Philadelphia Reflections

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

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Colonial Philadelphia (Pre- 1776)

Expanded Health Savings Accounts


Last Year of life insurance is life insurance, paid after the death of the subscriber. Proceeds are paid to a health insurance company, reimbursing medical expenses incurred during the final year of the subscriber's life. The ultimate effect is either to reduce the premiums of health insurance or permit an expansion of its benefits.

The overall cost of health insurance is not changed by changing the form of premium collection. Indeed another layer of administration is required. What purpose can it serve to pay part of your premium to company A rather than company B? There are five answers.

1. Non-Randomly Distributed Risks. Non-random disease like AIDS is destructive to the system of employer-based health insurance. It is obvious that HIV infection is overrepresented in the entertainment and design industries, and overrepresented in New York City, San Francisco, and urban centers generally. Serval HMOs have been destroyed by a succession of AIDs cases, and all insurance companies are considering ways to avoid adverse risk selection inherent in a certain business, to limit coverage of the condition within the benefits package, or to withdraw from business in high-risk areas. These are understandable but undesirable trends; far better to submerge AIDS among other fatal illnesses, since almost all fatal illnesses are characteristically expensive, and no one can escape having one.

2. Catastrophic Coverage. To define a form of catastrophic health insurance which largely excludes chronic and custodial costs. (Prior to 1987, it might have been considered a disadvantage to create a separation of expensive acute diseases from chronic ones. However, experience with the Bowen catastrophic health proposal showed that political pressure groups will put custodial care reimbursement ahead of acute illness if the two are combined. Experience in England is similar.)

3. Insurability. To create a reasonably inexpensive way for people to guarantee their fatal-illness insurability during the twenty or more years before stable permanent employment achieves for them the informal guarantees of employer-based health insurance.

4. Continuity of Coverage. To create inexpensive, portable, and possibly paid-up insurance against a major portion of the risk of getting severely ill during a period of temporary unemployment. And to reduce the reluctance of new employers, who are not in a position to evaluate health problems, to hire them. Further, to segregate from lesser health matters that portion of post-employment health costs which an employer might. be willing to obligate himself to cover on the grounds that the illness began during the period of employment.

5. Pre-Funding. By isolated underwriting of a fatal illness, to begin the process of converting a pay-as-you-go health insurance system into a pre-funded one. It is possible this can only be achieved step-by-step. In any event, successful implementation of an important component would advance general understanding of the value of pre-funding.

As far as the mechanism of implementation is concerned, the concept of last-year-of life insurance involves a treaty between two parties: life insurance which pays retrospectively, and the health insurance or other agency which pays at the time of service. Life insurance can be either private or employer-paid, but if employer-paid must be term insurance to constitute a business expense in the eyes of the Internal Revenue Service. The Association could usefully work for a relaxation of this requirement since it would be revenue-neutral for the government to permit a portion of health insurance premiums which are presently tax-exempted to be applied to this purpose.

Probably the easiest illustration of the principle would be for an individual who had ample life insurance to direct that a portion of benefits be set aside for the purpose, something which every subscriber has a right to do. A standard clause might evolve to the effect that all expenses which any health insurance company had incurred in the last year of the subscriber's life would be reimbursed, provided the health insurance company could demonstrate it had reduced its premiums appropriately in recognition of this forthcoming reimbursement. This example is only a preliminary version of what is needed, however. It might serve as a transitional tool, but most individuals would be uncomfortable about the unpredictable impact on their life insurance. Many people are overinsured, but few of them feel they need no insurance. Many people are overinsured, but few of them feel they need no insurance at all. Dr. Crandall's suggestion of designating a specified portion of life insurance to cover the deductible portion of very high-deductible health insurance )ie excess major medical) is superior in approach and should be urged by the Association.

For the last-year approach to be successful, it requires the additional step pf actuarially examining costs and determining both the risk and the appropriate health insurance premium reduction. Health insurance companies would have to compete with each other in offering such a service benefit, and subscribers would have to feel the proposal was an attractive one. Obviously, Medicare is the main health insurance third party, whose cooperation would make or break the idea. Since Medicare Part B pays itself 75% of its own true premium costs, Medicare ought to be very interested in anything which might reduce premiums.

For Medicare, therefore, the issue reduces itself to exploring what incentives HCFA could offer the public in return for being allowed to shift fatal-illness costs to other funding sources. By all odds, the most popular inducement would be the provision of nursing-home costs, which the debate on catastrophic health insurance clearly demonstrated was beyond the government's current means. Negotiation goes two ways: if Medicare wants to get out of fatal-illness costs, let them offer nursing-home benefits instead. Conversely, if the public wants nursing home coverage, they must begin to contribute toward it when they are young enough to have the compound interest at work for a very long time. To the five points made at the beginning of this paper, is now added a sixth, the trade-off between dying young and living too long. Both are tragedies, but nobody suffers both of them. Unless Medicare is abolished, it is the only mechanism available for combining the two risks into one funding mechanism. If the final individual choice is reserved to age 65, even prudent suspiciousness of the profligacy of sovereign of states might be mitigated somewhat.

The proposal would be that at age 65, the individual choose whether he wishes to commit his last-year life insurance to acquire a nursing-home benefit, or whether he prefers to leave it to his estate.

Most of the advantages of last-year insurance, such as permanent insurability, portability and the ability to exchange a tangible insurance asset for some other coverage, are dependent on having last-year insurance assume the form of prefunded cash value life insurance. Unfortunately, such insurance would have to be privately purchased under present federal tax laws, because life insurance may currently only be treated as a business expense if it is term insurance. (Self-employed persons, of course, already purchase health insurance with after-tax dollars, and would have no tax disincentive to substitute cash value life insurance for health insurance.)

One useful feature would nevertheless persist even using term insurance: the submerging of AIDS into a general risk class of fatal illnesses. Except in a few industries or cities, the epidemic is not yet of sufficient extent to justify radical rearrangement of insurance. The epidemic could spread significantly into the heterosexual, non-drug addicted, community. At pandemic extremes, even spread-the-risk approaches might fail to prevent a collapse of the insurance mechanism. However, assuming the disease stabilized within a manageable corridor of prevalence, it might be possible to hold the insurance mechanism intact through the principle of shifting HIV risk from individual employer groups to a far larger pool; and last-year-of-life coverage is suggested as a possible option.

IN SUMMARY, the Association is urged to study last-year life insurance, including some estimation of the difficulties and political opposition which it might encounter. It is not necessary to advocate this idea actively at the present time, but merely to make certain we could live with its ramifications as an alternative held in reserve.

The contingencies which might require its advocacy are threatened of the destruction of health insurers by AIDS, or a political approach to imposed restriction of the health system.

Dr. Donald Crandall, Chairman

Council of Medical Services

American Medical Association

Chicago, Illinois 60610

Dear Don,

Thanks so much for the courteous reception which you and the Council gave to me on Sunday. Let me summarize my recollection of the conversation:

The last year of life concept includes almost any system of reimbursing health costs through the life insurance mechanism. As the idea takes shape in response to audience reaction, it now has three configurations. 1) The use of existing employer group term life insurance as a mechanism for community rating AIDS or similar industry-specific health conditions, which would otherwise be disruptive to health insurers. 2) The use of cash-value life insurance as a first step introducing pre-funding to health insurance, and making it portable between employers. To do this through employers might require liberalization of the tax code, a project which Metropolitan is surprisingly optimistic about achieving. 3) The trade-off insurance benefits with Medicare in return for a long-term care concession.

The six main information gaps which I can identify are:

1. What has the average terminal illness cost? Does it vary significantly by age group?

2. What proportion of deaths is over and under age 65? Over and under age 18, where they begin to relate to employer groups?

3. Is it possible that fatal-illness costs are inflating at a rate significantly different from other healthcare costs?

4. How completely do 365 days include the majority of terminal illness costs? Would some other time period be superior?

5. What are the legal impediments?

6. What are the political impediments which become predictable when you see that the proposal creates a disadvantage for some interested group? How can the proposal be restructured to minimize such resistance?

As you requested, I will work up some proposals for a simplified notification procedure between the life health carriers which includes some safeguards against double-counting and double-dealing.

Sincerely yours,

George Ross Fisher, M.D.


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