Friday, August 28, 2009

The Health Bank

In the many debates I have with my brother about health care, I try to convince him that legislation that encourages competition between insurers will do far more to improve health care than a "public option" ever could. But he always retreats to the same point: that the health insurance market does not operate like other markets.

In the health insurance market, he claims, insurers are in the unique position of increasing profits by decreasing service, i.e. denying claims. While these conditions run counter to the way most markets work, they are not unique to health insurance. Indeed, one needs to look no further than your friendly neighborhood bank for an example of a market with the same set of profit motives, yet without double digit inflation or customer horror stories.

When you deposit money in your bank, your bank could theoretically deny you service, keep your money, and increase its profits. But they don't. Even given the billions of dollars banks could potentially keep, they do not take a penny. Now they might accidentally lose your money playing the stock market, but their intention is always to give your money back, with interest, because it's your money. This differs from health insurance, where a person can pay their premium every month for years, only to be denied coverage when they really need it.

For some reason, we have accepted a system that we pay into regularly, but have no guarantee of getting anything back. Why would anyone choose such a flawed way to pay for medical care? Well, they wouldn't. They would take whatever insurance is offered at their job, whether it was good or not so good, because any insurance is thought to be better than no insurance, though lately this point is debateable.

When choosing a bank, most people seek stability and reliability. If a bank ever tried to pull the same shenanigans as health insurers, they would lose all of their accounts and be bankrupt before the end of the business day. This is because people are able to easily pull their money out of a bank and take their business elsewhere. This is the real failure of the insurance market.

If someone wishes to change insurers, they must give up the thousands of dollars of premiums they have already paid into the system. If a person's insurer denies them coverage based on a contractual technicality, those premiums are gone, headed straight to the insurer's bottom line.

By now the solution should be obvious. We simply need to change the way we treat insurance premiums; instead of a subscription payment, we should see it as an account deposit. If a person decides to switch insurers, they should be able to take to back what they have already paid into their account, just like when a person switches banks. If an insurer chooses to deny coverage, they must return all of the customer's payment, in full, with interest, just like with a bank.

This will of course require Congressional action, but a bill with this idea at it's core would easily garner bipartisan support. Republicans would have to support it on competitive, free market principles, and Democrats would have to support it for it's populist theme. Insurers would hate it, but that would only increase the bill's popularity.

This plan might require an expansion of the FDIC, since insurance companies would essentially be banks with a mission. These new insurance banks would likely need stricter reserve requirements than regular banks (we should probably be stricter on a regular banks as well, but that's a story for another day). We could offset the government expansion by drawing down many other areas of our current insurance regulation apparatus.

This is but one of many fundamental changes we must make to our health insurance market to improve its efficiency and responsiveness to customer demand. Congressional plans that include a ban lifetime benefit caps, or plans that bar denial of coverage because of pre-existing conditions, serve only to treat the symptoms of a fundamentally diseased system.

By shifting insurers into "health banks," we force them to compete for customers, since stealing their money is no longer an option. Insurers will increase their level of service or perish, which will benefit everyone, save for insurance executives, who will have to work a whole lot harder for those million dollar bonuses.

Insurance companies are really nothing more than banks that can get away with murder, figuratively and literally, so why not make them play by the same rules as banks? It can only help.


  1. I would like to see real actual evidence that insurance companies are constanly in breach of contract by denying claims they said they would cover when you first signed on. Given that Americans report very high satisfaction with their health care I'm very suspicous of his premise that insurance companies deny clamis simply to make money.

  2. Oh, they're not in breach of contract. That's what's so messed up about the employer based system-- there's no individual market to sort these crappy contracts out. The employer based system separates insurers and insurees to the point that market does not function.

    Americans on average are satisfied with their insurance--until they are denied for a pre-existing condition or a minor mistake on paperwork.

    Steve, for proof that insurance companies deny claims to make money, all you have to do is follow the profit motive. If a business can eliminate a $20,000 expense by legally invalidating an agreement, it will.

  3. This idea does not make sense from an operational viewpoint. The collection of premiums would become inventory/reserves and not revenue. Now, the insurer would have to hold some fraction of reserves at all times to pay for expenses. They would now make their money entirely like a bank--making loans--instead of like an insurer. (Premium revenue - expenses + investment income = profit)

    Now all these insurers have to go hire underwriters for loans asset backed loans not sjut for underwriting insurance. Also, a major expansion of bureaucracy is needed to regulate these new banks. This adds to both a company's admin costs and to govt costs.

    I find it very amusing that a libertarian continues to advocate policies that can only expand the role of the government while crying out that the government is dumb and evil.

  4. And your brother is correct; health care markets are unlike any other market.

  5. First, insurance companies are already run like banks. Or do you think they stuff their extra capital under their mattresses? Premium revenue - expenses + investment income = profit? Yeah, they already figured that one out.

    As for the cost of loan underwriting, if you don't think they will just pass this cost to the consumer, you haven't ever applied for a mortgage. When I got mine I was hit with more fees than you can shake a stick at. Banks do not simply absorb this cost.

    As for an expansion of government bureaucracy, I disagree. Insurers are already regulated, I'm simply proposing we streamline the way they are regulated by shifting the incentives to better align with our moral imperatives.

    And I am not proposing an expansion of government control. I'm proposing an expansion of consumer control. Our health care market is already highly regulated while costs spiral out of control.

    Ideally I would get rid of medical licensure as a requirement to practice medicine, but realistically I know this won't happen. So I instead turn my energy towards tweaks to the insurance model.

    Yeah, and iPod markets are different from peanut markets, but they all operate on the same basic principle: greed. The challenge is finding a way to channel that greed to benefit society.

  6. Please point to the evidence that health insurance companies deny claims that they are contractually obligated to cover.

    Point to instances in which a health insurances company changed a policy for the explicit purpose of making some large sum of money.

  7. I already told you, they are not breaching contract. The issue is that policy holders do not shop around for insurance, but rather take whatever insurance is at their job.

    The contract for this insurance is not a good one, but people take it anyways because there are no other affordable options. Thanks to employer based health insurance tax incentives, the insurance market for individual policies is virtually non-existant.