derifatives

In my previous post, I argued that insurance should be purchased privately in a free market. Many of the comments seemed to rely on arguments that basically assumed that the insurance purchased would have essentially the same characteristics and properties as today's insurance, and many of the rest were based on a "folk economics" view of insurance companies that assumes that under a free market system, insurance companies would behave the same way they do today.

First, I agree that insurance companies want to make money. I think that is a good thing. But business models are not fixed, as we'll see.

To me, the primary issue with insurance right now is that you are not a customer of your insurance company in a very meaningful sense. You get your insurance [in enough cases that this basically determines how the market works] through your employer, and you are not choosing an insurance company. Your employer has some interest in choosing an insurance company that satisfies you, to the extent that they would not like you to choose a different job because that other job offers better health insurance, but it is extremely tenuous for at least two reasons. The first is that the employer is trying to choose a plan that is good for its employees on average, rather than a plan that is good for you. The second, more important reason is that health insurance is one of a large number of factors in choosing a job, and your employer knows that the specific health insurance company will not be a decisive factor for most employees. So your relationship to your employer-sponsored insurance company is not as a customer, but as a cost. [I will actually try to talk in detail about the numerous problems of the current insurance system in a separate post; there are additional regulations that make things even worse.]

This serves as a natural explanation for many of the behaviors that people object to, most notably a seemingly random denial of claims, massive paperwork requirements for appeals, and high rates of recision. I agree that the insurance company has a strong incentive to avoid paying large health bills once you get really sick. But what I disagree with is that this is fundamentally different from an airline's strong incentive to avoid flying you somewhere after you've bought the ticket, or a car maker's strong incentive to avoid honoring their warrantees. If we are to move beyond the level of discussion of "greedy companies want to make money so they'll screw their customers whenever possible," we have to ask why carmakers frequently do honor their warrantees, and why airlines nearly always do actually fly you somewhere when you pay, and if we think those arguments don't apply to health insurance we must think clearly about why health insurance is so fundamentally different, rather than just saying "companies are greedy." Insurance companies are fundamentally no more or less greedy than other businesses.

Companies are trying to make money. Absolutely. In a free market, where customers have options and are making real choices, companies have to compete by offering value to customers. In the case of insurance, companies can compete not just on price and benefit, but also on customer service, reputation, and trust. You don't want to be hassled when you need to make claims, and you definitely don't want to face recision when you get very sick. If you had a choice, you would go with the company that offered these things.

Health insurance is admittedly a complex product. The challenges are that you pay for it for a very long time, it has negative expected value, and once you are asking the insurance company to honor "their end" of the contract, they face a large cost to do so. Under the current system, where you are not a customer, the cheapest and therefore most profitable way to deal with that is for them to try to avoid paying. In a free market system, a company needs to convince you that they're not going to screw you if you get sick, compared to that other company that also wants your business. Which brings me to the real topic of my post, which is innovation in insurance contracts.

A great way to convince me that you're not going to screw me is to sign a contract detailing how you're not going to screw me. So I brainstormed some things we might see in health insurance contracts under a free market system. I'm not saying we would see any one of these provisions in particular; certainly they wouldn't be required, and the market will likely dream up other better ones. But these are some ideas:

• Late payment protection. Afraid of losing your insurance if a payment is one day late? Our contract says you can be up to three months behind, in case times get tough. Of course, you'll pay a small late free, but no need to worry about being one day late.


• Hate paperwork? Under our contract, if a claim is denied for any reason, there'll be a 24-hour number where you can talk to a supervisor immediately. These supervisors will speak your language and have enough authority to resolve claims.


• Afraid of recision? If you've been a customer of ours for more than 1 year, we agree not to cancel your contract for any reason other than discovery that you directly lied to us about the condition you're applying for treatment for [e.g., you already had diabetes and didn't tell us.] After 5 years we agree that we are not allowed to cancel your contract for any reason.


• Afraid of huge payment increases later? This contract binds us to a schedule of maximum premium increases. We may have to renegotiate a rider later if technology makes expensive new treatments available and you want those covered as well.


• Want to be able to switch companies later? We will hold X% of your premiums in an "escrow account". When we pay claims, we will take them out of this escrow account first. If you cancel your insurance at any time, we'll give you back the contents of the account. If you wish, you may transfer this money to your new insurance company, which should make them more interested in accepting you, even though you'll be older when asking for insurance.