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expanding coverage with actuarial vouchers

I was going to write a post on the current health care reform debate, but at this point the proposals are too amorphous and the debate too inane. That said, there are numerous problems with the American health care system, and today I’ll share an idea I have for tackling the problem of non-existent or inadequate health care coverage. Perhaps in another post I’ll tackle cost control, but now I just want to drill down on this actuarial auction idea.

For all its misgivings, the insurance market can effectively provide coverage for basic and catastrophic care for non-pre-existing conditions and risk factors. Insurers are not paid enough, however, to make it profitable to pay for long-term care and potential side-effects of pre-existing conditions.  Insurers are currently asked to be part-insurance company and part-social service.
Both insurance and social service delivery would be more effective if these responsibilities were separated and assigned to their rightful owners. Insurance is the province of the private sector, while social service is best channeled through the government. This does not mean that the government has to provide the charitable care itself, it simply means that by the time the private sector is asked to interdict, the proper provision of the care must be profitable (>0) to the provider.

If the private sector is indeed perfectly capable of selling basic and catastrophic care for non-pre-existing conditions and risk factors, the question becomes how the government should augment this market? For one, it could choose to provide a voucher for the poor to purchase health care insurance, as the government provides vouchers for food. It could also choose to mandate insurance, as the government does for auto insurance, due to negative externalities.

Third, the government could provide a voucher conditional on the likely-cost-of-coverage for a patient’s pre-existing conditions and risk factors. This voucher could be combined with the basic/catastrophic voucher to purchase insurance at the elevated payment rate necessary to make high-risk patients actually attractive customers to insurers. That is to say, insurers seek out healthy patients not because they are healthy, but because the healthy patients are willing and able to pay slightly more for coverage than the insurer anticipates paying out: the premium of security for the patient. If you paid insurance companies at a level commensurate with the likely payout of high-risk patients, they would also try to make their plan more, rather than less, attractive to those patients.

Does such a conditional voucher sound outlandish? Remember that insurance companies are performing just these sorts of calculations when they set their rates for different risk groups. In fact, the best way for determining the optimal level for the conditional vouchers would utilize the knowledge of those very insurers. For example, an auction system where each insurer makes the lowest bid they would accept in payment to provide a specified minimum amount of coverage to an individual: this amount could be taken as the minimum amount necessary to pay for a given type of patient.

The lowest bidder not only sets the voucher value with his low bid, but also could receive a percentage bonus payment (e.g., 5% of low bid) from the government on each individual who spends his voucher at that plan. This type of incentive is common: we currently provide similar bonus payments to providers that comply with government data and quality standards. Reckless low bids could be dissuaded by a mandate that the low bidder *MUST* accept any individual with that health profile who wishes to redeem his voucher with the low bidder’s plan. In essense, we hire Al Roth and tell him, ‘Make me an auction system.’

In sum, here I am arguing that there exists a market design solution that could effectively price vouchers, which would make it profitable to take care of the sick. It’s important to make it profitable to take care of the sick, as otherwise health care plans and providers will simply try to drive down the cost of their care to minimize the loss, which is when you run into problems like patient dumping. I am also implying that the insurance market is capable of administrating care and insurance to both healthy and sick patients, and that they simply need to be paid more for those high-cost, sick patients. Finally, I am implying that the government should mitigate this high-cost of insurance for poor and sick patients. Thoughts?

Filed under: Health

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