"Tontine" Health Insurance: A Misdiagnosis

Two law school professors advocate Tontine Heath Insurance plans in today’s New York Times.   These plans would pay a “dividend” if patients did not use non-preventive services over a five year period, and Baker and Siegelman suggest that this would help overcome the resistance that “young invincibles” have to making a “bad investment” in health insurance.   


I think the authors have misdiagnosed the problem.  Perhaps some young adults don’t purchase insurance because they feel it’s a bad investment; more don’t purchase insurance because it is just too expensive and they have competing financial needs.  Reserving dollars to pay dividends to policy-holders who had no claims would make insurance even more expensive, unless you believe that the potential of a dividend would bring in massive numbers of beneficiaries with few or no expenses, or  would convince policy-holders to forego discretionary treatment. 


Remember that among all adults 19-64, the 50% of patients with the lowest medical bills represent only 3% of all medical costs, so there just aren’t a lot of savings to be had amongst the healthy beneficiaries.  On the other hand, the 10% of patients with the highest bills represent over 2/3 of all medical expenses, and the Tontine scheme would not do anything to lower costs of this population.   I believe that this asymmetry of spending is even more extreme in the 19-29 year old group than in all adults.


In this era of plummeting 401Ks, the young (or others) should not be looking to health insurance as an investment vehicle. In fact, as the life insurance market has shown us, it’s better to separate the core insurance function from an investment vehicle. That’s why term life insurance products are more prudent and have become vastly more common than “whole” life policies that couple life insurance with an investment.


Health insurance, for the young and for most others, should be a bad investment unless you are unlucky enough to have a significant illness.  The social pooling function of health insurance dictates that the premium dollars of the healthy will pay for the costs of caring for the sick.