Sunday, December 20, 2009

Government subsidy of catastrophic health care costs

Sure, maybe the proposed health insurance reform may finally be enacted early next year, but its not too soon to start thinking about how to address issues beyond the superficial issues addressed in this first phase of health insurance reform. The issue that seems most intractable to me is how to deal with the cost of catastrophic health crises. Private health insurance can easily cope with the full range of "normal" health contingences that most people run into during their daily lives, things like flu, broken bones, pregnancy, contagious disease, even heart attacks. Health insurance companies, just like life insurance companies, can gather and study detailed historical actuarial data and reasonably project potential expenses and set premiums to cover those projected expenses plus a moderate profit. The problem comes on three fronts: 1) catastrophic health crises, 2) severe chronic conditions, and 3) end of life care. The basic problem is that the costs of all three can be so high and so unpredictable that no mere mortal (let alone an insurance company) can forecast what the "reasonable" cost should be on average so that it can be fully funded from normal premiums without either a high risk of financial ruin for the insurance company or excessively high premiums for "normal" people - the latter being what most people are experiencing today. My solution is to put a reasonable upper-end cap on such expenses, with the federal government covering the excess costs, and insurance companies and insurees would pay a moderate premium amortized over all insurees of all insurance companies to cover a sizable portion of the excess costs, and to do it in a way that is predictable enough that insurance companies have no excuse for "fat" premiums simply to compensate them for the extra risk that were taking before. This also eliminates the motivation for insurance companies to refuse to insure high-risk individuals or those with pre-existing conditions, and to do it in a way that doesn't put upwards pressure on premiums or that encourages them to seek compensation elsewhere in the business in a way that has negative consequences for insurees.

In addition, the federal government might also contract out private reinsurance to cover a sizable fraction of excess catastrophic health care costs. Putting it simply, ask Warren Buffett what piece of that reinsurance business he would want (since that is a business he is already in) and use that as a guideline. The federal government and taxpayers would have to eat the rest. Congress and government health care agencies would be responsible for trying to keep such costs down, but at least insurees would no longer have to fight with the insurance companies over such costs.

End of life care can be extremely expensive, especially as people live longer and with more underlying chronic conditions, and as new medical technology and new treatments tend to add to costs by keeping people with chronic conditions alive even longer. There is no way to reasonably expect that private insurance companies can take on the totality of these costs without passing them along as dramatic increases in the health insurance premiums of  average and healthy individuals. Better to set an average end-of-life cost that insurance companies and health insurance premiums should cover, and then "lay off" the excess to the federal government, which would then amortize the cost over all taxpayers and then somehow proportion that amount between tax revenues and higher insurance premiums.

There is also the issue of "older" persons who are now within "striking distance" of end of life. There simply are not enough years left until the insurance company needs to expect that on average such persons will start incurring end of life expenses. We still want there to be a significant financial incentive for private insurance companies to offer insurance coverage to such individuals for all "normal" health expenses, but not have either the insuree or the insurance company take on some impossible financial burden. The insuree should continue to pay "normal" insurance (same as an early middle-aged person, say 40 years old), with the federal government and private reinsurance covering 100% of all excess health care costs, both end of live and the incremental increase of health care costs expected due to being past "prime" health stage of life. This should address outrageously high health insurance premiums for those over 50.

A similar model is needed for pre-existing conditions and for those who are "at risk". Maybe part of the overall premiums collected by a health insurance company need to be "mandated" to specifically target subsidy of those two categories so that their premiums can remain "normal" at no loss to the insurance company. This should be done based on real actuarial data, with government subsidy beyond "reasonable" expenses. So, for example, if the sum of all chronic condition treatment costs exceeds a mandated fraction of total premiums collected by that insurance company, the government begins to pick up the tab for the excess for new insurees so that there is no financial disincentive for the insurance company to turn down pre-existing conditions or those at risk.

-- Jack Krupansky

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