Commentary

‘Health Status Insurance’ Provides Real Alternative To Universal Care

None of us has health “insurance,” really. If you develop a long-term condition such as heart disease or cancer, and then lose your job, divorce or outgrow your parents’ plan, you can lose your coverage. You now have a pre-existing condition. Insurance will be enormously expensive if you can get it at all. This can happen to anyone, with devastating consequences.

Solving this problem is a central goal of every health care policy proposal, including President Obama’s campaign plan, a likely blueprint for the administration’s upcoming health care efforts.

That plan promised “stable premiums that will not depend on how healthy you are” and that Americans “will be able to move from job to job without changing or jeopardizing their health care coverage.”

Most proposals, including the Obama campaign plan, try to regulate this problem away. The government herds us into employer-based or other groups in which the healthy cross-subsidize the sick; it requires insurers to take all comers, and bans risk-based premiums as in the Obama plan’s proposed “exchange.”

Regulations reduce competition. That’s not an unintended consequence; reducing competition is in many ways their central point. Regulators feel that if insurers can compete freely, insurers will grab the healthiest customers, leaving no one to cover the expenses of people with long-term illnesses.

[R]igorous competition and free consumer choice are the only hope for better service, innovation and lower costs. ”

Even the modest competition we have now leaves people stuck who change jobs or take some time out of the labor force. We seem headed inexorably to one big group with no competition at all — national health insurance.

But rigorous competition and free consumer choice are the only hope for better service, innovation and lower costs. This is especially true in health care, which is a complex and fast-changing service-oriented business.

Government does a mediocre and costly job of basic simple services like garbage removal; government-provided health insurance is a certain recipe for expensive, inefficient and ossified health care.

Government is not the only option. Markets can provide long-term, secure health insurance while enhancing choice and competition. Given the chance, they will.

The key innovation is “health-status insurance.” If a health shock causes your medical-insurance premiums to rise, it pays a lump-sum payment sufficient to pay the higher medical-insurance premiums. (To deter fraud, the payment goes into a special account that can only be used for medical insurance premiums.)

You can always purchase medical insurance with no change in out-of-pocket costs, and therefore have complete long-term health security.

When people have health-status insurance, medical insurers can be turned loose to freely compete, even though they will charge higher premiums to those with long-term illnesses.

Insurers will compete for the sickest patients, attracting them with better care rather than “cost containing” them, or denying them coverage for pre-existing conditions. Insurers will compete hard for the healthy patients too, giving us all better service at lower cost.

With health-status insurance, consumers can have ultimate choice. You do not depend on the good graces of one insurer or group to take care of you if you get sick. You can take your lump-sum payment and change jobs, move or change medical insurers at any time.

This is not pie in the sky. The market for individual health insurance is already innovating to provide better long-term insurance. Well before it was required by law, insurance companies started offering “guaranteed renewable” policies.

Once you buy in, you have the right to continue coverage even if you get sick, and your premiums do not rise if you get sick.

UnitedHealth Group recently announced a product that gives customers the right to buy medical insurance in the future, at a premium that depends only on their current health status.

For a small premium, you can protect yourself against the risk that your health premiums will escalate. This is only a small step away from full health-status insurance.

To get there, we must first reverse the strong tax and policy preference for employer-based group insurance over individual insurance, rather than strengthen that preference as in current proposals.

You should not lose your health insurance when you change jobs, as you don’t lose car insurance, and you should be able to keep without penalty an individual long-term policy when you start a job.

It makes no sense that the government pushes this system on us rather than encourage us to buy individual insurance that already protects against long-term illness.

We must then allow insurers to fully risk-rate premiums, so that insurers will compete to serve the sick rather than avoid them, and otherwise remove the many roadblocks to competitive innovation in insurance.

We need not choose between competition and long-term health security.

Private, less-regulated and competitive insurance markets can deliver secure, long-term, portable health insurance — if only we let them.

Cochrane is the Myron S. Scholes Professor of Finance at the University of Chicago Booth School of Business, and the author of the recent Cato Institute research paper, “Health-Status Insurance: How Markets Can Provide Health Security.”