As previously discussed, households and firms exercise incremental risk management decisions on a cost-benefit basis regarding the implementation of increased levels of risk management. Conversely, institutions such as government agencies, public interest private organizations, and public interest movements exercise categorical risk management with decisions based on a zero cost basis with the incentive being purely benefit based. (1)A short review:
(a) Categorical risk management appears when the "cost" component of the cost-benefit approach to risk management is born by an exogenous entity. That is, when the institution making risk management decisions has no cost basis they opt for categorical risk management. The implicit assumption to categorical risk management is that no risk can be taken. Items and situations must be absolutely safe. (2)
(b)What institutions have no cost basis, exercise categorical risk management, and make the assumption that absolute safety must exist? Government agencies, public interest private organizations, and public interest movements have no cost basis and exercise categorical risk management. The cost basis used by these organizations is taxes, donations and in some cases law suit proceeds (using other people's money).
(c) How does this difference in incremental risk management and categorical risk management relate to ObamaCare? Beyond ObamaCare being a price fixing scheme, the health-care reform legislation comes from and sponsored by the same group of institutions that have the mind-set of categorical risk management. The mandated coverages, deductibles, co-insurance requirements, the requirement everyone must buy coverage or else be fined, etc. comes from the exact same organizations that perceive absolute safety at any cost. In other words, the absolute coverage mandates, the exercise of categorical risk management, the deletion of incremental risk management, is due to the years and years of making risk management decision with other people's money.
(d) Hence one of the drivers of the future increased cost of health-care via ObamaCare, which is becoming increasing evident, is in fact due to the framers of such legislation exercising categorical risk management based on their prior experience of of using other people's money, leading to incentives to produce purely benefit based items with disregard to cost-benefit incremental risk management.
One of the best examples of categorical risk management appeared last week that might help the reader better understand categorical risk management and how the framers of ObamaCare used categorical risk management that will drive up health-care costs in the short, medium, and long run.
USA Today published an article 09/01/2010 entitled Kid-in-car warning systems urged.
"Safety advocates are urging Congress and regulators to force carmakers to install warning systems that would prevent distracted parents from leaving children in cars, preventing heatstroke deaths."
"At least 41 children have died already this year in hot cars, more than any previous year at this point. August was the deadliest month on record, according to the advocacy group Kids and Cars." (3)
A child's death is tragic beyond belief. However, these children died due to "distracted parents"?
What exactly is the trend and scope of this particular risk of "distracted parents"? Five (5) children died in 1990 of unattended vehicle heatstroke deaths and forty one (41) have died of unattended vehicle heatstroke death in 2010. (4)
The article goes onto report "From 1998 through 2009, 51% of the deaths involved children forgotten in cars, 30% were children playing in unattended vehicles and 18% were intentionally left in cars, says Null". (5) Forgotten children, children playing unattended, and children intentionally left in cars are not exactly the components of the concept of "distracted parents".
As you can see, the categorical risk management being advocated is the concept that complete and absolute safety must occur. Who would be advocating such categorical risk management? The National Highway Traffic Safety Administration (government), Kids and Cars President Janette Fennell, and Consumer Federation of America and Advocates for Highway and Auto Safety. You guessed it, entities that have zero cost basis and advocate total safety (benefit) regardless of cost. That is, when you have no cost basis in risk management (using other people's money) your incentive to produce the product of risk management is no longer cost-benefit based. The incentive becomes purely benefit based. That is, the public must be made safe at any cost. Even safe from "distracted parents" leaving children in unattended vehicles.
What would such a system cost to produce this "absolute safety"? Is the system available? No cost estimate was forth coming and as far as the system: "Automakers say it's not as easy as it sounds. Using sensors to detect heat, heartbeats and/or the weight of children can be an inexact science, as is deciding when to sound alarms". (6)
Hence we have an unknown cost to produce a non-reliable system. The cost is not a consideration in the least and absolute safety is not achieved. Categorical risk management at it best!
Enter incremental risk management. The cost of "Safety advocates are urging Congress and regulators to force carmakers to install warning systems..." would be a cost added to each vehicle manufactured. Who will oversee such systems and at what additional cost? Do all vehicles have children within them all the time? What about single people that rarely if ever have children in the vehicle? What about commercial vehicles that rarely have children within the vehicle? What about the vast majority of parents that are not "distracted" when it comes to leaving children in a vehicle? Should the overwhelming amount of situations, that yield no heatstroke death, incur an added cost that makes the marginal situations absolutely safe from "distracted parents"? Is the real risk associated with a very, very marginal amount of "distracted parents"? Is the risk based in responsibility, planning, and common sense? Should the responsible, common sense minded, non-distracted parent be able to opt-out? Or is the best course of action to rely on those spending other people's money, that suffer no cost, and advocate only the benefit of absolute safety?
The reason categorical risk management is a necessary study within the field of risk management is: how it costs you, the household or firm, added expense in the quest of absolutes. Now think about ObamaCare. The same categorical risk management process was used by the proponents/framers of ObamaCare. That is, absolute coverage for all with an absolute fine for non-purchasers. An absolute coverage design exists that produces the one size fits all approach of low deductibles, low co-pays, and expanded scope of coverage. Absolute government intervention within a private sector based on absolute price controls that end in quantitative and qualitative reductions in supply. The absolute addition of participants to Medicaid roles. A plan to create absolutes regardless of cost.
One fine point about categorical risk management and its absolutes is that someone or some organization must oversee the absolutes. One must not forget that the concept of "regardless of cost" comes with oversight. Oversight, especially government oversight, costs even more money. Oversight by government is produced through highly paid bureaucrats in a highly rigid manner (central planning). Don't forget the flow chart pictured below that depicts the organizational aspects of ObamaCare delivered through oversight of categorical risk management thinking regarding absolutes.
Hence ObamaCare is merely unknown costs to produce a non-reliable system (rationing due to qualitative and quantitative reduction in supply) managed through central planning through categorical risk management. Brilliant!
(1)http://thelastembassy.blogspot.com/2010/08/obamacare-error-of-categorical-risk.html
(2)Applied Economics, Thomas Sowell, pages 144 - 145
(3) (4) (5) (6)http://www.usatoday.com/MONEY/usaedition/2010-09-01-hotcars01_ST_U.htm
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