The High Cost of Health Insurance - An Idea

I am not in the healthcare field. I do, however, work somewhat closely to the insurance field. I know, in a broad and general sense, how insurance contracts are written. I can't discuss a lot of the particulars of health insurance contracts because, let's face it, human health is probably the most complicated subject going. Nonetheless, I think that the healthcare problems we have in this country are economic and not medical in nature.

Nobody doubts that the technical abilities and expertise of American healthcare providers are top notch. Where we have problems is in the cost of insurance, particularly for those who work at small businesses and/or for low wages. Before I get to my proposal, I want to talk about two specific state-run insurance programs in Indiana, hardly a bastion of wild-eyed progressive ideas.

The first publicly funded Hoosier insurance program is called the Excess Liability Trust Fund. This is for underground storage tank operators, including farms, gas stations, and the like. The policy decision was made, at the state level, that the potential liability for the owners of pre-existing and yet-to-be-built underground storage tanks was so great that to not offer some  help would cause untold economic damage, with various unpredictable consequences. Thus, the ELTF pays for remediation and liability associated with underground storage tanks, beyond a certain amount. Stated another way, the tank owner is liable for the first $XXXXX, and the state insurance fund picks up the rest of the cost. It is not a simple program, but it has been very effective at staving off bankruptcy for some small businesses and unremediated, polluted sites where USTs had leaked a bunch of nasty chemicals into the ground. ELTF is funded with a user fee on the operators, owners, etc., of storage tanks.

The second publicly funded Hoosier insurance program is associated with medical malpractice liability. I think it is called the Patient's Care Fund, but I'm not entirely sure. Indiana has a host of "tort reform" things in place to discourage medical malpractice litigation (probably for good reason, but that's a discussion for another day). Included in Indiana's "tort reform" is a law that caps private liability for medical malpractice at $300,000 (with a host of exceptions . . . please do not take legal advice from my blog; contact an attorney). After the $300,000 is paid by the doctor's malpractice insurance, the State of Indiana is liable to pay the remaining damages resulting from any such malpractice out of the patient's Care Fund. This saves doctors from having to purchase liability policies that insure up to $10m or some such figure. I have heard that a surgeon presently shells out about $35,000/year in malpractice insurance premiums. That's no chump change, and that is for a policy that only has to indemnify up to $300,000. Imagine the premiums otherwise and what that would do to the availability of doctors to treat Hoosiers; not to mention those on whom medicine was indeed negligently practiced . . . they would continue to not be made whole in large numbers. My point is that the Patient's Care Fund is the result of an idea to place a publicly funded "umbrella" over the insurance required to do this, because not doing so would have deleterious social consequences, i.e. doctor shortage and injustice.

The point of both of these publicly funded insurance programs is not to destroy the entire insurance market, but to better aggregate the risk associated with these two activities that we find to be economically and socially useful.

Health insurance seems like a good place to try something like this, essentially an "umbrella" insurance policy that covers the cost of one's healthcare beyond, say, $1m/year and $10m/lifetime, adjusted for inflation.

It occurs to me that a large percentage of healthcare resources are routinely consumed by a rather small slice of the populace. This is a common lament I hear from those I know who work in that industry.

Perhaps it would be a better idea, relative to the way we finance healthcare, to institute a public excess liability insurance fund. The funding would of course be relatively tricky, but assuming it has the desired effect of controlling costs by having a monopsony for the "good" or "cost" that is healthcare beyond $1m, it is possible that it could have a diminishing public investment in the trust fund, and the cost be increasingly borne by surcharges on insurance policies. As the premiums go from $400/month to $300/month, perhaps the excess liability fund captures some of those savings and aggregates them into an umbrella risk pool.

I can't be the first person to have thought of this, and I wonder why it is not discussed more often.