Cheap gene chips, the sequencing of the human genome, and the ability to provide customized treatments to account for genetic variances will all be leading to big changes in the years to come. But of course this is going to lead to some thorny problems as well.
Changing Calculations of Risk
The first that really comes to mind is that the basic premise of health insurance is going to have to be reconceived from the bottom up. Traditionally, "insurance" has been a mechanism to pool and distribute risk. The drones at insurance companies pore over their actuarial tables and statistical databases, calculate the expected amount of claims, and price their premiums to cover their expected payout. However, in recent years - especially for health insurance - this paradigm has begun to fray at the edges.
As demand in the health field has shifted from catastrophic care to ongoing treatment for chronic conditions, insurance companies have responded by invoking "pre-existing conditions" in order to keep their payouts down. While most health consumers see the denial of coverage for pre-existing conditions as yet another screwjob by the insurance companies, it should be recognized that the insurance companies do have a pretty good rationale for this. For many pre-existing conditions, there is little unknown risk to insure against. Where is the unknown risk for a person who needs weekly dialysis treatments, or daily injections of insulin? The costs can easily be projected, and can be determined ahead of time - creating difficult problems when these issues are viewed within the conventional insurance paradigm.
The US government has responded to this problem with such devices as the Kennedy-Kassebaum bill that "fixes" the pre-existing condition problem by forcing insurance companies to pick up the cost of treatment for "pre-existing conditions" even people move from one insurance plan to another. Once patients are in the health insurance system, their costs will be borne by whatever health plan they happen to be in. This shifts the costs of chronic care between insurance companies, and in the long run will help boost the costs of health insurance as the insurance companies raise the price of their premiums to cover these ill people that had previously been denied access to the health insurance system.
Genomic Surveillance
With the coming advances in genomic diagnosis, it will be possible to determine the pre-existing conditions for everybody. One little blood sample and a gene chip is all it's going to take, and our entire record of genetic predisposition's will be brought to light. And of course it will be child's play for the insurance companies to take this information and calculate the expected costs for treatment. The only unforeseen risk will be the random everyday injuries that cause people to be rushed to the emergency room. So if the traditional "unforeseen risk" paradigm has been getting creaky these days, it will completely collapse in the years to come. Eventually we may very well be able to use genetic engineering techniques to counteract many genetically caused diseases, in the short term, there is going to be a period where we will have the ability to diagnose a wide range of genetic predisposition's without having equivalent means to inexpensively treat these problems. It's this gap between the knowledge of genetic predispositions, and our lack of capacity to remedy these propensities towards illness that should emerge as a big problem for health insurance systems in the years to come.
Government Solutions
One solution to the conundrums surrounding health insurance has been to move towards single-payer health care. Given a collapse of the risk paradigm for health insurance, it's sure to be a popular solution to the problems that emerge from widespread use of genetic testing for disease predisposition's. As a solution it has been pretty popular everywhere but the US, and truth be told it does have certain advantages. The great genius of single-payer plans are that they manage to pool the risks of health care costs across the entire taxpaying national population. It's solves all the problems with cherry-picking people with low health risks, covers the chronically ill, and solves the dilemmas associated with the uninsured quite simply. The only problem is that there is not an unlimited amount of money to pay for every health want of the national population. Under a democratic system, when the voters perceive that they are paying "too much" in taxes for health care, there will be the inevitable political response to cut costs. Usually this manifests itself as some form of rationing - limiting the availability of certain treatments, or limiting access to care through creation of a waiting list.
But now - thanks to all the tobacco litigation - there is a new way for the government to cut costs. One new principle that has been established is that society as a whole should not have to bear the costs of unwise health decisions by individuals. So in the interest of public health - and public finances - it is now acceptable to reduce the harms to society by providing disincentives to individuals to engage in such behaviors. Of course, now that the principle has been established, it's unclear where we will draw the line. Why should society as a whole have to bear the cost of alcohol consumption? Why should society as a whole have to bear the cost of obesity? New taxes on alcohol or fat (or sugar - per the protein diet craze) would certainly serve the interest of the public health. Now that these sorts of utilitarian cost-benefit principles have been enshrined as public policy, it is difficult to see where the line will eventually be drawn as to what unwise individual decisions will be able to stand against the weight of public health efforts. One nightmare scenario is for a single-payer health care system that eventually slides into a form of medical fascism, where a wide range of "unwise" personal choices are subsumed by the will of the collective.
A Market Solution - Derivatives
Thankfully, there may be other alternatives to the problem that have not yet been explored. One recent development in the technologies of risk management have been the growth of a wide variety of financial derivative contracts. While there have been some blatant abuses of derivatives in the past several years - notably the bankruptcy of Orange County, the Barings Bank, and the Sumitomo trust company, for the most part many companies have been able to better manage the risks from swings in exchange rates, interest rates, or event the weather (with commodity contracts).
One of the best examples of the benefits gained from derivatives has been the emergence of the secondary mortgage market in the over the last 20 years. When the federal government (through Fannie Mae) standardized the mortgage finance process, it allowed a diverse market with a myriad variety of mortgages to be commoditized and traded. Mortgages contracts could be pooled, priced, and the stream of payments could be bought by interested investors. This spread mortgage default risk among a wide pool of investors, as well as opening the mortgage market up to the investment capital of international investors. It's been a win-win situation for everybody - banks carry less risk of mortgage default, investors have another financial instrument, and homeowners have a lower cost of home financing because of a highly liquid mortgage market.
According to Richard Sandor, the father of the secondary mortgage market, it should be technically possible to create a secondary market for health insurance coverage as well. Many financial derivatives follow the same basic model - you pay a fixed sum in the present for the right to an income stream in the future. Health Insurance can fit into this basic model quite well - the income stream is the premium payments made by customers minus the cost of paying for claims made. The real problem is creating a standardized and commoditized contract that is basically interchangeable. This was a large hurdle for the secondary mortgage market because of the variability of housing units and the difference in the creditworthiness of borrowers, but Fannie Mae eventually prevailed and managed to find a standard.
Rationale for Medical Derivatives
Ironically, it is the looming breakthroughs in genomics that could provide a sound foundation for the creation of a commoditized contract for a medical insurance derivative. The individualized data for genetic predisposition to disease allows for a quantification of the risk inherent in any given genetic makeup. Any insurer should be able to test for all genetic predisposition's for disease, assess the probability of the disease occurring, and forecast the expected costs of treatment. A standard for a future health insurance derivative contract could consist of 50 individuals with a pooled risk assessment of "500" (on some hypothetical risk assessment scale). The specific health or diseases of the 50-member pool are rather unimportant - what really matters is that in the aggregate the level of risk posed by this pool is equivalent to the risks associated by any other pool. Much like banks have to package mortgages for resale on the secondary market, insurance companies could package the financial risks of carefully selected clusters of clients for resale on a secondary market.
Interestingly, the market would demand a large quantity of similar pools to increase the liquidity of the market in health insurance derivatives. To maximize the potential number of insurance pools, the pools would have to be representative of the total insurance buying population. This would mean that the infirm, high cost patients would have to be included in the pools of insurance. (or if the market didn't do this, some sort of government imposed standard could do the trick).This may tend to make insurance companies that would participate in the health derivative market not try to skim off the healthiest patients, in order to preserve the marketability of their policies on the secondary market.
So who would trade this sorts of contracts? Certainly any institution that is concerned with the cost of providing health insurance. Much as Starbucks is concerned with swings in the cost of coffee, or Nissan is concerned about fluctuations in the Yen-Dollar exchange rate, many large companies (and even local or state governments) are concerned in the fluctuations in the cost of paying healthcare premiums for their employees. In the same way as Nissan can hedge against a swing in the exchange rate, companies could invest in these contracts as a hedge against a rise in healthcare costs. If a company is worried that their health premiums will spike upwards, they could invest in a series of health insurance derivative contracts that would pay off if healthcare costs were to rise. The profit from the derivative would help defray the costs of the rise in premiums, in the same way a sophisticated investor can use derivatives (usually index options) to hedge against a decline in their portfolio of stocks.
A health derivative market would be able to spread health related risks as widely as possible. Single-payer programs are necessarily limited to the taxpayers of any given nation-state - and the notion of single-payer healthcare from an institution of global governance is not even a glimmer on the horizon yet. Health insurance derivatives could be used as a financial hedge, or as an investment, by institutions from across the globe. Tapping into the massive global funds of investment capital will allow the financial risks of healthcare to be spread far and wide - certainly farther than any national boundary.
Assessment
The likelihood of such a system coming to pass is difficult to assess. On one hand there is a distinct trend towards "Securitization" - David Bowie has even managed to sell the residuals for his albums in the form of a "Bowie Bond" and pollution trading credits are poised to come into widespread use in the years to come. But there is also a definite counter-trend, in which we are making incremental progress toward a single-payer solution for health insurance. Kennedy-Kassebaum was only the first step - currently there is a push to expand prescription benefits for the elderly and expand coverage for children. The next step would be to implement single-payer coverage for all children by arguing that the increased access to preventive care will save society billions in the long run. And what scrooge wants children to go uninsured? With children fully insured, it's just a small and easy step towards extending single-payer healthcare to those between 18 and 65.
Written by Mark Justman Copyright 1999 Posted 11/12/99 http://go.to/futureplex
