Philadelphia Reflections

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

Related Topics

Personal Reminiscences
One of the features of aging past ninety is accumulating many stories to tell. Perhaps fewer are left alive to challenge insignificant details.

Four Prescriptions: Proposals or Reform of Health care Financing Rx. I: PRE-FUNDED HEALTH INSURANCE

The Chicago Quartet Volume Two

Four Prescriptions: Proposals or Reform of Health care Financing


INTRO page 1.


Benjamin Franklin organized the first American fire insurance company in 1736. Success in the insurance business rests almost unnoticed among the many scientific and political accomplishments of that remarkable man. Even in Philadelphia, few people realize Franklin’s company and several others like it still operate comfortably. Franklin called his company a “Contribution ship”, but a more familiar modern term is “mutual” insurance company. Even though mutual life insurance companies have come to predominate, for important reasons fire insurance has been more salable when provided by profit-making companies. The ancient mutual fire insurance companies remain small but reflect some important thinking which this book argues should be applied to health insurance, where ideas are currently badly needed.

What the world already knows about these quaint little companies is almost a hindrance. Occasional articles in the Philadelphia Sunday supplements do sometimes mention them, mostly fascinated with how socially prestigious it is to be a member of their boards of directors, what excellent dinners are served at directors meetings, what priceless antiques are to be found in their headquarters. Franklin to be sure would probably relish the elegance. Unlike the Quakers of Colonial Philadelphia, Poor Richard was not frugal in order to be inoffensive; he was frugal to get rich. Dying the second richest man in the city, he lived the kind of life many Yippies might admire.

Mutual fire insurance companies sell something called "perpetual insurance" which turns out to be perfectly ordinary homeowner's insurance, with one big twist to it. The customer makes one large lump sum deposit in advance, then never pays premiums. During all the time the insurance is in force, perpetually if need be, no further premiums are paid. The deposit earns enough interest to pay the full premium cost of the insurance protection. In that way, the customer has the perfectly astounding experience of having every penny he paid to the company returned when he eventually gives up the insurance. Centuries of experience show that a single deposit of roughly ten years conventional premium will generate enough investment income to cover all anticipated costs from "losses" and administration. The deposits themselves "share the risk", eliminating the cost of paying investors to provide a "contingency reserve". This simple scheme is Perpetual mutual insurance.

As everyone knows, that isn't the way most fire insurance works; the only things perpetual about a more typical policy are the yearly premium notices, which in the aggregate eventually cost much more than making a deposit and giving up the income from it. It is left to the typical stockholder company to worry about getting contingency reserves coming from investors are more popular with homeowners than reserves they have to provide themselves, consequently why perpetual premiums are so much more scalable than perpetual insurance. The young homeowners is typically a debtor, stretching to buy the best house he can afford when he can stump up a down-payment; fire insurance is something his mortgage banker insists he buys. In order to have the American dream a little earlier, the homeowner agrees to pay a little more, later.

Two hundred years after Franklin's death it is possible to gain other insights from "perpetual" insurance because the unfamiliar approach makes us ask basic questions. The next several chapters of this book now set out to argue that health insurance has some serious problems which could be improved by asking those questions. The problems of health insurance are not trivial; many experts question whether we can afford to continue the present system. Whether a breakdown of health insurance would lead to worse care, no access to care or rationed care, the whole subject of health insurance is important to more people than insurance executives. We will return to Franklin's idea after a flyover of current major problems of health insurance, with reflections on how things got to be such a mess. Then, after compounding several insurance remedies based on Franklin's formula, an effort is made to identify potential harmful effects but few are found. The main problem with the prescription is that it has a rather bitter taste.


There are many things good about the American system of health insurance. Compared with the nationalized health insurance schemes of other countries, our health insurance is a utopia. Indeed, the main reason to criticize the American system of health insurance is to save it from itself, since the foreign alternatives are so much worse. No doctor ever saved a patient by ignoring the symptoms. To be concise, our health insurance system is unfunded, inappropriately linked to employment, adequate for moderate illness but not for catastrophic ones, and incredibly expensive to run. For each of these four disorders, this book offers a prescription. In the first section, keeping Poor Richard in mind, the disorder under examination is that health insurance is unfounded. For the ailment of being unfunded, the prescription offered is the IRA for Health.

Unfunded, Being unfunded does not mean cheap. It costs a typical family about $3500 a year for health insurance premiums. It has become commonplace to read newspaper articles announcing or predicting 15-30% increases. Annual national costs of healthcare are about $500 billion. Those who would like to solve the problem with a national health scheme should remember that $500 billion would be half of the current Federal budget; the $200 billion already federalized are nearly destroying the government. Health care is expensive all right, and unfunded.

Further, because an employee can escape income taxation on a health insurance premium if his employer pays it for him, that's the way health insurance.

Originally published: Thursday, August 30, 2018; most-recently modified: Monday, May 20, 2019