A health insurance approach based on responsible individual freedom

As I said in my last posting, for me to offer a health insurance proposal is rather like a weatherman offering to design a jet fighter: though he's familiar with its operating conditions, odds are that his ideas won't fly. That said, I suppose I have at least as much expertise on the subject as, say, leftist politicos like Barack Obama, an observation that emboldens me to share the thought experiment that follows.

I strongly believe that it's often a good idea to start a discussion by clarifying in simple terms exactly what it is we're talking about. Health care becomes an issue of public policy concern mainly with regard to the approach we take to paying for health services. If everyone had as much money as Bill Gates or Donald Trump, I doubt there would be much fodder for political discussion. Still, since money is so much of the issue, it might not hurt to think about how we'd handle things if we did have their resources. We'd have the freedom to do what we thought would most effectively and rationally maximize our health and longevity.

So assume for a moment that you are a person of relatively unlimited resources that you can allocate in any way you choose. Let's also assume that, being a person of good sense and will, you want to take care of your own needs and reasonable desires, while maximizing the surplus that remains to be devoted to some good that you want to achieve. Having a sane regard for you personal comfort and safety, you want to take care of your health. What would be your most reasonable course of action?

Let's say that you are start out in a state of good health. So your first concern is to maintain it. You would budget a certain amount of money for this purpose. It might include an allocation for a fitness regimen; for developing and maintaining a healthy diet; and for regular consultations with health professionals (fitness coach, diet specialist, personal physician) who use appropriate measures to check your overall state of health. Let's call this the health maintenance allocation. Your budget might also include money that you may need in order to deal with emergencies (in the broadest sense) including accidents and occasional bouts of illness. Ideally this allocation would be reserved in the form of some productive investment, so that the money involved, though readily available, would be fruitful and multiply as time passed.

In addition to this basic budget, you might designate an additional amount meant to accrue value over the longer term. This would ideally provide the wherewithal to handle the anticipated inevitable effects of aging, as well as longer term care that might be for chronic, incapacitating illness or during the period of acute decline prior to natural death.

Given your relatively unlimited resources, more extreme and hard to anticipated emergencies would have to be handled by extra budgetary allocations, taken out of the surplus that would normally be devoted to such other good as you are trying to achieve.

Now, most people don't have relatively unlimited resources. Some might be in a position to maintain a reasonable budget for ordinary health related expenses, but many would have trouble dealing with foreseeable health emergencies, much less the more extreme exigencies. Any extra budgetary allocations would probably have to be financed by borrowing. But people with relatively little surplus income beyond what's needed to maintain their everyday life are limited in their ability to service debt, especially in the large amounts that might suddenly be needed to meet a health emergency. At any given moment, however, the risk that any given individual will face such an emergency is relatively small. Spread that risk over a sufficient number of people, and the burden of meeting it in any given case can be met by a fund replenished through small, regular contributions that each of them can afford. Thus the basic concept of emergency health insurance emerges. It's intended to allow people who must live on a wage or other regular but limited income to provide for needed health services that they could otherwise not afford.

Though we call it insurance because of the fund's purpose, we should keep in mind that it is actually much like a special purpose savings bank. Like any such bank, some of its income is properly generated from prudent investment of part of its available resources. Thus its gross income for any given period consists of the total amount of the regular individual contributions plus interest or dividends derived from investment. The total value of the fund at any given time includes, in addition to operational balances, the total value of the invested capital. For any given period, the bank may generate a surplus that consists of the total income for that period minus the sum of its operating costs and any outlays for health emergencies during that period.

Looked at in this way, we immediately notice one difference between the operation of the insurance savings scheme and other kinds of savings banks. At other banks, those who provide the funds the bank uses for lending and other investments receive some interest on their deposits. If they leave them untouched, the value of these deposits increases over time. Depositors therefore have a certain incentive to leave them untouched, in order to maximize their growth. In effect, the bank's profits, in any given period, are divided between the owners of the bank and its depositors, who own the accounts that constitute the bulk of the bank's liquid assets.

The contributors to the insurance fund do not 'own' or derive income from the total amount accounted for by their contributions during any given period. Their premiums pay for the right to borrow from the fund to meet any health emergencies that occur during the period.

In comparison with a savings bank, however, the insuring bank has less control over the amount the bank may be called upon to lend during any given period; they also can't control the relationship between the amount they lend to any given individual and the total amount of the regular contributions they receive from that individual after the emergency has been handled. They can't be sure the loan will be fully repaid (much less any interest that would otherwise accrue.) To compensate for this, they must have a stream of new income from a) new contributors signing on to the fund; b) the bank's investments; c) sale of stock in the company. They must also find ways to manage the overall risk distributed among their contributors so that the fund continues to grow enough to prevent shortfalls on account of any individuals from gradually reducing the fund below the level needed to fulfill its obligation to pay (at any given time) for the needed health services of its contributors.

Assuming however that all this is done competently, (and that unexpectedly adverse conditions do not consume its income producing assets) the insurance savings (or fund management) scheme (what we, somewhat misleadingly, call the insurance provider) could generate a profit over time. As things stand that profit goes entirely to the owners and/or stockholders of the bank. After all, they provide the critically important initial and ongoing capitalization needed to launch and sustain the insurance scheme. But without garnering sufficient contributors to form an adequate risk pool, would the scheme work for very long? Probably not; it would become a rather expensive and short lived form of charitable giving. The money derived from individual contributions, as well as the health and behavior of the individual contributors, form an essential part of its real and ongoing capitalization.

Given this fact, as well as our overall goal of respecting individual liberty (choice and responsibility) in dealing with health matters, does it make sense to leave the whole incentive for managing risk to the banking institution? For better or worse, the individual's behavior contributes to the success or failure of the risk management task. Under present arrangements, some efforts are made to enlist individual cooperation by offering lower contribution requirements (premiums) in exchange for certain behavior modifications. But the accrued value of this incentive is hidden, so that it is psychologically consumed almost at once, and rapidly decreases even further over time. Wouldn't it be more effective (since an ongoing commitment is needed) to offer incentives in a form that persists and grows in perception over time, so that as individuals maintain a state of health that keeps down their withdrawals from the general fund, they see an appreciable increase in the value of the incentive?

Without such an appreciably increasing incentive, as healthy people contribute to the general insurance fund, the perceived value they derive from it decreases in direct proportion to their success in staying healthy. In effect, their good health over any given period subsidizes the outlays made for those who have less successful health maintenance records during that period. The longer their good health lasts, the greater the total amount of this subsidy. In terms of value for money, there is actually an incentive after a certain time, to become more casual about resorting to health services, less prone to reflect much on the real necessity for doing so.

Given this perverse incentive structure, why do we marvel at the present insurance system's tendency to generate higher outlays? How can we alter this incentive structure to reward people who maintain their health, so that the longer they sustain their successful health record, the larger the reward's value to them appears to be? The answer is simple: their good health habits must be seen to contribute to their accrued assets over time so that sustained health translates into increased wealth, thereby encouraging their commitment to healthy behavior.

By combining the wealthy individual's common sense approach to maximizing the surplus available to do other good things, with an insurance fund incentive structure that maximizes individual contributors' commitment to good health habits, we arrive at a health insurance approach that might have features like this:

• Coverage of all aspects of basic health maintenance including the maintenance of good fitness and diet regimens and routine check-ups.
  
• Premiums that, in addition to producing regular operating funds and the money needed to meet the costs of contributors' basic health maintenance services generate the surplus needed in any given period to meet foreseeable health emergencies.
  
• A category of additional premiums going into a separate fund reserved for a) acute emergencies and health situations requiring longer term care; b) the increased costs associated with the inevitable health effects of aging and/or the special care required during the decline toward death.
  
• All regular premiums to be credited to individually denominated, interest bearing checking accounts, associated with an interest free health credit line capped at an appropriately determined quarterly limit. Individuals agree to pay for all health related expenses with funds disbursed from this account. Emergencies requiring disbursements beyond the predetermined credit cap would require a limit increase approved by the insurance fund manager according to a predetermined schedule of step increases, up to the limit set for foreseeable health emergencies. Beyond that limit, disbursements would come from funds obtained out of the acute emergency/longer term care fund.
  
• All acute emergency/longer term care premiums to be credited to individually denominated, interest bearing money market checking accounts, with disbursements according to the model established for the regular premium account, but with a separate schedule of disbursement caps.
  
• Unused balances in the individually denominated accounts, plus interest accrued, would rollover and accumulate from quarter to quarter.
  
• A schedule of discounts would be applied to premiums in one or the other, or both categories, related to an individual's commitment to maintain a fitness and dietary regimen developed and supervised by health professionals and facilities chosen by the contributor, but approved and accredited by the insurance institution. The regimen would include regular evaluations and reports (based on agreed upon measures and areas of evaluation) as to the individuals' active compliance with their regimen's fitness and dietary provisions.
  
• A schedule of interest rates for the interest bearing accounts such that the rate increases in relation to the length of time a) the individual successfully maintains the commitment to an appropriate dietary and fitness regime; and b) maintains a state of health and fitness within predefined age appropriate parameters.
  

This list of features is obviously intended mainly for illustrative purposes. In considering them, it's important to keep in focus the objective at which they aim, which is to eliminate third party administration of the disbursement of health funds, placing choice and responsibility squarely on the shoulders of the individuals who actually experience the provided health services. At the same time, the incentives connected with individual ownership and wealth creation are mobilized to encourage individual behavior that improves health prospects while reducing casually inconsiderate drains on overall health fund reserves. There are probably other and better features with which to achieve these objectives. The advantage of advocating freedom, rather than socialist government control, is that creative individuals and institutions are left free to think through and implement them. The key to defending their freedom, however, is to fund the individually owned accounts the incentive structure requires in a way that respects the power and prerequisites of a free market, while providing effectively for the hard cases that the socialists claim only coercively raised tax dollars can insure. In the next and final installment of this series we'll consider where that key (or at least a serviceable impression of it) may be found.