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Treat Health Insurance Like An Investment to Cover Young Adults

March 09, 2009

Could an annuity scheme that was popular in the late 19th Century hold the key to providing health insurance for young adults ages 19-29, the so-called young “invincibles” who account for more than one-third of all uninsured adults?

Yes it could, say two professors who claim that the annuities, called tontines, would be more effective and less expensive than forcing businesses to insure their employees’ grown children or increasing the maximum age for participation in public insurance programs.
“Many young Americans don't have health insurance, and not necessarily because they can't afford it. Some just don't want to invest good money in health care that they may never need,” professors Tom Baker of the University of Pennsylvania and Peter Siegelman of the University of Connecticut write in an op-ed published today by The New York Times. “This creates tremendous burdens for the individuals who do end up having medical problems, as well as for the taxpayers who cover their visits to the emergency room.”
In the late 1800s, tontine life insurance policies paid a deferred dividend to policyholders who survived and faithfully paid their insurance premiums for a defined period, usually 20 years. The amount of the dividend depended on how many people were left in the insurance pool when the dividend was paid.   Tontine health insurance could be structured to pay a cash bonus to subscribers who never have to use their health insurance, the professors write.
“The tontine feature frames the health insurance purchase as a smart investment rather than a way to spend money for something the customer doesn't think he needs,” Baker and Siegelman argue.
Baker and Siegelman’s working paper on which their op-ed is based is available on SSRN.