Premium Increase Insurance Solves Much of Health Care Dilemma

Published on October 14, 2009

Providing a second market of insurance against increases in premiums of health insurance would effectively address the critical problem of pre-existing conditions preventing people from getting health insurance, said John Cochrane, AQR Capital Management Professor of Finance.

“You have a separate premium increase insurance that when your premiums go from, say, $1,000 to $10,000, your insurer pays in one lump sum enough to cover those premiums for the rest of your life,” Cochrane said during a Becker Brown Bag Series presentation, sponsored by the Becker Center on Chicago Price Theory, at Harper Center on October 14.

Such a market would guarantee coverage for people with pre-existing conditions without additional out-of-pocket costs and would eliminate current gaps in coverage, he said. Consumers would enjoy complete freedom to change jobs, relocate, or change insurance companies.

“In fact, we would now have a system with intense competition in every single case,” he said. “You’ve got diabetes? No problem. You’re going to be getting calls on your cell phone at dinner time, saying, ‘Switch to our plan.’ They’re going to charge you a lot of money, but you’ve got the money to pay for it. Then they’re going to work hard to come up with a plan that helps you.”

To achieve the cost-cutting revolution experienced in other industries in recent years, health care must enjoy “ruthless competition” and innovation, Cochrane said. To promote such intense competition, consumers must spend their own money and new players must be permitted to enter the market, he said.

“We have some of people spending their own money – probably not enough – in deductibles and copayments,” Cochrane said. “The real problem is that we don’t have new entrants coming in and finding new ways to do things. Health care won’t quote you prices. In what business won’t people quote you prices? A very uncompetitive business.”

In Latin American, patients can get a CAT scan at 2 p.m. for $400 or at 2 a.m. for $75, he said. “It’s a big, expensive piece of equipment and running it 24 hours a day is an efficient way to operate it,” Cochrane said. “Can you imagine trying to get that to happen in any of our hospitals here?”

Cochrane’s proposed solutions to public policies distorting the health care market, which are based on his articles, “Health Status Insurance” and “Time-Consistent Health Insurance” and are available on his website, include:

• Eliminate or restructure the tax deduction offered to employers for providing employee coverage. “Let the employer contribute to an individual policy you take with you,” he said. “Better yet, contribute to an individual policy you already have.”

• Ban insurance that is not “portable,” or transferrable to new jobs, locations, etc. “Otherwise, if you lose your job, you become an expense to taxpayers,” Cochrane said.

• Introduce massive deregulation to allow the supply side to grow and innovate. “We need to allow new competitors to come in to creatively meet the needs and desires of customers,” he said.

For second-year student Gustavo Lara, the key takeaway from Cochrane’s presentation was to “step back from the noise, the buzz, and the politics” of the health care debate. “You learn to deconstruct the problem,” Lara said. “With something that is complex and regulated with lots of rules, you need to take a look at the fundamentals and see how supply and demand work. Start building up from there how an ideal system would work and bridge that with how it is now.”

                                                                                                                        — Phil Rockrohr