Tuesday, June 16, 2009

Premiums in a Medical Savings and Loan

Adding a loan component to medical insurance could help solve one of the most perplexing issues in insurance: That is determining the best deductible for the insured.

I introduced the idea of a medical savings and loan several posts ago. Such a package would have a medical savings account, a high deductible insurance policy and guaranteed loans to cover any gap between savings and insurance.

The goal of the Medical Savings and Loan is to create a system where people negotiate directly with doctors and health care provides for basic health care.

The challenge with medical loans is that only people who get well will pay them back. As it is absurd to expect that everyone receiving care will get better, one would expect a high default rates on medical loans.

The loans could not be funded by access to the loans. Rather one would need to develop a system where people paid a premium for access to guaranteed loans. The premiums would build a financial basis for the loans.

The mathematics of loans is favorable when compared to insurance. Imagine a system where three quarters of medical loans would be repaid. Of $1,000,000 million in loans $750,000 would be repaid. The premiums in such a system would need to cover $250,000. While the premiums for insurance would have to cover the full one million.

As the majority of people using a medical loan system would be intent on repaying the loans, the system would create a dynamics where the patient more aggressively negotiated health care expenses with their provider.

A system with a medical savings and loan would transition the funding of health care so that it better fits the life cycle of the individual. Young people would start out depending on access to loans to guarantee access to health care. In middle age, people should be building up equity in health care. A middle age person is likely to have a savings account sufficient to cover their entire deductible, etc..

A medical savings and loan would have three components: A savings account, a guaranteed loan and high deductible catastrophic insurance. The owner of the account would pay a premium for both the insurance and loan access.

As mentioned earlier, the premium for the guaranteed loan would be driven by performance of medical loans. I suspect that insurance companies will quickly discover that the performance of the portfolio is largely dependent on the size of the loans.

The insurance firms are likely to discover a threshold amount to place the cut off between the loan and insurance. The deductible for the insurance component would sit at a point where the loan would likely go unpaid.

The goal of the medical savings and loan regime is to encourage people to think of medical expenses as they occur in the life cycle of an individual. I suspect that, if an actuary were to look at lifetime medical expenses for the population, the expenses would fall into a bell curve and that, for the majority of people, health care expenses fall reasonably within a life time income. Once in place, a savings and loan system could help people match their medical expenses to their income. There would, of course, continue to be a need for insurance, charity and government assistance for the small number of people whose expenses fall outside the norm.

A system of medical savings and loans would be superior to current employer based insurance as people would have greater control and bargaining power with their health care dollar.

The system is also superior to employer based insurance in that employees build equity in their medical savings account, reducing the problems that occur when they change jobs.

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