Tontines for the Young Invincibles: An Idea from Insurance History Behavioral Economics Could Be to Entice Low Risks into the Health Pool
Baker, Tom, Siegelman, Peter, Regulation
Over a third of all uninsured adults below retirement age in the United States are between 19 and 29 years old. When young adults, especially men, age out of the dependent care coverage provided by their parents' employment benefits or public health insurance, they often go without, even when buying insurance is mandatory and sometimes even when that insurance is a low-cost employment benefit. In health policy parlance, these people are known as the "young invincibles" and are considered unreachable by ordinary health insurance. As these young adults grow older, most of them eventually join the health insurance pool. But some of them face serious medical needs during the uninsured period, and their lack of insurance for those needs imposes costs on others in society, not to mention the consequences for themselves.
Policymakers have suggested a number of ways to get this group into the health insurance pool. One obvious approach would be a universal health insurance program. Alternatives include requiring employers to increase the maximum age of children who may be covered under their parents' health care benefits, raising the maximum age for participation in state-based public insurance programs, or mandating that individuals carry insurance. All of these are costly and/or involve an element of coercion.
Instead of forcing them to buy something they do not want or making others subsidize that purchase, what about offering the young invincibles a product they would be more willing to pay for? Insurance history and behavioral decision research suggest that insurance is just like other consumer products or services different people have different reasons for buying it (or not). Young adults in particular tend to feel "invincible," as if no serious harm could ever befall them. And of course, there is not much point in getting insurance that you believe you will not need, which in part explains why this group is reluctant to buy coverage. Whether or not their beliefs are rational, the invincibles are unlikely to be interested in insurance for classic prudential reasons. To reach them, we propose an idea that had great success in the 19th century life insurance market: tontines.
Tontine health insurance would pay a cash bonus to those who turn out to be right in their belief that they did not really "need" insurance after all. The simplest arrangement would award the bonus to those who did not consume more than a threshold value of medical care during a three-year period, potentially excluding preventive care. Tontine health insurance differs from ordinary health insurance or managed care in one main respect: Ordinary health insurance provides a tangible benefit only when you need health care. Tontine insurance pays a cash benefit when you don't use it, as well as covering your medical expenses when you do. As such, tontine insurance is structured to be maximally attractive to those who have an overly optimistic assessment of risk.
There are only a few current analogs to tontines--and nothing remotely like them in health insurance, as far as we know. But insurance products that pay off in both good and bad times were once incredibly successful in the life insurance market. They were so successful, in fact, that they fueled a massive inflow of funds into the coffers of life insurers, resulting in a major political backlash that shaped the overall architecture of the financial system in the early 20th century. That history is worth reviewing, because it reveals how attractive a bonus feature can be to those who are reluctant to purchase insurance.
Tontine life insurance emerged in the United States in the mid-19th century and became a resoundingly successful alternative to traditional life insurance. A tontine life insurance policy paid a deferred dividend to policyholders who timely paid their life insurance premiums for a specified period: 10, 15, or 20 years, depending on the policy that the applicant chose. …