Buy Health Update
29 years ago, as a first year grad student, I published one of my best ideas:
“Buy Health, Not Health Care.” Cato Journal 14(1):135-141, Summer 1994.
To cure health care, give your care-givers a clear incentive to keep you well. Make sure that when you lose, they lose, and just as much. Buy lots of life and disability insurance from your care-givers, and have a third party, unable to act against your life or health, pay you to be the beneficiary.
Alas, that paper has so far received only four citations (one by me).
My starting idea, of merging health and life insurance, was also discussed in the 2003 book Why Not? by Barry Nalebuff and Ian Ayres (p.69-70). And I’ve just learned that three years ago a top econ journal published “Combining Life and Health Insurance” by Ralph Koijen amd Stijn Van Nieuwerburgh:
We estimate the benefit of life-extending medical treatments to life insurance companies. … We estimate that the life insurance sector’s aggregate benefit from FDA-approved immunotherapies is $9.8 billion a year. … We discuss potential barriers to integration and the long-run implications for the industrial organization of life and health insurance markets.
They report that in 2016 over half the US population had life insurance, with a mean death benefit ranging $101K to $278K across twelve age-gender groupings. And they identify some medical treatments that are often not done, but where the cost of saving a life via those treatments is plausibly less than these amounts, making it in the interest of a life insurer to pay for them.
The straightforward way to induce such payments would be get people to buy their health and life insurance from the same firm. These authors asked 23 senior executives in the health and life insurance industries why this hasn’t been done. They found:
70% say: “combination products cut across lines of business that have not been integrated historically”
61%: “regulatory frictions to obtaining approval for such combination insurance products”
52%: “If life insurance combines aspects of health insurance, it may limit the ability to account for preexisting condition during the underwriting process.”
43%: “challenging to explain new consumer products to consumers”
30%: “legal and reputation risk related to the confines of what therapies the insurance would and would not cover.”
Issues 1,4 are generic obstacles to any new product, while issues 2,3,5 are mainly due to regulation, with issue 3 created by Obamacare (ACA), which didn’t exist back in 1994 or 2003. So it seems that regulation blocks this innovation, and has gotten worse over time.
As a typical value of life is roughly $2-10M, a great many treatments must be cost-effective and yet not worth the effort for a life insurance firm only on the hook to pay a $101K to $278K benefit. Also, a life insurance firm would not want to pay for treatments that only reduce pain or disability, not mortality. My 1994 paper focused in dealing with those issues, but alas my proposed solutions would face even larger regulatory obstacles.
(Btw, this paper didn’t cite mine, nor the Why Not? book, which also didn’t cite my paper.)
Added: Here are offers for life/health insurance combos. Oddly they don’t mention the incentive benefit! Alas probably because they aren’t achieving that benefit.
I also mentioned a variation of this idea in my Cut Medicine In Half discussion.
If the real problem with implementing something like this in healthcare is regulatory barriers, then how about trying it for car care? Car care is a lot simpler than healthcare, but similar in that you are maintaining a complex system where the customer doesn't know exactly what's necessary. Let a company offer "car life insurance" policies that pay out when the car is a write-off (or something like that). Then the insurance company can pay for regular maintenance and repairs, provided that it postpones the policy payout by enough. The insurance company can determine which mechanics are cheapest and most reliable, and pay the customer for their time to take the car there.
Of course, I can think of some problems with this, such as insurance fraud. Also how do you know how much car life insurance to get? We might see similar problems if we tried it with health care.
This has long been my favorite of your policy proposals. In fact I'd much rather use something like this as an ingredient in a government system than idea futures.
Thus the cynic in me isn't surprised it's gotten so little traction.