Wednesday, February 20, 2013

Grants v. Insurance

I created a presentation called "The Medical Savings and Loan." The goal of this presentation is to create a system for funding health care built from the ground up around savings account. I designed this program to replace an employer based insurance pool. The program has to be understood in contrast to insurance.

The primary feature of this program is that all medical spending flows through savings accounts owned by the members. Since the money is flowing from individual savings accounts to providers, I realized I had to change the job description of the claims adjuster. So, I snuck into Hogwarts. Stole a wand. Waved it and the Claims Adjusters magically transformed into "Health Care Advocates."

The advocate helps people with the savings plan. The advocate helps find care providers and helps negotiate services with doctors. They have other duties which we will discover below.

I realize that people may have insufficient funds for a medical emergency. So, I require members to buy a share in a loan reserve. This reserve is used for interest free loans. The loan reserve involves both a lost opportunity cost and medical lending has a high default rate. The cost of the lost interest and the default is the premium members pay to have access to interest free loans.


The combination of savings accounts and interest free loans give people who have the ability to self fund their care to accomplish this task. So, lets say you have a medical emergency that costs $10,000 more than is in your savings and heal up. You would borrow the $10k and start paying it back.

I realize some people have medical costs that they can't repay. For these people I created a well funded system of grants. There is a fundamental difference between grants and insurance that I will talk about below.


I created the Medical Savings and Loan as a replacement for insurance. I will give a very simple presentation that has a lot of loose ends. The purpose of this example is to show how loans and grants work together.

For arguments sake: Let's say there was a group of 10,000 people with an expected annual health expense of $82,000,000 with a 10% margin of error. An insurance company might offer to cover this risk for $90,000,000. They charge a premium that comes to $9,000 per member.

Rather than putting this money in one big pool, I will place some of the money in the Savings Accounts. I will put some in a Loan Reserve and hold back the rest in a grants program. In the real world, the break down would be based on actuarial analysis. For arguments sake, I will simply divide by three.

If you were a member of this group, I might do the following. I would place $3,000.00 in your savings account. (There is now $30,000,000 in the savings accounts). I would give you a share in a loan reserve with a cash value of $3,000. (I know have a loan reserve with $30,000,000).



The last $30,000,000 is for grants. I will place it in the loan reserve so that we know have a loan reserve loaded with $60,000,000.00. We will talk about grants below.

The loan reserve works as follows: Each person has a share in the reserve worth $3k. (In this example, the grant agency has 10,000 shares). At the end of the year any money not lent out would fall into the savings accounts. Of course, you are required to buy a share in the next year's reserve.

Lets say $50,000,000.00 of the $60,000,000 was lent out. There are 20,000 shares. $10,000,000 distributed among 20,000 shares is $500. At the end of the year, the reserve would pay $500.00 into your savings account. Imagine that $10,000,000 or the loans were repaid in the second year. You would get $500.00 at the end of the second plus the used portion of the second year's reserve.

Do you see how this works? Every year you buy a share in a loan reserve. Buying a share gives you access to interest free loans. As people repay loans, that money falls into your savings account.

As people pay back their loans, the money will fall into the savings accounts of their coworkers. Imagine that after 10 years people repaid 90% of their loan. You will have seen $2,700 of the original $3,000 repaid into your account. Imagine that the last $300 fell into default. That default plus the lost opportunity cost of the money is the premium you paid to have access to interest free loans for a medical emergency.

Losing $300 in a loan default is a much better deal than losing $9000 to an insurance company.

The idea of a loan reserve sounds bizarre. It is actually a better deal for employees than employer based insurance. It gives people the same amount of protection, but provides a mechanism for employees to build equity in their accounts.

BTW, I should repeat here. You are an employee. This system is replacing your insurance pool. Your experience is that your employer gives you a share in a loan reserve. Having a share in a loan reserve means that you have access to emergency medical loans and you get a little pile of money every year as your coworkers pay back their loans.

The money lost in this program went to help one of your coworkers who had a bad medical expense.

So, I want to talk next about the people who have big medical expense. There experience is as follows. They will be given a savings account and a health advocate (who was a claims adjuster before some smug-muggle snuck into Hogwarts, stole a wand and went around casting spells).

So, you have some money, but it is insufficient for your needs. Your advocate will help you find doctors and negotiate bills. The advocates will help you secure loans.

There is a huge loan reserve. The amount of money in the loan reserve was determined by the same actuarial analysis used to put money into an insurance. You will be able to borrow sufficient amounts of money to pay for your health care needs.

A caveat of this program is that people with large medical expenses are expected to pay back their loans if they can. We will define this question of "if they can" later in the program.

Please notice what is happening. A person with a big medical expense is going to a health care provider with a health care advocate at his or her side. This person has access to a loan reserve with the same amount of money as an insurance company of similar size. The patient has cash in hand. The patient has an advocate experience in negotiating with doctors. This patient is expected to pay back a sizable chunks of the amount spent at the doctors.

The Medical Savings and Loan has just created a viable mechanism for restoring the pricing mechanism in health care.

When you are buying health care, you are doing so with the expectation that you will have to repay the loan.

Now, lets get back to the $30,000,000 set aside for grants. The $30,000,000 was foolishly invested in a loan reserve by some right-wing nut job who thinks Harry Potter is real.

But that is not that big of a deal.

The grant agency has a legal obligation to disperse the $30,000,000.00 to people who had higher than normal health care expenses.

The grant agency will "disperse" its money by writing off loans. So, the fact that the money was invested in the loan reserve isn't that big of a deal after all. Hmm, maybe Harry Potter is real?

Did I mention that you had a health care advocate? When you borrow to pay for your high medical bills, your advocate will apply to the grant agency.

So, the grant agency will end up writing off $30,000,000.00 of the loans. This will cover a good portion of the loans, but not all of the loans. People with high medical expenses will end up paying back a good portion of their high expenses from their personal finances.

Remember, the mantra of the Medical Savings and Loan is: Those who can self fund their care should. The writing off of loans will have a needs based component. Imagine that an executive making $500,000 a year had an unfortunate accident in the hot tub while celebrating his $200,000 Christmas bonus. The incident cost $50,000.

Sorry, but this bozo can afford the $50,000 hospital bill.

The minimum wage janitor who was hit by a car while biking home from work will have a much harder time paying that $50,000 medical bill.

This program fares well in the progressive test. There is a big transfer of wealth from the healthy to the sick. There is needs-testing of the grants as well. Above all, there is a massive transfer of wealth from the big insurance pool into the pockets of the workers.

On the conservative front. People will buy health care on a fee-for-service basis with the expectation that they must pay back their loans. People with higher medical costs are expected to pay a higher portion of their care.

An important aspect of this program is that people with large medical expenses are expected to pay more. The grants assure that middle income workers to not see an outlandish increase in what they pay.

Did I mention the bozo executive who tripped in a hot tub while celebrating his $200,000 Christmas bonus? He has to pay more.

But, I've never been all that fond of clowns ... especially the ones in suits.

The above simplistic model shows how savings, loans and grants work together.

All health expenses flow through the savings account and care is delivered on a fee for service basis. The costs are negotiated with the help of a trained advocate.

People who have insufficient funds get loans from a well funded loan reserve. The loan reserve just happens to include a huge amount dedicated for distribution as grants. The grants will be distributed by writing off the loans.

With this basic model in mind, I can finally address the difference between grants and insurance.

A grant agency has a huge pool of money. The agency has a legal obligation to disperse the funds according to a formula. In the above example, the agency has $30,000,000. The agency is required to distribute this $30,000,000 to the people in our group of 10,000 workers who had above normal medical costs.

The formula includes needs-testing. The overpaid bozo in a hot tub scores lower than the deserving janitor who is putting thirteen orphaned-children through college by riding a bike to work.

The grant agency works seamlessly with the loan reserve. A person with high medical bills will have the experience that that a mysterious loan agency writes off a big portion of the loans.

In contrast, insurance is unwieldy. With insurance an actuary analyzes the expected experience of a group. An insurance company will speculate on that risk and offer to cover the risk for a premium. The premium includes a big profit to cover the cost of the risk.


People with a health expense will file a lawsuit against the insurance pool. The biking janitor does not have the same legal clout as the suited-clown. The janitor might get some substandard and be expected to man up and live with the pain, while the suited bozo will get lavished with the best care political influence can buy.

Insurance is such a stupid thing. Everytime you want to see a doctor, you have to file a lawsuit.

Yes, if you are a political insider, you can get lavished with care. If not, God help you because because the insurance company that took your money won't.


The structure of the Medical Savings and Loan sounds bizarre. However, the program leads to more equitable results than insurance. We can see this when we examine people with chronic conditions.

Imagine two sportsman. Each have an insurance policy with a $3,000 deductible.

The first breaks a leg in a skiing accident. It costs $23,000 to pull the skier from the slope and slap on a cast. Too our great joy, the skier heals up and has a great story of an adventure in Park City. He pays a $3,000 deductible and the insurance pays $20,000. The insurance company raises the skier's premium for a few years, but it falls back down again because the the accident did not increase the client's overall risk profile.

In the second case, a fisherman tweaks his back while reeling in a steelhead. He goes to a chiropractor that costs $3,000 and finds out that he will need a treatment that costs $1,000 a year for the next 20 years. To make matters worse, the fisherman with the bum back now has a decreased earnings capacity.

The insurance company pays nothing because the $3k is under the deductible. Since the guy has a bum-back the insurance company jacks up the insurance premium $500 a year for life.

Both sportsmen had an injury that cost $23,000. The skier has a great story of a fun adventure. The fisherman has chronic pain for life. The insurance company will give the skier $20,000 simply because the cost came in a lump sum. The poor fisherman gets nothing and has to pay a higher premium.

The Medical Savings and Loan works as follows. Both sportsmen had $3,000 in their savings account. The skier has to take out a $20k loan. The fisherman pays the first bill from cash. The advocate will learn that the fisherman has an expected $20,000 in expenses and a lower earnings capacity.

Because this system is looking at each person as whole being the grant agency will end up giving the fisherman a little bit more than the skier because the guy with the bum-back and decreased earnings capacity has it worse than the guy with a cast and a story to tell.



This is a much better deal for you than your old insurance because you are now building equity in your savings accounts.

If you are lucky and don't have high health costs, you will see a tidy sum accumulate in your savings account.

1 comment:

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