In 4 earlier posts (one, two, three, and four) I’ve tongue in cheek asked about the life insurance crisis in the U.S. Of course, there isn’t one. I’ve then advocated reforms to make the health insurance market work as well as life insurance. We have discussed three. The first is changing the tax laws so that you get a tax subsidy for buying health insurance unrelated to your employment. The ability to walk from the boss’s offering will allow for much greater choice in plans. Further, it makes you and me, not your employer, the customer. Second, there must be transparency in the cost of care to consumers. When we have numerous choices we need to be able to see how much the plans cost so that we have an incentive to economize. An unrestricted fee for service plan will cost much more than a closed panel HMO with limited appeals. If we want more freedom in our use of health care we need to know that it’s not free.

Third, employer contributions to the cost of insurance (actually, just a redirection of our pay) need to be based on the risk of each employee. Risk-adjustment is crucial in making the market for health insurance function properly. We have accurate data on health expenditures back to 1929 and a remarkably constant finding is that 10 percent of the population incurs 80 percent of health costs. Without risk adjustment choice at the individual level will not work. Carriers will try to enroll the healthy and shun the sick if employer provided funds are on an equal per person or per family basis. But if funds are adjusted for risk status innovative providers will develop products catering to those with significant health problems. Risk adjustment in the Medicare Advantage Program has had precisely this result. There are now “Special Needs Plans” that sell only to beneficiaries with a multitude of medical issues.

The final reform needed to make health insurance work like life insurance is the elimination of guaranteed issue and the reallocation of direct provider payments. Guaranteed issue would destroy life insurance as rational individuals would wait till they are dying to purchase the product. The same is true in health care where we would purchase coverage when we develop significant medical problems. Direct provider payments such as DSH payments and other monies to providers should be partially reallocated to “use it or lose it” credits to purchase health insurance. These credits should also be risk adjusted with the sick receiving a much larger amount.