The U.S. Government could self insure to a point and buy catastrophic coverage as a backup plan: The Healthcare model should act like a “health spending account” and not waste unused premiums to insurer profits

In Canada, the group insurance market is wrought with escalating premiums as claims rise. Large groups are a better “deal” for the employees as the cost sharing arrangement usually leaves the employees paying only a portion of the overall cost. The group, if really large, will have bargaining ability with the insurer with the goal of containing cost increases. The insurer will want to keep premiums low in order to not lose the client.

But, when groups are smaller, there is a direct correlation between increasing claim numbers and premium increases.

The 60% rule applies – if you use 60% of the premium in claims, then expect a rate increase for your group in the coming annual renewal. The claim “experience” can be spread over three years often, but if there is an upward trend in claims, this “spreading out” of claim experience will not have much if any bearing on future premium increases.

President Obama has mentioned that the government being large, will be able to have an effect on the insurance industry cost for coverage, but the program is designed more like an individual policy than a large group. With limits low, there is no guarantee that those that need the coverage most – with chronic or terminal illness – will get adequate coverage and high enough insurance compensation.

If it holds that there will only be eight doctor visits per year and a hospital limit of $10,000 annually, this does sound more like “off the street” pricing with very little pull for being a supposed “large group”.

Inherent in the “premium” method of funding health care, there is a use it or lose it aspect that is critical in this analysis.

When someone pays a premium, if they are healthy and do not use the coverage, the premiums are forfeited to the insurance company. The money that might otherwise be available to be used by the government to cover increasing costs for those individuals in need is not available, but lost to the insurers looking to profit.

Would the government really need to fund healthcare in this way? Likely not. They could actually use a system known as the “health spending model” of self insuring, and only buy stop loss coverage from the insurers to fund claims that go over a given threshold – in this case, say $10,000 per enrollee.

I will assume for purposes here that less than 20% of the population will develop serious or chronic illness and require treatment beyond the $10,000 threshold. The cost saving should be significant.

If the U.S. government were to save premium dollars on the healthy, and pay the insurers only for catastrophic illness, the amount of premiums that would be outlayed would be far less than that proposed in the Bill.

I am under the impression that the U.S., like Canada, makes provision in the Income Tax act to cover tax saving for people who have Health Spending Accounts.

The model I propose would put a savings element into the equation that is sorely missing. It would also ensure the annual, low limits for those needing significant health coverage would not be a factor. And, it would ensure that pre-existing conditions could also be funded.

The above model relates to all expenses, and buying catastrophic coverage is like saying,

“We will self insure our citizens individually to a point, but when they need a great deal more coverage, we will share that risk with the insurance company, containing our cost.”

Therefore, the only true premium that needs to be paid is for the catastrophic component. The cost savings can ensure the viability of cost-containment moving forward.

Below: information on catastrophic “drug” coverage in Canada.

In Canada, here is an interesting document on Catastrophic Drug coverage in Canada.

  • In 2002, one study estimated that approximately 11% of Canadians faced the risk of experiencing high prescription drug costs because they either lacked or had insufficient drug coverage
  • Unlike most countries that are members of the Organisation for Economic Co operation and Development (OECD), Canada does not have a national catastrophic drug coverage system, nor does it have a national universal prescription drug coverage plan.
  • Though the Canada Health Act provides for public coverage of physician services and hospital care, the only pharmaceuticals it covers are those used while in the hospital.(17) Out-of-hospital prescription drugs were left beyond the purview of the Canada Health Act, because historically they had played a limited role in the provision of health care, and their costs were not considered a significant financial burden to Canadians
  • It also meant that prescription drug coverage was not considered medically necessary, but rather a fringe benefit offered by employers in the private sector.

However, this situation began to change as early as the 1970s, when provincial governments started to recognize that the rising costs of prescription drugs could constitute an increasing financial burden on those with low or fixed incomes.

  • Private Plans: Private plans offered by employers, unions and professional associations are a significant source of drug coverage in Canada, providing approximately 60% of Canadians with some degree of protection from catastrophic drug costs.(22) Of those enrolled in private sector programs, 55% have plans that protect against catastrophic drug costs, either through the provision of a cap on overall drug expenses, or through their coverage of 100% of total drug costs. The remaining 45% have plans that provide substantial but incomplete coverage, commonly reimbursing 80% of drug costs, once a deductible is reached.
  • Federal Government Plans: The federal government administers prescription drug coverage plans for specific population groups that do not otherwise have access to private drug plans, or plans offered by provincial or territorial governments. These programs are managed by the following departments: Health Canada for First Nations and Inuit; Veterans Affairs Canada for veterans and regular and retired members of the Royal Canadian Mounted Police; Correctional Service of Canada for federal offenders; Citizenship and Immigration Canada for refugee claimants, Convention refugees, and persons detained by the department for immigration purposes;(25) and the Department of National Defence for members of the Canadian Forces. Altogether, these federal plans cover approximately 1 million eligible clients at a cost totalling $594 million in 2007–2008.
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