Take a long-term disease such as rheumatoid arthritis. Before you get it, it's a risk and it looks just like what you describe, something whose probability and cost you can predict. After you get the diagnosis, however, it's a certainty that you'll incur costs on the order of $30-50k/year for the rest of your life.
The response of an insurance company (and I have first-hand experience with this) is to try some combination of jacking up your rates or pushing off some or all of the expense onto someone else, so that you and/or the taxpayers end up paying $30-50k per year.
So in the end, the only risk is the first year of treatment expenses. After that, the insurance company makes a profit every year even from someone who is very sick. That isn't real insurance at all. If it were real insurance, the insurance company would respond to your diagnosis by putting in escrow a principal amount based on actuary calculations, that would cover the treatment costs for the rest of your life. And the annual insurance premium wouldn't change.
If it were real insurance, all of our rates would be higher, but we would be paying for true risk reduction, in that our health care costs would stay the same even if we get sick.
Unfortunately, insurance is complicated and few people would buy a true insurance policy if it were offered, because it would be more expensive. People take their chances because if they get sick and can't afford the higher insurance premiums, they know the government will step in and cover the costs.
Your vision of "real insurance" sounds nice, but I don't think there is any real possibility of it happening.
Real insurance covers what can’t be foreseen, not what can. It was developed to manage risk. New catastrophic policies which approach insurance from that standpoint offer the industry a host of new opportunities.
NOTE: This is the second in a series of articles about business opportunities in health reform I wrote for the week when I’m traveling to the Open World Forum for ZDNet Open Source and won’t be at my desk.
Insurance was created as a way to manage risk. Most insurance policies, whether business or personal, are essentially wagers on whether bad things will happen. In this way, insurers are more bookies than bankers.
Take a look at your car insurance policy. States mandate you buy this coverage in order to legally drive, because driving is risky.
What you will find is a collection of risks, each priced separately. Collision covers damage to your car, for instance, and if you have an old car you may not want to buy this coverage. Uninsured motorist protection is what it sounds like, coverage that kicks in if the person at fault in an accident has no policy.
Your cost is partly covered through deductibles. The lower the level of risk, the higher its price, so most policies leave the first few dollars of loss to you. You can save money by assuming a higher deductible.
Then there are limits. Most car insurance policies cover health care costs only up to a certain limit. Past that you’re on your own. As I have said many times you can’t have an unlimited draw from a common pool. Not if the business model is to work.
In the commercial market, and insurance was first created to cover commercial risks, policies are built by layering levels of risk. The lower the level of risk, the more you pay to cover it. The first million costs more than the 100th million. In this way enormous risks can be insured by risk capital.
Health insurance has never worked that way. But now some innovative brokers are trying to make it work that way. John Word and Rusty Brown (above, from their corporate Web site) are the brokers behind HealthCompare, one of the many new insurance exchanges that push catastrophic plans alongside other policies, online.
While catastrophic plans have their critics, they are real insurance. They kick in when losses get extreme, after a car accident or cancer diagnosis. Terms and limits are strictly defined. The risks can be estimated. They can be rated. They make money.
Catastrophic plans do more than bring health insurance back to its insurance roots. They also start a discussion within the market. They move responsibility to the insured — they are designed to be bought by consumers and not just companies. They’re not health care, either, although they are an important component of coverage.
Separating health insurance from health care is important. Everyone needs health care services, just as cars need regular maintainence. You don’t get into a car accident every year, but you will always need health services.
With innovation, insurers get back to their roots and we can start talking about paying for the maintenance services everyone needs.
