Council. They discussed, in broad terms, major changes the incoming administration envisioned for the intelligence community, as recounted by a person on the train who overheard their conversation…

A longtime critic of government defense and security policies, Prince advocated a restructuring of security agencies as well as a thorough rethink of costly defense programs, even if it meant canceling existing major contracts in favor of smaller ones, said a person familiar with the matter…

Lemme see if I understand this: A guy who made billions running mercenaries for the highest bidder, scion of a family notorious for pushing ‘privatization’ of government functions to fatten private businesses, someone who’s currently camped out in Hong Kong supervising the PRC’s turf-building exercises in Africa because he’s leery about answering to American legal authorities… just happened to be providing advice because “Trump was weakest in the area where the stakes were highest — foreign affairs.”

After all, the American military is a mighty machine, and therefore one that can hardly have been privatized enough, so far.

You can’t take your eyes off these goniffs for a single minute.

Might go down to Georgia, I don’t know

Let’s make this an open thread for GA-6. Sounds like Ossoff’s a long shot to go over 50%, but let’s see what happens. I had good luck with the NYT coverage last time, so I’ll give a link here.

Social Notes Open Thread: What Do the Simple Folk Do?

The couple celebrated Passover at the Four Seasons Whistler in Canada, according to an article and exclusive photo in Jewish Insider

The Four Seasons Resort is hosting “Pesach on the Mountain,” a 10-day kosher ski vacation, billed as “an exclusive Pesach vacation that offers supreme accommodations” on its website. The 2017 accommodations were sold out. Passover tourism is common, as the holiday requires the observant to remove all leavened products from their homes, use separate dishes that only come out once a year, and deep clean their cooking equipment.

Trump and Kushner are not the first orthodox Jews to serve in an administration. But it’s unclear whether the couple’s travel is in line with previous administration officials, since the couple has a much higher profile. It’s unusual in the first 100 days of an administration, especially as many White House staffers and high-level officials have logged long hours and most weekends…

Here’s hoping ‘Empress Melania’ agreed to give up her weekend, or we’re due for some more headline-making tweets by tomorrow evening.

(The White House Easter Egg Roll isn’t until Monday, and it’s still not clear whether Melania will be there. Most schools take a vacation week, I’m told, so Barron’s schedule shouldn’t be an issue.)

We’re not in Kansas anymore

After last night’s strong performance in Kansas-4, there are a couple more special elections coming up. You all know about Jon Ossoff in GA-6. You can donate here.

Goal Thermometer

There’s another special election in May in MT (statewide, it’s a small state) and the Democratic candidate there, Rob Quist, sounds great. Let’s throw him some money too.

Goal Thermometer

Everything is dust in the wind

Cray, if true.

Trump won this district by 27 points.

Thanks to everybody who kicked in — we raised $2500 for Democrat James Thompson in this race. It’ll be exciting to see what happens tomorrow. There are no moral victories in politics, but a closish race tomorrow should scare the fuck out of Congressional Republicans and convince them to shelve at least parts of their destructive agenda.