Wednesday, July 18, 2007

A Less Rough Vision of Healthcare Insurance

I think a free market, private system of health insurance should be the dominant system for healthcare coverage in the US. (As I have said, the chronically sick and otherwise uninsurable ought to have a government provided safety-net system to alleviate their healthcare costs.) First principle - the vast majority of Americans are not currently sick and are thus not at risk of falling into the uninsurable category and there is no reason to believe that healthcare insurance can't look exactly like life, auto or home insurance. I have tried to outline a rough vision of this type of healthcare coverage before, but lately I've been trying to put some dimensions around it. Given that the vast majority of our healthcare spending relates to only five diseases, I thought I'd tackle one of them and create some food for thought with a little financial analysis. I chose breast cancer. Now breast cancer comes in various degrees so I chose an extreme case. Meet this woman. Here are some basic parameters about her - she was diagnosed with aggressive breast cancer at age 43 and she claims it costs her $300,000 each year for treatments to keep her alive. I doubt it cost her $300k for each year since 1998, but it costs her that sum now. Even so, I make the assumption that it will cost that amount for each year of treatment. To keep this woman alive for 15 more years would cost $4.5 million (take out inflation for now). Let's factor in the time value of money which makes that 15 year treatment bill $2.73 million in net present value terms (7% discount rate). The incidence of breast cancer has held steady at 100.6 per 100,000 women for about a decade and a half. So now let's go back to 1997 before this woman was diagnosed with her cancer. In a uniform pool of 100,000 women, an insurer would expect to encounter a cost in NPV terms of $2,750 per woman to keep each woman who contracted breast cancer alive for 15 years at $300,000 per year. So I ask, would there be 100,000 women willing to pay $2,750 to be free and clear of all breast cancer treatment costs for 15 years should they be diagnosed. I think women would gladly pay that. Clearly though that could be paid in installments, say annually, which would be only $183 per year. That is hardly beyond the reach of most women at risk.

Let's explore this a little more and take it closer to home. The ever-ravishing and always lovely Mrs. Baseball is 38 years old. Her fate may or may not be identical to that of our Assertive Patient, meaning that at 43 she will be diagnosed with a virulent breast cancer. The calculations say that in five years time to begin treating Mrs. Baseball for 15 years at $300,000 per year, the NPV of expected costs is $2.08 million. Thus, in a pure pool of 100,000 women, the expected cost per woman would be $2,100, or $105 per year for twenty years (less even if you factor the time value of money to me the payer). Would I pay that kind of money to have Mrs. Baseball be able to receive that kind of treatment and have our family avoid financial ruin? The question answers itself, but let's compare that calculation with another one just to see if we are not being outlandish here.

My wife and I both have life insurance policies to provide for the Baseball kiddies should we shuffle off the mortal coil - $3 million of coverage each to be exact. It costs about $1000 to insure Mrs. Baseball's life for $3 million which is roughly comparable, but greater, to the breast cancer treatment NPVs discussed above. That's $2.74 a day, less than a tall mochachino at Starbucks. But wait. The death rate from all causes for adults 25-44 in the US is 177.8 per 100,000. So Mrs. Baseball has a greater risk of dying from any cause than she has of getting breast cancer. If an insurance company is willing to underwrite a greater amount, $3 million, for a riskier proposition, death, for less than a fancy cup of coffee then surely an insurance company could offer coverage for breast cancer treatment along the lines of my example for at least a similar amount, and lower likely.

My numbers are pretty conservative (i.e. not every woman will require $300,000 per year in treatment), so this is just the realm of the possible. You could even pad the numbers a little to generate even fatter profit margins for the insurance companies and you still can imagine a generous coverage package for a trvial cost. This is the world of free market, private insurance. This is the realm of the possible. The notion that is flogged by collectivists that insurance companies are the source of the problem and must be reined in, regulated and robbed of profitability is absurd. It is based on the frankenstein, quasi-free market monster of yesterday's HMO or today's employer-focused healthcare insurer, not the pure risk-based insurance of the private sector.

What about the Assertive Patient? Well, she is likely uninsurable at this point in the private insurance world. For her we need a governemnt solution to help her with the costs of healthcare, but it is absurd to propose that we need a government solution for the millions of women who are not like her. Those women are insurable and should be able to get great coverage at low cost. No insurance crisis exists for these women, no crisis except that our current system disallows businesses from offering a pure insurance product for them. To assume the liabilities of those millions of women without regard to risk will yield two destructive results. First we'd be opening ourselves up to tens of billions of dollars in unfunded liabilities and, second, we'd be forcing ourselves into rationing care for those women outside of the price mechanism and any such rationed care is going to be degraded care. Is this what we want for our wives, mothers, sisters and friends? Or do we want risk-based insurance that can deliver generous coverage for the cost of a cup of coffee?


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