Solution: Health insurance through life insurance policies

The Obama administration’s health care bill still hasn’t passed Congress and may never do so. Even if it does, it probably won’t work as advertised. Like most government endeavors, it’ll likely cost more and cover less than planned. Ironically, it is in the government’s power to substantially improve health care outcomes in the United States by passing a relatively simple piece of legislation, then getting out of the way. If the government is serious about reform, it should allow national health insurance mutuals to form and to offer individual, prenatal, noncan, participating policies linked to a life insurance policy. That’s a mouthful, but easy to grasp when broken down into bite-sized bits:

• National: Most U.S. health insurance is state-bound. That is detrimental because it limits application of the law of large numbers (an important actuarial concept), makes it costly for health insurers to exploit economies of scale, and stifles innovation and competition.
• Mutual: Mutuals are for-profit corporations owned by their customers. They have a long, impressive, but unfortunately largely forgotten history in banking and life, fire, and, yes, health insurance. Profits accrue to policyholders, not stockholders (because there are none). Mutuals have a reputation for being stodgy, but research has shown that if competition is vigorous and the sales force has a say in governance, mutuals can be as dynamic as any stockholder-owned company.
• Individual: Employment-based insurance is a major cause of un-insurance and came about mostly due to historical accidents like the Great Depression and a World War II tax break designed to tamp down on wartime wage and price pressures. Employment-based group policies did reduce adverse selection, one of the banes of insurers, but at the cost of creating the pre-existing condition problem that haunts insurance-seekers to this day. Moreover, there is a better way to reduce adverse selection, to initiate coverage before the insured knows much about the specific risks she or he represents.
• Prenatal: Baby’s first present from Mommy and Daddy, besides life itself, should be health insurance. Before birth or any diagnostic tests, adverse selection is minimal because nobody knows if a given child is more or less likely to suffer from health problems than the average child, given the parents’ demographics, like the mother’s age. Most parents will jump at the opportunity to ensure their child will always have coverage at an actuarially fair rate.
• Noncan: This is just industry lingo for a policy that the insurer cannot cancel as long as premiums are paid. A properly run mutual would have little cause to cancel a policy anyway because it need not please Wall Street investors, just its sales force and other policyholders, neither of whom have much to gain from the uncertainty that canceled policies would create.
• Participating: Insurance premiums are based on assumptions about future claims, expenses, and investment returns. Participating policies allow policyholders to benefit from instances where actual experience is better than (lower claims and expenses and higher investment returns) the expectations built into premiums. Those benefits can take the form of so-called dividends (refunded premiums), higher benefits, or a combination thereof.
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