The first lifelong health insurance post is here. I recommend you read it before continuing.
In my first post on lifelong health insurance (LHI) I didn't offer many details. LHI is not a fully worked-out idea, but I'd like it to be, even if ultimately it must be rejected. If the idea interests you I hope you'll contribute some comments. Here is the basic concept:
First and foremost, single pool instead of single payer. A single nationwide pool means that we don't have separate insurance markets for large employers and individuals. We don't have "community rating." Insurers design coverage and states cannot add mandates. States and consumer watchdog groups can of course review and rate offers. Insurers can only base pricing on a single piece of information, which I'll call age at first premium. Buying in to LHI at age 50 should cost more than at age 20.
There are no uninsurables. If there is a single pool with no exclusions then the pre-existing condition is not a meaningful concept. If you offer LHI you must have an offer price for all comers of any age. This price would factor in the likelihood that the buyer is purchasing only after learning of an expensive health condition. The only grounds for recission would be lying about your age. This nearly gets us guaranteed access, but obviously for people starting out over a certain age an LHI policy would be cost-prohibitive. This might not be such a bad thing. If the pricing can work out right it could incentivize more young and healthy people—the ones who opt out of conventional health insurance today—to buy LHI early.
LHI is high-deductible. How high? The upper bound might be a level sustainable by the median wage-earner without forcing them from the middle class. Diminishing returns come into play; the premiums for a deductible of $10,000 probably won't differ much from those for a deductible of $5,000. The lower bound, I think, should be a value which a majority of the pool does not exceed in a given year. 2006 values from the Census suggest $2,500. I don't believe the feasibility of LHI is sensitive to deductible. Employers that traditionally provide first-dollar health benefits could self-insure for the deductibles or make HSA contributions.
How much insurance do we need? Alemayehu and Warner (2004) determined per capita lifetime expenditure at birth is approximately $320,000, and that includes nursing home expenses. (I will leave that component in for now, since I think it's a great thing to insure or save for. An apples-to-apples comparison to other health insurance plans would have to remove it.) 80 percent of lifetime expenditure is experienced after age 40, and half of it is spent after age 65. This gives you some idea of the distribution and how beneficial it can be to start saving/insuring young.
In a very rough calculation, let's assume a typical lifetime scenario involves negligible claims before age 50 (nearly all years' expenses do not exceed the deductible). From 50 on expenses exceed $2,500 every year and LHI claims average $7,500. Our typical lifespan is 80 years. These are conservative numbers. The present value at age 50 of those claims is $115,000, assuming a 5% yield. The present value at birth is $10,000 and at age 21 it's $28,000.
Let's have our typical individual purchase an LHI plan at age 21 and finance it over a 40 year career at 8%. This is $200 a month in level payments. Remember that this covers all expected claims including nursing home care. Obviously there are ways to make payments even lower for say, ages 21 to 25, in recognition of low entry level salaries. Note that the insurer enjoys a 3% spread. Also note that this is lifetime expenditure. This individual will not need Medicare.
There are some problems of course. A period of high inflation or fiscal mismanagement could be devastating. Factoring in normal inflation turns an optimistic $200 a month into a severe $400 a month. (Still a good deal if you include long-term care.) Another problem is consumer dissatisfaction. If 20 years in you have a dispute with your insurer, can you walk? Can another firm buy out your contract? This is essential. Lifetime medical expenses are not normally distributed. The likelihood of a $1,000,000 bill is greater than that of a $0 bill. I don't know how fat the tail is. Moral hazard and fraud are reduced by high deductibles but not eliminated, especially within hospitals and nursing homes. Expensive tort insurance is still a factor.
Despite these problems I think this is an encouraging start. The LHI concept is worthy of further exploration.
Few points:
ReplyDeleteYou can help alot with the buy-in-when-diagnosed problem by doing a 6 month exclusion period on policy inception, or else a maximum payout (±$10,000) in the first year.
For transferability, what I would do is a pro-rated escrow system for premiums paid, which would be transferable to a new insurance company if I want to change my coverage. So say I buy a policy at age 22 at $200/month ($2400/yr). By age 32 I am fed up with the terrible service from my insurer and want to switch. Policy for a 32 year old would be $300/month new. But I have paid $24,000 to my current company. I should be able to transfer some portion of that (for example, $24,000+interest - all claims paid - 3%/) to another company in exchange for them honouring the original premium rate. This would be similar to how we treat whole life insurance, as an asset.
The pension-like issues that come up can be taken care of with reinsurance I think, and taken care of in a better fashion than most pensions, since the reinsurer will have an incentive to make sure it's taken care of properly.
For a ground-up system, this would work really well I think, the problem though is implementation (which I'll put in another comment; this one is getting too long.)
Comment #2: Implementation
ReplyDeleteThe problem with this is the same problem with buying a $300,000 whole life policy at age 50. You can buy it in theory, but you can't afford it. Let's use $200/month at age 20 as our starting point, and assume premiums rise 5%/year (medical inflation is a big problem here).
By age 30 you have $325/month, 40: $530/month, 50 $864, 60: $1407/month, 70: $2293/month.
It is important to note that this doesn't include medicare, and would rather be covering all healthcare expenditures for people's entire lives. Let's say we abandon medicare and use the medicare tax to pay for subsidies, so we get about 3.5% of GDP to subsidize this system. You would probably need a 10 year phase in to get people switched over from current plans to the new plan, and I'm not sure what the best logistics for it would be.
Being the irrational creatures that we are, one of the problems with high-deductible insurance is that it does not provide good incentives for preventive care.
ReplyDeleteWhen seeing the doctor is low deductible, I tend to go more often for smaller-issue visits.
I'm healthy and free of childhood and other maladies. Why would I want to be in a pool with people that cost more than me to insure?
ReplyDeleteTo anonymous ^ for the same reason you're in an auto insurance pool with drivers who've had more accidents than you. You are paying for the security that if sometime in the future you should become seriously ill they'll be money in the pool to pay for your care.
ReplyDeletePeter, thanks for your comments. I agree that there is a certain age past which LHI becomes an unattractive option. But maybe that's a feature, not a bug. It incentivizes the young to buy in early.
ReplyDeleteAnonymous 9:03 PM, I don't know about every high deductible plan, but the one I am a member of has annual physicals not subject to the deductible. It is in the interest of insurers to promote effective preventive care, which may entail in less frequent visits to the doctor than you might think.
Anonymous 11:56 PM, All I can say is, although you are healthy right now, you cannot know if you will need expensive medical intervention later in life. Maybe you don't "want" to be in a pool with less fortunate citizens than yourself. Don't buy an LHI policy then. Take your chances each year that you'll remain in the low-cost pool. I've tried to show here that single pool, which would solve a lot of our national problems of access to conventional health insurance, can be affordable. With LHI the risk is spread over the maximum number of payers, and the cost is spread over your lifetime.
I linked to this thru Marginal Revolution. Thank you for this post. I think it is in the direction we all should have gone in over the past two years, although I come at it by thinking we should have a single pool for catastrophic situations (catastrophic to health or finances) that are not caused by lifestyle choices, and have a private market that is wide open and optional for everything else. But all these ideas are politically impossible because the AARP would oppose them and politicians would never take on the AARP crowd.
ReplyDelete