Wednesday, March 4, 2009

Cochrane on Health-Status Insurance

University of Chicago finance professor John H. Cochrane has published a terrific paper on how the free market can handle one of the problems that worries patients most about health insurance -- namely, "What happens if I get sick and become uninsurable?"

His paper, "Health-Status Insurance: How Markets Can Provide Health Security", discusses how this problem can be addressed through the free market, without government regulations. From the executive summary:
Free markets can solve this problem, and provide life-long, portable health security, while enhancing consumer choice and competition. "Heath-status insurance" is the key. If you are diagnosed with a long-term, expensive condition, a health-status insurance policy will give you the resources to pay higher medical insurance premiums. Health-status insurance covers the risk of premium reclassification, just as medical insurance covers the risk of medical expenses.

With health-status insurance, you can always obtain medical insurance, no matter how sick you get, with no change in out-of-pocket costs. With health-status insurance, medical insurers would be allowed to charge sick people more than healthy people, and to compete intensely for all customers. People would have complete freedom to change jobs, move, or change medical insurers. Rigorous competition would allow us to obtain better medical care at lower cost.
Basically, it's insurance on future insurability, similar to this option being offered by United Health Care.

Cochrane's paper also discusses why various proposed government "solutions" (such as laws requiring insurers to accept all applicants and charge them the same price for coverage) merely make things worse.

When there is both a demand for a service (protection against future uninsurability) and someone willing to supply that service, the marketplace will allow both parties to work out a mutually satisfactory arrangement.

(Via PatientPower.)