Solution: Health insurance through life insurance policies

Robert Wright Contributor
Font Size:

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.
  • Linked to Life Insurance: The cold truth is that your health insurer and your annuity provider (in both cases the government for many older Americans) would like nothing better than to see you drop dead, preferably well before EMTs arrive. (A gut level understanding of this perverse incentive helps to explain the otherwise bizarre “death panel” outburst.) Your life insurer, by contrast, would like to see you and its other insureds top the century mark. Why not create policies that link health and life insurance, so your health insurer is at least ambivalent about your continued existence? In other words, I would like to see policies where the insurer stands to lose a sizeable sum if it refuses coverage.

If they tied life insurance benefits to the level of lifetime health insurance claims, such policies would also force Americans to make end-of-life decisions they currently rarely face: is it worth losing a substantial portion of one’s estate to prolong life another week? Month? Year? The tie-in would also keep healthy individuals from dropping coverage by rewarding their good health with a bigger life insurance payout, a twist on the old tontine idea.

Of course some tricky regulatory and actuarial issues would need to be worked out but the mutual form and participating nature of the policies entail a good deal of self-regulation. Moreover, we know enough from regulating mutual life insurers for well over a century to formulate decent regulations from the start.

Such policies would also become important savings vehicles. From the Civil War until World War II, life insurers played a major, positive role in the development of U.S. industry by linking the savings of many small investors to the financing needs of corporate innovators and entrepreneurs. Americans’ savings rate has since dwindled, virtually to nil. National mutual health insurers would reprise that important intermediary role as Americans begin to save for their futures once again, through the Health Through Life policies advocated here.

Robert E. Wright is the author of the forthcoming “Fubarnomics” (Prometheus) and the Nef Family Chair of Political Economy at Augustana College in Sioux Falls, S.D.