I cannot remember wanting to cheer and applaud after reading a policy analysis. But this is how pleased I was with a new Cato Institute Policy Analysis by University of Chicago finance professor John H. Cochrane:
In short, health-status insurance addresses what worries people most about health insurance: What if I get sick and become uninsurable?
Health status insurance protects people against the risk that their insurance premiums will increase should their health status change. In addition to buying medical insurance each year, you could also buy health status insurance. Should your premiums increase the next year because you get sick, the health-status insurance will deposit money into an account that can only be used to buy insurance. The amount would make up the difference between what you were paying and the now increased premiums.
This is similar to the product by United Health Care called Continuity. But it’s different in that financial institutions could issue the health-status insurance, and consumers would be free to use the benefits to buy insurance from different medical insurance carriers. This is certainly a good feature, which is also absent from guaranteed-renewable insurance. With guaranteed renewable insurance, you’re pretty much stuck with your medical insurance provider once you get sick. Not so with health-status insurance.
For health-status insurance to take hold, Cochrane points out that government should:
end the tax and regulatory preference for employer-provided group insurance over portable individual insurance, not strengthen that pressure. We need to allow medical insurers to compete—to charge more for people with long-term expensive conditions and less for healthy people—not prohibit them from doing so. We need to allow health-status insurance to emerge so that people can be insured against higher costs.
Cochrane explains why insurers deny coverage:
the main reason insurance companies refuse coverage, deny coverage for preexisting conditions, or more subtly avoid or mistreat people with long-term expensive conditions, is that they cannot charge those people enough to cover their costs. If medical insurers can charge enough, they will compete for the business of every customer, even the sickest. Freely risk-rated, competitive medical insurance gives everyone access, albeit at a cost. It leaves people vulnerable to the financial risk of large premium increases, but health-status insurance would fill that gap.
Cochrane also addresses how health-status insurance would benefit those who are already sick and those born with expensive medical conditions:
Health-status insurance accounts offer a good way to help people who are already sick. The government could simply deposit money in an individual’s health-status insurance account and then get out of the way. Private charities could help people in the same way. This is much more straightforward, flexible, and less distortionary of markets than directly running a government-sponsored health insurance plan, or forcing private insurers to take such patients and treat them well. …
Parents could buy family insurance that provides health-status insurance accounts for their children. Then, children who develop rare long-term diseases would be covered for life without government intervention. Health-status insurance could even apply to unborn children, and thus insure against genetic defects from birth.
Conchrane ends on an inspiring note for those concerned with individual freedom, free-markets, and quality health care:
we have not so far had a vision of how a completely free market could provide long-term and fully portable health insurance. Without that vision, one could have a nagging sense that there is some hiddenmarket failure.
At a minimum, the possibility of health-status insurance gives us that vision, reassuring us that there are no such failures, and that these are needless regulations. Free-market economists no longer need to hem and haw, saying, “Well you have a point there, but do we have to make the regulation quite so intrusive?” We can instead say with confidence, “We can have long-term insurance with a less-regulated health insurance market, and here’s how.”
I’ve been studying health care policy for two years. OK, that’s not very long compared to economists and full-time policy wonks. But it’s quite refreshing and exciting to see a free-market solution (or at least partial solution) to the pre-existing condition issue. Thank you John for bring this idea from your earlier and more technical paper to a broader audience.