19 February 2010

Health Insurance And Pregnancy

One of the biggest divided between group health insurance (from an employer) and individual health insurance is the way the policies treat pregnancy.

Group plans invariable cover pregnancy costs and this inclusion doesn't add a huge amount to the total claims cost of the plan, because while most people get pregnant more than once in a lifetime, employers with group plans rarely have all of their employees have a pregnancy at once.

In contrast, individual health insurance almost always excludes pregnancy (even if you represent that no one covered is pregnant at the time) unless you buy a rider on the policy that costs something very close to the cash cost of all medical care for a full pregnancy, whether or not you someone covered actually gets pregnant, or you get a deductible for pregnancy costs that is a least as big as the typical cash cost of all medical care for a full pregnancy (and even then the rider isn't cheap).

This isn't any great mystery. Individual health insurance plans are protecting themselves from adverse selection. If they covered pregnancy for the price that group plans do, people would buy health insurance, promptly get pregnant, get all the pregnancy costs paid, and drop the policy, inevitably recouping at least as much, if not more, than they paid in premiums in health insurance benefits.

This wouldn't have to be so. There is a very subtle piece of health insurance regulation and insurance company economics that drives this adverse selection incentive. You can cancel future coverage from a health insurance policy at any time for any reason. If you prepaid your premium, you get get your premium back. The right is almost as universal and absolute as the right of an employee to quit; there may be breach of contract damages in very rare haggled one of a kind employee deals, but even then, the employer can't force you back to work unles that employee is the military. A contrary requirement would be considered slavery or indentured servitude.

But, the prohibition on irrevocable health insurance policies is not nearly so profound. While there are consumer risks to buying in for the long term and then getting stuck with poor service, and there are insurance company risks that they will have an insured who doesn't pay a premium or has lots of kids with expensive care requirements there are ways around this, if the regulatory environment were interested in making it happen.

The insurance company could offer a policy in effect for the rest of an insured's life (or through some age reasonably chosen to let almost all insureds reach menopause) that would cover one, two, three, or any number of pregnancies, with a price based on age and the number of covered deliveries chosen. The policy could be prepaid. There could be insurance company arranged financing that would not use the policy as collateral (possibly with the same kind of preferences in bankruptcy that student loans receive on the theory that education similarly is not a suitable form of collateral).

A policy for an eighteen year old that covers two deliveries through age forty-eight ought to cost significantly less than $10,000, the cost of providing two deliveries reduced by the time value of money from the time that the policy is purchased to the time that the policy is used each time (and taking into account the costs avoided when someone with coverage decides not to have kids). Some people would pay up front, others would financing the policy over five, ten, fifteen, even thirty years. Insurance regulators and the right to bring bad faith claims would give insureds bargain power to make sure that they got the coverage that they paid for and insurance regulators would require insurance companies to set aside reserves to fund the plans. The policy could be quite cheap if purchased when a girl was born, perhaps $2,000 or less for a two pregnancy policy.

This is not the only way one could cut the Gordian knot. One could have comprehensive universal health care in some form or another; any system that brings everyone or almost everyone into the risk pool would do. Medicare payroll taxes could be slightly increased (perhaps from 1.45% for employer and employee to 1.5%) to fund a Part E benefit that covered all pregnancies and deliveries and neonatal care. One could simply make it a government benefit available to all out of general revenues - what politician doesn't love babies?

But, the plus is that it would solve a market failure with a reasonably regulated market solution, that otherwise can't be fixed without a government program that will depend from year to year on favorable federal funding.

Suppose that some treatments are too politically controversial to cover, like abortion or fertility treatments? One could set up a market for multiple year, irrevocable pre-paid supplemental plans that would cover the costs associated with those services. To keep the administrative costs down, these supplemental plans could be run something like AFLAK, which sells insurance policies that simply hand a flat predetermined dollar amount to an insurance when an event happens. To avoid concerns about creating bad incentives, the insurance company could, for example, sell "positive pregnancy test" insurance that pays the insured $1,000 upon a positive pregnancy test and lets the insured decide what to do with that money.

Maybe the time to market positive pregnancy test insurance would be when a girl is born, a bit like life insurance companies do. This way, the cost of the policy could be reduced by a decade or two or three of investment returns between the payout and the premium payment, and the risks of adverse selection would be lowest. Maybe a policy would cost a couple hundred bucks.

If some philanthropist or non-profit (perhaps Planned Parenthood) or government agency that can't afford to send every kid in a neighborhood to collect wanted to give families in the area a long term boost, it could buy positive pregnancy test insurance for every girl born in the community at $200 each, a reasonably affordable proposition that would help a lot of young women at a possibly tough moment in their future. Perhaps a non-profit like Planned Parenthood could even open a side business that offers the financial product, the way it did when it got into the drug marketing business when the private sector wouldn't sell a controversial pill.

At its root, the issue is that a whole life insurance model may be a better approach to funding some kinds of health insurance than a casualty insurance model, for certain kinds of care, if one is going to use insuranc at all.

The notion of endowing a child early on also doesn't have to be narrow. College funds are the norm for the middle class. People routinely save for retirement. Money can solve lots of problems that average people have in life. People save up for down payments on homes. It used to be common place to save for a wedding rather than for college for girls. There is something quite sensible about starting out young adults in life with a financial cushion set aside for them. The upper middle class of America sets up trust funds for their children for good reason.

It is cheaper, as a general rule, to start setting aside money for foreseeable expenses when you know that they are likely, rather than when payment on them is due. Then compound interest works in your favor, rather than against you (actually, no sensible consumer loan ever charges interest on interest, interest payments and some principal payment is made regularly instead; one of the surefire signs of a likely to be exploitive contract is that it is likely to have a substantial interest on interest component).


Unknown said...

My experience is that it is almost always less expensive to cover the cost of a pregnancy outside of individual insurance rather than include it as a covered expense. Obstetric practices, as a rule, are better prepared to handle direct patient payments over time than other areas of health care. There seems to be little logical reason for insurance to be involved. Yet that is not what insurance buyers want to hear; we want coverage that costs little and covers all.
Tony Novak,
Freedom Benefits Association

Medical Insurance London said...
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