Journal of Financial Planning - May 2000

The problem with today’s health care insurance is that it is not being viewed like other kinds of insurance.

Getting 'Real' with Health Care

by Peter Katt, CFP, LIC

In their book, Life Insurance (Eleventh Edition), authors Kenneth Black, Jr., and Harold D. Skipper, Jr., discuss the meaning of insurance, stating, "…human beings are exposed to many serious perils, such as...losses from disability and death...[T]he function of insurance in its various forms is to safeguard against such misfortunes by having the losses of the unfortunate few paid by the contributions of the many who are exposed to the same peril."

In principle, insurance doesn't pay for routine or trivial expenses. That is, auto insurance doesn't pay for car washes, oil changes, spark-plug replacements or any engine work, for that matter. And when damage is done to a car by a covered event, there is usually a deductible. Same for homeowner's insurance. It doesn't pay for landscaping, house painting or window washing. Rather, it covers such catastrophic events as fire and storm damage. Disability income insurance doesn't cover lost wages due to the flu or a sprained ankle. Only when a disability will cause the insured to be out of work without compensation for an extended period of time does coverage commence. Term insurance covers a completely unexpected event; permanent insurance covers the unexpected event of premature death, and its coverage of expected death is completely paid for in the aggregate.

Confusion About Insurance

However, current notions about health insurance don't conform to this definition of insurance because our political elites and most media pundits have confused its true meaning. The outstanding example of this confusion is Bill Bradley's frequently told story of the family who took their son to the doctor for strep throat, causing the son to tearfully apologize for getting sick as he watched his parents write checks for the doctor's services and his antibiotic. The point of this anecdote is Bradley's complaint that health insurance isn't affordable for every American. In that a consultation, test and treatment for strep throat probably cost less than $75, Bradley's idea of health insurance is first-dollar coverage. First-dollar coverage of a completely expected and inexpensive event isn't health insurance-it is third-party financing.

Washington is abuzz with health care reforms. One would mandate universal access to health insurance with proscribed costs. Another would give patients much greater control over treatments within health maintenance organizations (HMOs). Neither will work. With respect to universal access to health insurance, we humans have a remarkable talent for discovering and then pursuing our best interests. If insurance companies are required to insure everyone at the same rate regardless of health, why waste all of those unnecessary premium dollars when we can wait until it is really needed? Pass this law and there won't be any private insurers offering health care coverage.

As for HMO reform, keep in mind that HMOs aren't insurance-they are a type of health care financing. The HMO receives a set fee per patient. No additional revenue is received for services provided; therefore, the HMO has every incentive to provide as few services as possible. HMO gatekeepers are needed to maintain financial integrity because patients have every interest to maximize the number of services they receive. Wake up with a sore throat, go to the doctor. Feel queasy at work, go the doctor. Suffer the ravages of incurable cancer, demand every treatment that can be thought of. When an HMO says no, it is perceived to be putting the patient at risk in order to boost profits, and this is politically untenable. Because of these adverse interests, there is no way to avoid problems. Once it is mandated that patients can compel services via the threat of lawsuits with unlimited or very high punitive damages, goodbye HMOs.

While we dither about health care issues for pre-seniors, Medicare is headed for a train wreck of historical proportions as the leading edge of the massive body of baby boomers enters the system. Either some seniors will have to begin paying for much of their health care (means tested), services will have to be rationed, or a significant increase in payroll or other taxes to support these exploding costs will have to occur.

If private insurers are mandated out of business and the political clout of baby boomers makes Medicare reform impossible, causing gigantic deficit spending, American voters may finally let Washington take total control with government-provided health care. Regardless of the form government control takes, rationing will occur, quality of care will drop dramatically and medical innovations will wither.

Real Innovation

Combining two innovations could change this possible government-controlled health care future. One is allowing real health insurance to flourish. The other is to institute real government-provided health care for everyone who doesn't have a private plan. Since real health insurance would appeal to one political faction and real government provided health care would appeal to the other political faction, combining the two might allow for a grand compromise. To follow are highlights of these two.

For health care insurance (HCI) to revolutionize our current health care arrangements, it must allow for and encourage lifetime coverage that substitutes for Medicare. But for individuals to pay their own health care costs and insurance in lieu of taking Medicare coverage, HCI must have advantages compared with Medicare. Or perhaps put another way, our political elites must candidly inform us that the current level of Medicare coverage can't continue once the baby boomers are in the system. If we understand that some aspects of Medicare will be less attractive, many Americans might be motivated to pay for their own lifetime health care. Americans voluntarily paying for their own lifetime HCI would potentially relieve the Medicare system of its looming financial crunch, making Medicare benefits much better or minimizing additional taxes on pre-senior workers than would otherwise be the case without HCI.

HCI policies with, say, $2 million lifetime coverage might have these characteristics:

1. Two components: cash value and insurance with a lifetime per capita deductible of, say $4,000.
2. Tax-deductible and flexible premiums. The minimum premium must cover the pure insurance cost. The maximum annual premium, set by statute, might be $4,000 per capita. The cash value is the deductible amount. As it increases, pure insurance costs are reduced; that is, the pure insurance premium for a family with a $100,000 cash value (deductible) would be less than for an identical family with a $20,000 cash value.
3. Cash values could be transferred tax-free upon death to named heirs' HCI policies.
4. Policies could be partially or completely cashed in, but cash values would be subject to full taxation.
5. Insureds would be eligible for government-run programs, including Medicare, if HCI coverage terminates.
   
6. Fully coordinated with employer-provided benefits.

Ideally, all HCI policies would be part of a single utility-like organization with experience-based pricing and a fair way of handling pre-existing conditions so that individuals have access without their being able to take advantage by waiting until their health has deteriorated. Committees made up of rotating medical provider academicians would set covered benefits, keeping in mind that at all times they must be more flexible and generous than government-provided care, including Medicare, or there would no reason to continue private HCI.

Government Health Care-Medical Service Corp

Vice President Gore laments that there are millions of Americans without health care. What I think Mr. Gore means is there are millions of Americans who are not formal participants in a health care financing or insurance plan because anyone walking into an emergency room must be given treatment. Federal and state governments have a plethora of health care safety nets that are expensive to operate because of overlapping administrative costs and frequently having to pay market-based fees for contracted services. Instead, why don't we just have real government-provided health care in the form of a national Medical Service Corp (MSC)? The MSC could be patterned after military health care. It would be available at no cost to every American who doesn't have a health care plan, no questions asked.

The MSC might have these major characteristics:

1. Stand-alone clinics and hospitals in every community whose need for MSC could support such facilities, with a network of mini-clinics in smaller communities acting as feeders to full-service MSC facilities. And full-service facilities would feed specialty MSC facilities in metropolitan areas.
2. All routine health care would be provided within MSC. Complicated care would be contracted out to the private sector.
3. Many MSC services would be provided by technicians, supervised by professionals. State licensing laws would be ignored as they are in the military. For example, most prescriptions in the military are filled by military-trained pharmacy specialists. (Indeed, I was an Army-trained pharmacy specialist, filling thousands of prescriptions and a doing a lot of drug compounding during my tour of duty.)
4. Almost all MSC health care providers would have limited tours of duty at military-type wages (no unions allowed). After it was up and running, many MSC staffers' tours of duty would be in exchange for college and post-graduate scholarships. Until then, staffing needs might have to come from a draft system.

The MSC would produce tremendous per-service-provided cost savings, allowing it to provide many more services. Patients would be treated with dignity, but services would be provided on an impersonal basis with probable extended waiting room time like in the military. The object is for the MSC to provide excellent services within its budget while encouraging MSC patients to move up the private sector.

Conclusion

HCI would not necessarily cause any changes to current employer-provided health care insurance and financing, medical savings accounts or Medicare. However, it is likely that many employers would use HCIs for their health care benefit, or at least coordinate their employee benefits package with them for employees who wished to purchase HCIs on their own.

Holders of HCI policies would do the health care system a tremendous service by paying the income taxes that fund MSC and payroll taxes that fund Medicare, but not using either. In addition, HCI maintains the health care marketplace for efficient pricing and allocation of resources. In exchange, HCI policyholders get more personal care with more choices. HCI is identical to parents who send their children to private schools. They pay income taxes that support federal educational programs. They pay property taxes that support the local public schools, but don't use public school services, allowing per capita expenditures to be higher.

MSC would eliminate the need for Medicaid and all other of the various health care programs set up for the poor.

Fighting to create MSC would smoke out those politicos who prefer "providing health care for all Americans" as an issue rather than having a solution. Opponents would likely attack MSC as second-rate health care, but they would then have to explain why they haven't spoken out about so-called second-rate military health care. In fact, military health care is very adequate and so would health care under MSC.

Note:

Please see an update to this article in my March 2003 column of Journal of Financial Planning.

Reprinted with permission by the Financial Planning Association, Journal of Financial Planning, May 2000.

Peter Katt, CFP, LIC, sole proprietor of Katt & Co., is a fee-only life insurance adviser located in Kalamazoo, Michigan (269.372.3497).