Saturday, April 29, 2017

Term Life Plus Health Insurance Package: An Insurance Product That Should Exist

Here is my idea for an insurance product that needs to exist, but is precluded by a bad regulatory regime.

Suppose you have a combined term health and life insurance package (possibly with disability coverage thrown in the mix). The term is in decades, say 20 or 30 years, and very hard for either party to cancel. Your insurer gets locked into a certain rate based on your current health status, but also the insurance customer can’t simply jump ship every time s/he finds a cheaper rate. This way, your insurer knows that they are on the hook for your health expenses for the long term. You aren’t going to leave in a few years when you switch jobs, or move to another state, or simply decide to switch carriers because you can save a few percentage points on premiums. If a 30-year hard-to-cancel contract sounds stiflingly authoritarian to you, just realize that the 30-year mortgage and 30-year term-life policies are pretty common (though the latter can be canceled by the insured pretty much at will). As I explain here and here, such policies are perfectly feasible and fundamentally affordable. The “life” portion of the plan covers your family in the event of your untimely death, and the “health” portion covers catastrophic medical expenses. But given this setup, your insurer may voluntarily pay for things other than what it is minimally contractually obliged to pay for, which I’ll explain in a minute.

This setup gets all the incentives right. Your insurer won’t be skimping on medical expenses unless they have a good reason. If a routine blood screening or annual well-checkup or referral to a specialist represents a net savings in health costs, the insurer will pay for it. From the insurer’s perspective, they hold a portfolio of future assets and liabilities. If more people stay alive and healthy, they will keep paying their premiums. If more people get sick or die, then the insurer will lose more of the future premium payments and incur larger future costs (payouts for medical expenses and death benefits). Insurers will be looking very closely at what kinds of preventive care and treatments are effective. Any preventative care with a positive expected return (representing a net savings) will likely be approved. They are still on the hook for the catastrophic expenses if something goes horribly wrong, mind you. They can’t simply deny your claim for cancer treatment just because it represents a negative investment return for them; they are contractually obligated to pay for these kinds of catastrophic expenses. But they will supplement these contractually-mandatory claims with low-cost preventative treatments that, while they aren’t obligated to pay for, it’s in their best interest to provide.

You can think of there being three “tiers” of preventative treatment. There is (1) preventative care that pays for itself by preventing future medical expenses. This kind of care is like an “investment good.” Even if you don’t particularly care about how healthy you will be in 20 years, you’ll shell out because the return on investment is good. Then there is (2) preventive care that has a positive effect on your future health, but doesn’t pay for itself. (It's a consumption good, but not quite an investment good.) So it’s lower value than (1) but still maybe worth buying. Your insurer (under my scheme) won’t necessarily shell out for these treatments, but they may send you a list of things you should be doing to maintain a healthy lifestyle. They’d prefer you to go out and buy (2) on your own, but it’s not worth actually footing the bill for you. Then there is (3) preventive care that has negligible health benefits, even negative health consequences. I’ve heard the PSA test for prostate cancer listed as an example of (3). Supposedly the test provides many false positives for each true positive. But it’s hard to separate “false” from “true”, so a lot of these guys get unnecessary treatments that lead to incontinence or impotence. Many die from complications of their surgery. And this is to treat a cancer that people can live with for a very long time without it causing any problems.  I’m not an expert on this, so I won’t hang my entire case on the PSA example. But suffice it to say you could come up with an example of “preventive care” that’s useless. Imagine monthly cancer screenings for a healthy 20-year-old. Or daily for that matter. There is a line somewhere that separates worthwhile preventive care from worthless. Your insurer will be trying to figure out, at a population level, what goes into categories (1), (2), and (3). They will strongly encourage (1), weakly nudge you toward (2), and ignore or perhaps even try to talk you out of (3). It's often implied that insurers simply want to deny every claim to save money, but clearly that won't be the case if some of those claims lead to lower future costs. With this setup, insurers will approve claims because it's in their own interest to do so.

I think there is great potential if this ever gets going. You will have insurers with massive 20+ million customer portfolios and tons of data on medical procedures and subsequent health outcomes. They will be employing state-of-the-art data-mining to separate good medicine from bad. They will employ econometricians to tease out causal inference, and separate the truly causal from the merely correlational relationships between treatment and outcomes. We will learn things about medicine that we don’t currently know. Pharmaceutical firms will have an incentive not just to pass the FDA’s bar for clinical trials, but to prove to insurers that their drugs have a real health benefit. We’ll see a new age of medical experimentation with tons of data. There will still be academic studies and clinical trials, but conceivably health/life insurers will have better datasets on larger samples. They’ll produce studies that aren’t quite as “controlled” as clinical trials, but may be more valuable nonetheless because of sheer data volume.

Unfortunately, this kind of product is illegal. Health “insurance” is required by law to cover a lot of low-value, low-expense, routine medicine that the patient should really be paying for out of their own pockets. An even bigger problem is that health insurance isn’t appropriately structured. People drag around their “pre-existing conditions” with them. The way it should work is that when you get hit with a big bad diagnosis, you get a big payout that’s calculated to cover the cost of that diagnosis (future cancer treatments, diabetes medicine, etc.). Even if health insurance doesn’t go to 30-year policy terms but renews year-to-year like auto insurance, the policy that was active the year of your diagnosis should cover all related expenses, just as your auto bodily injury coverage covers an accident that occurred the year you were covered (regardless of when a future surgery occurs or when the medical bills come due). We need to allow insurers to exclude pre-existing conditions, or otherwise charge the right premium for them or underwrite against them. This should be fine. It would not, as so many people assume, leave a bunch of really sick people without coverage; if health insurance simply paid out the way other forms of real insurance do, these people will be covered. (I explain this point in more detail in my two links above, repeated here.)

I hear clueless pundits all the time, rambling on about how we need to protect people with pre-existing conditions from ravenous insurers who will price-gouge them or exclude them entirely. I want to shake these people by the lapels and say, “It’s your fault we’re stuck in this situation, you fool!” These are invariably the same people who support health insurance as a mandatory employee benefit, support the tax exemption for employers who purchase such insurance, support tons of mandates for health insurance to cover everything, politicize and even gender-bait the coverage of certain gender-specific provisions, and insist loudly that we can’t allow premium increases or coverage exclusions for pre-existing conditions. It’s a bad combination of these items that has led to very high insurance premiums, a stifled private market, and the transferring of liabilities from insurer to insurer. 

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