Tuesday, March 21, 2006

The End-of-Life Buy-Out Option

An astonishingly large fraction of healthcare expenditures go toward heroic end-of-life treatments. I don’t know the exact percentage, but it’s big. What’s more, the benefit of such treatments is not terribly great; they typically extend one’s life by a few low-quality weeks or months. So why do people spend the money? Obviously, it’s hard for both dying people and their families to let go at the end. But just as important, the medical expenses are usually covered by health insurance or Medicare. When there’s a third-party buyer, there’s no reason to economize.

I’m not going to suggest that people should be forced to cover their end-of-life medical expenses out of pocket. It’s true that we use health insurance to cover lots of things that should be paid out of pocket, and would be if the tax code didn’t encourage employer-provided comprehensive health plans. But given the cost and risk associated with end-of-life treatments (your time of death is uncertain, as is the amount of money your pre-death treatment will involve), it’s sensible enough to insure for them. The problem is that once these expenses are insured, patients will consume medical treatment until the marginal benefit is zero or the insurance money runs out, whichever comes first.

So here’s my modest proposal. Health insurers (both private and public) should offer their customers a buy-out option: you can either incur the big end-of-life expenses, or you can accept a cash payment equal to some substantial fraction of the expected cost (say, 50%). Some people would still choose to take the heroic measures (and everyone would still have that option, at least among those who have it now), but others will take the cash in order to leave a larger inheritance, pay a grandchild’s tuition, take one last vacation, or throw an ass-kicking rock-your-face-off party. The insurers would be better off because they’ll pay out less than the expected cost of end-of-life treatment, and the patients will be better off, or at least no worse off, because they’ll have an option they didn’t have before.

Why aren’t insurers doing this already? The neoclassical economist in me says that if my plan were viable it would already have been implemented (at least by private insurers), so I must be missing something. The Austrian economist in me sees dollar bills on the sidewalk.


R.J. Lehmann said...

It's an interesting question. Basically, it sounds like an adaption the concept of viatical settlements, wherein a terminally ill patient assigns the death benefit on a life insurance policy to a third party in exchange for cash upfront.

Viaticals are a highly regulated and tremendously controversial practice, and often find themselves afoul of "insurable interest" laws. I'd imagine health insurance settlements would be similarly controversial, but there is -- technically speaking -- no assignment of interest to a third party, so that part of the law might actually be easier to get around.

I have a few thoughts, based on what I know of the industry, but I can't say I have a definitive answer:

1. For most people, end-of-life care is provided by Medicare, rather than private insurance. There isn't a strong incentive for the program to innovate.

2. The concept might have been more feasible when people actually had health "insurance," per se, which traditionally meant a standard indemnity plan with a face value. In the era of managed care, however, what most people have is a prepaid medical plan that tends to get mislabeled as "insurance" in the common vernacular. Payments by such plans are made to doctors and hospitals on the basis of patient volume on a flat-fee, monthly basis, rather being scaled procedure-by-procedure. Cashing out the costliest patient would not, in the short term, save the health plan any more money than cashing out the cheapest patient.

3. I don't know for sure, but I doubt this would pass muster with the I.R.S. Employers can deduct the cost of health benefits from income only so long as they comply with state insurance codes or, in the case of large group plans, federal ERISA and HIPAA regulations. Employees do not pay income tax on the value of those benefits provided the same caveats. But a cash settlement is a cash settlement -- the I.R.S. would almost certainly look at that as income, from both the employer and employee perspective.

4. The idea that health plans actually HAVE an idea what "expected costs" are for any given patient assumes a bit too much. As a rule, health insurers do not have anywhere near the sort of underwriting expertise that you see in property or life. There are tremendous assymetries of information, morbidity tables just aren't all that robust or reliable, the number of covered perils are virtually infinite, and the volatility spreads are enormous. And for the most part, they don't need this information, because 80% of the time, they are writing at the enterprise level for a group. That fact alone helps collapse the tails and makes the risk an approachable one. But if you want to segment out one given input within that group, and try to assess not only the perils he faces but how much they will likely cost within a finite window of time...that's a task that, I'm afraid, most health plans just aren't equipped to carry out.

But I'm not just going to leave you hanging like this. I talk to both industry regulators and executives all the time, and this is an interesting enough question that I plan to put it to them and see what sorts of answers they give. I'll let you know what I hear back.

Brett said...

Sounds like a great idea, provided I can use it to fund my cryonics coverage.

RiskyBiznatch said...

Lehmann is up inside more insurance companies than I am so his insights are more diverse than mine. His first point is very important: Medicare picks up a huge percent of end of life care. It seems that the issue is who picks up the bill after a person burns through their Medicare coverage. If a person has Medicare Supplement insurance there is still no room for creativity in plans. The govt has standardized these plans and private insurers can't deviate from the plans. For care beyond Med Supp, that is typically the domain of Long Term Care Insurance.

LTCI is where there could well be some innovations. Right now I am seeing companies talk about "combo products" that combine an annuity and LTCI or life insurance with LTCI. The idea is that if a policy holder does not or chooses not to spend their LTCI pool of cash they get some portion of that back.

Ray said...

Yeah, the LTC/annuity combos are interesting, in that you cancel out two different kinds of adverse selection. Annuities appeal disproportionately to those who live long and prosper. LTC appeals disproportionately to those who will live long...hacking and wheezing. The combo splits the difference and provides a reason to buy the plan for both cohorts.

Unfortunately, the flip side of that coin is that it essentially guarantees a lapse rate of zero, so it's going to be pricy. And you had better be spot on in your mortality assumptions if you want to stay solvent. Should life expectancy suddenly and unexpectedly tick up the way it did in the 70s, forget it, you'd be wiped out.

But I don't really see that market going anywhere until many more of the regulators start letting companies treat LTC policies as having a cash value, and until Congress grants tax-free inside build up of that value. There are a few proposals to do just that, including one from Santorum, but with Chuck Grassley putting the kibosh even on expanding HSAs, I don't see it happening any time soon.

R.J. Lehmann said...

Oh, yeah, that was me, by the way. I didn't realize I had two different blogger accounts.

RiskyBiznatch said...

Lehmann, Thanks for posting. I'm thrilled to actually read good discourse in the comments section of a Blog. Times, they are a changin'

RiskyBiznatch said...

Lehmann, Thanks for posting. I'm thrilled to actually read good discourse in the comments section of a Blog. Times, they are a changin'

RiskyBiznatch said...

Yeah, I stutter online. A blog therapist is treating me though.

Glen Whitman said...

I second RiskyBiz's comment, Ray. It's nice to actually learn something from my commenters. I'm looking forward to anything you find out from talking to your contacts in the industry.

In addition to your possible explanations, I'd add a simple "ick factor" explanation. People might just rebel against the very thought of accepting a cash payment instead of doing (even pointless) treatment, and they might (unjustifiably) vilify the insurance firms for even offering such an option.