The rise of direct-to-consumer genetic testing has made it easier than ever before for people to find out their genotype. When coupled with affordable prices (around £150), it comes as no surprise that popularity has soared over recent years. Companies which are innovative have especially thrived. In the case of Pathway Genomics, advances in medicine have been merged with artificial intelligence to provide precise results. Another factor of this substantial growth is the increase in savvy consumers aiming to maximise utility from health insurance plans. However, we must question if it really is the consumers who benefit, or rather the insurance providers.
Insurers are currently unable to obtain genetic information about clients before giving health premiums. As a result, people who find out that they are susceptible to serious illnesses tend to have life insurance. The problem in the market is therefore caused by asymmetric information (a.k.a. information failure) - where one party knows more than the other in an economic transaction. In most cases the party with less information makes losses, however this isn’t the case in the insurance industry. Over the first 3 months of 2017 alone, five of the largest health insurers (Aetna, Anthem, Cigna, Humana and UnitedHealth Group) accumulated a net earning of $4.5 billion. Why? As I see it, there are two main reasons.
The first is irrational decision-making. People have a tendency to make impulsive decisions, in fact, it happens all the time. The amygdala (a part of the brain above the medial temporal lobe) is responsible for many of these and these instant decisions have played a key role in survival for centuries. However, in this case the amygdala’s influence has detrimental impacts. When someone finds out that they have an increased risk of getting a disease they think about the worst-case scenario – falling ill; and what would help? Having insurance. Once we have this initial thought from the amygdala, it’s hard for our more advanced decision-making system, the neocortex, to override our initial reaction. Therefore, although the proposed risk may be minimal (and the neocortex may tell us so), our instincts drive us towards purchasing a plan. But, in order to trigger the reaction of buying insurance, it must be one of the first things that the person believes will help. Companies utilise this basic human psychology, one prime example being via advertising.
Whilst reading The Power of Habit by Charles Duhigg, I came across how Pepsodent (a toothpaste brand) became a success even amongst failing competitors in a small industry. The advertising system was key. Designed by Hopkins, a simple cue-routine-reward system sold a product which changed America’s brushing habits for ever. The cue in this case was the film that covers your teeth (which they claimed ‘robs teeth of their whiteness’), the routine shown was brushing every day and the reward was pearly white teeth. The campaign utilised the cue of film, which everyone has, in order to promise the users a reward of white teeth, which everyone wants. Ultimately, Americans became compelled to brush their teeth every time they felt film on their teeth in order to achieve the desired results. I believe advertising departments in insurance firms also use a similar system. The cue is someone getting ill or talking about illness, the routine is to buy an insurance policy and the reward of financial security in case of an unfortunate event. It is this cue which likely triggered those ‘savvy’ consumers who obtained genetic test results to believe that their next step is getting insurance. Since decision-making is so heavily influenced by external factors, I believe that people overestimating the probability of events occurring due to persuasive advertising allows businesses to outsmart many consumers.
The second factor is the use of statistics in the industry. Before insurance companies give out premiums, they take a survey from the customer. It contains information such as lifestyle choices, age, weight etc. These lifestyle factors can sometimes have greater impacts on health than the genotype of a person. Therefore, insurance companies hire actuaries who use the data to calculate probable claim rates. The use of stochastic models enables the simulation of future events. These can show estimates of the number, time and size of claims. Although estimating the probability of a random event occurring may seem likely to be inaccurate, when hundreds of similar cases are compiled together in mortality and sickness tables, the results obtained are generally quite predictive of the value of claims. Therefore, insurance companies give out premiums which are affordable whilst providing enough money to maintain some small profits. However, the companies make most of their profits from investing the money from premiums e.g. into low risk securities. In a nutshell, even if consumers are trying to ‘cheat’ companies by getting genetic tests, the income stays relatively unaffected as other factors affect mortality rates and most of their profits are derived from investment using premiums.
Overall, I believe that the impact of those using genetic testing is limited at its current level. However, as a higher proportion of insurance policy buyers do this, the premium revenue decreases leading to less investment money for these companies which may ultimately lead to lower profits. As a result, the influence of genetic testing is still worrying for policy providers. In the future, insurance companies may be in trouble, but currently, they are one step ahead of the game.
Written by Harshith Chakka
Edited by Omkar Dixit