Longer term health insurance policies

Hanming Fang and others write,

Under long-term contracts, sick individuals pay relatively low premiums and compensate by paying relatively high premiums in healthy times of their life. In theory, a carefully designed long-term contract can reduce the risk of premium fluctuations due to health shocks (“reclassification risk”), while ensuring participation and eliminating adverse selection

This was the health insurance solution that I advocated in Crisis of Abundance in 2006. The authors look at an version that is used by about 10 percent of the insured population in Germany.

The main contribution of our paper is to provide a systematic welfare analysis of an existing, simple real-world alternative long-term contract with a distinct advantage of low information requirements for implementation. We show that, even though the GLTHI [German long-term health insurance] contracts are theoretically not optimal, they provide a close approximation in terms of welfare to the optimal GHHW contracts by providing better reclassification risk insurance at the cost of less intertemporal consumption smoothing

8 thoughts on “Longer term health insurance policies

  1. Compare John Cochrane, “Health-Status Insurance” (Cato 2009):
    https://www.cato.org/publications/policy-analysis/healthstatus-insurance-how-markets-can-provide-health-security

    “Health‐​status insurance covers the risk of premium reclassification, just as medical insurance covers the risk of medical expenses.”

    Cochrane’s 2009 policy brief is based on his 1995 JPE article, “Time-Consistent Health Insurance”:
    https://www.journals.uchicago.edu/doi/10.1086/261991

    Abstract:
    “Currently available health insurance contracts often fail to insure long-term illnesses: sick people can suffer large increases in premiums or denial of coverage. I describe insurance contracts that solve this problem. Their key feature is a severance payment. A person who is diagnosed with a long-term illness and whose premiums are increased receives a lump sum equal to the increased present value of premiums. This lump sum allows him or her to pay the higher premiums required by any insurer. People are not tied to a particular insurer or a group, and the improvement is free: insurance companies can operate at zero economic profits, and consumers can pay exactly the same premium they do with standard contracts.”

  2. When I was a regulator, every instance of long term health insurance I reviewed was a train wreck. Lots of anti-selection, inability to accurately forecast long run medical costs, horrendous loss ratios.

    • Exactly. LTC has been a disaster. I cant see this being any different. I will have to read up on the Germany example, however.

  3. The life insurance industry has offered level-premium lifetime contracts for many years, (i.e. whole life insurance), and it is a prosperous and stable policy form.

    However — the contracts are underwritten at issue, and the event to be insured (death) has a fixed price.

    With health insurance, the illnesses covered and the treatments to be paid for are expanding all the time. A lifetime health insurance contract offered in 1970 would never have anticipating paying for transplants, proton beam therapy, etc etc.

    • Indeed. I’ve even seen fixed price long term health insurance ($X/day) fail because its difficult to predict utilization (how often, how many days).

      The biggest issue though is anti-selection. In order to anti-select against life insurance the insured has too, you know, DIE. Not many people feel like they pulled one over on the insurance company when they are dead. There is enough underwriting these days to prevent people who are already terminally ill from getting policies.

      By contrast, consider a long term disability contract that I once reviewed. There was enough wiggle room on what “disabled” meant that tons of doctors that wanted to retire early bought the policies and suddenly became “disabled” and got paid a dollar fee per day disabled (what you could get paid was based on your salary, so high salary individuals that didn’t need their full income found this very appealing, hence doctors).

  4. “Under long-term contracts, sick individuals pay relatively low premiums and compensate by paying relatively high premiums in healthy times of their life.”
    —-
    Hmm. I would rather purchase the healthy for cheaper rates, are they for sale?

  5. It’s an interesting paper, and the German health insurance system is indeed hugely under-rated, but I don’t think pages 4-7 really convey the context of the overall market which I think is better summarized here:

    “Health insurance is mandatory for all citizens and permanent residents of Germany. It is provided by two systems, namely: 1) competing, not-for-profit, nongovernmental health insurance funds (“sickness funds”—there were 118 as of January 20161) in the statutory health insurance (SHI) system; and 2) substitutive private health insurance (PHI). States own most university hospitals, while municipalities play a role in public health activities and own about half of all hospital beds. However, the various levels of government have virtually no role in the direct financing or delivery of health care. To a large degree, regulation is delegated to self-governing associations within sickness funds and provider associations, which are together represented by the most important body, the Federal Joint Committee.

    Who is covered and how is insurance financed?
    Publicly financed health insurance: In 2014, total health expenditure was 11.2 percent of GDP, of which 74 percent was public, mainly SHI spending (58% of total). General tax-financed federal spending on “extraneous benefits” provided by SHI, such as coverage for children, amounted to about 4.5 percent of total expenditure in 2014.2 Sickness funds are financed by compulsory contributions levied as a percentage of gross wages up to a ceiling. Coverage is universal for all legal residents. All employed citizens (and other groups such as pensioners) earning less than EUR56,250 (USD71,564) per year as of 2016 are mandatorily covered by SHI, and their nonearning dependents are covered free of charge.3 Individuals whose gross wages exceed the threshold and the previously SHI-insured self-employed can remain in the publicly financed scheme on a voluntary basis (as 75% do) or purchase substitutive PHI, which also covers civil servants. About 86 percent of the population receive their primary coverage through SHI and 11 percent through substitutive PHI.”

    https://international.commonwealthfund.org/countries/germany/

    Amazingly politicized and very little room for cost-shifting.

  6. State capacity libertarianism = mask & scarves. Spray & prey among the god fearing tax paying subgroups of ‘state capacity libertarians’?

    Prey for warmer and humid weather in the summer. The enemy of all corona viruses. That may require a god to change the seasons?

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