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Work in Progress: Enticing Low Risk Young Adults into the Health Insurance Pool

May 12, 2009

Young, healthy people are an elusive group for health insurance companies.   Dubbed the “young invincibles,” they are 18 to 29 year olds who can afford to buy insurance but don’t because they are overly optimistic about not getting sick or injured.  

How can insurance companies entice these individuals to buy insurance? Give them incentives, says Penn Law Professor Tom Baker.   Baker and his colleague, Peter Siegelman, are proposing the revival of tontines, a centuries-old insurance scheme that pays a cash bonus when you don’t get sick and one that covers your medical expenses when you do. They will present their research at the Insurance Project Workshop of the National Bureau of Economic Research in June in Cambridge, Massachusetts.
It’s important for young invincibles, who number in the millions, to have some type of insurance, said Baker. Some of them end up facing serious medical needs during uninsured periods, and their lack of coverage forces other taxpayers to subsidize their health care. 
Some solutions for insuring this population include establishing universal health care, requiring employers to increase the maximum age for children who are covered under parent’s health insurance and increasing the maximum age for participation in state-based programs. For Baker, none of these solutions are ideal because they are costly and some involve an element of coercion.  
Health insurance companies have also tried a number of approaches to lure invincibles -- flashy marketing materials, barebones plans with no premiums and stripped down policies with low premiums-- but all these efforts miss the point, said Baker. These individuals will never buy something they don’t think they need. 
Tontines, in contrast, are products that invincibles will actually pay for because they can be framed as a smart investment, said Baker. 
While Baker and Siegelman have devised a number of options for insurance companies to consider, the simplest arrangement would award a cash bonus to a policyholder whose costs are below a certain level over five years. Preventive care would not be counted towards the costs.  
Introduced by life insurance companies in the U.S., tontines were immensely popular during the 19th century. Tontines paid a deferred dividend to policyholders who regularly paid their premiums over a 20 year period and appealed to customers because they saw it as a way “of backing their own life,” said Baker. 
Companies selling tontines quickly amassed large reserves of capital, which executives began treating as their own fortune. They led extravagant lives and invested large amounts of money in stocks, allowing them to wield considerable influence over the companies.   Charges of influence-peddling provoked state legislatures to outlaw tontines in 1907, ending an era of unprecedented economic control for insurance companies.
Despite their unsavory past, Baker argues that properly designed health insurance tontines would avoid the issues that plagued life insurance tontines because young people have less money to invest and the funds would only be built up for five years as opposed to twenty. 
For Baker, tontines deserve a second life because they capitalize on a fundamental truth about human nature: an irrational belief about one’s own invincibility. 
[Read Tom Baker's New York Times op-ed.]