Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Healthcare Reform: Looking Ahead (2)
The way to make certain you have enough -- is to have too much.

A Gradual Transition, Not a Steep Step

Insurance companies announce premiums in September or October, giving themselves a few months of constant premium prices while they sell policies with a January renewal date. That provides time for the hesitant buyer to look over the competition but is an unnecessary inefficiency for a lifetime insurance, where it is likely to disappear. During the introductory period, experimentation should be made with charging for the ten-year incidence of certain conditions like appendicitis or gallstones, and allowance made for previous removal of the organ in question. A much larger database would be required to make the same adjustments for annual renewals, and there would be considerably less tendency for the patient to game his own health history. The incidence may be the same, but the risk of shopping behavior is much reduced. The possibility of introducing an elective surgery rider exists.

But a transition can be gradual in more ways than just one, changing annual renewal into once per lifetime marketing. Actuaries calculate the average lifetime healthcare cost to be around $130,000 in the year 2000 dollars. Retirement and Medicare begin at the same time, but retirement is continuous rather than episodic. A comfortable retirement to average age 84 might cost four times as much as the healthcare which created it. We may thus be talking about an average lifetime cost of $650,000 in the year 2000 dollars. At 3%, inflation could increase to nominal average cost of $ Assuming we continue yearly premium adjustments, we should at least make yearly adjustments to the premiums for lifetime coverage. That promotes a yearly decision between the present one-year term insurance and a smoothed-out lifetime price, mostly based on considerations other than price. It probably starts with a variable price band for the company to set, within which the employee is allowed a choice to switch to permanent insurance, or not, with a small price variation depending on the calendar date of switch-over. Age and perhaps other variables would affect the changing price. But the main consideration would be transferability between employers, so several large employers would have to agree on the schedule of prices. If the employer declines to participate, he also declines to pay for it, so he must adjust his pay packet accordingly. It must already be obvious why the employer is inclined to follow industry standards, and why special anti-trust exemptions may be necessary. However, once an employee makes a switch, he is likely to remain with that company for a lifetime, so the incentives are mixed.

To assist that decision, a brief overview of the insurance company position is in order. On the one hand, marketing costs are small for an existing company. The negotiation is with a single personnel office rather than hundreds or even thousands of employees. The concept of permanent insurance is probably unfamiliar to most employees, and most of them would have questions. On the other hand, insurance administration is simpler and cheaper, and some innovative clauses could make it still cheaper to run. It would create a permanent customer for many years of coverage with fewer loopholes. And just look at the money involved.

A lifetime policy, once it gets started, aims to create an individual $2 million reserve at age 65, which is run down to zero in twenty years by payments until average longevity of 85. But half of the clients will live longer than that, so there is a strong probability of payouts from a trust fund for another 21 years. Whether the insurance company services these expenses itself or farms them out to a vendor, this is a very appreciable amount of business. Multiplying such numbers by 350 million Americans, the sums are in the trillions, approaching the total now invested in index funds. What's involved is the destruction of a medium-sized industry, in order to create a mammoth-sized one.

Originally published: Saturday, July 15, 2017; most-recently modified: Friday, May 10, 2019