Health Insurance as an Investment to Cover Young Adults

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Media Contact:Jeanne Leong | jleong@upenn.edu | 215-573-8151March 9, 2009

PHILADELPHIA -- Could offering a cash bonus for not consuming more than a threshold value of medical care hold the key to providing health insurance for 19-29 year olds, the so-called “young invincibles” who account for nearly half of all uninsured adults?

“Some young adults can’t afford to buy health insurance, but many can,” Tom Baker, a professor in the University of Pennsylvania Law School, said. “Instead of forcing them to buy something they don’t value, or making others subsidize that purchase, we suggest designing a product they would be willing pay for.”

Baker, along with Peter Siegelman of the University of Connecticut Law School, have a plan they call “Tontines for the Invincibles,” which is based on an annuity scheme that was popular 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.

In their research paper, “Enticing Low Risks into the Health Insurance Pool: Tontines for the Invincibles and Other Ideas from Insurance History and Behavioral Economics,” Baker and Seligman write that the tontine feature could make buying health insurance more palatable to young adults because it frames the purchase as a smart investment, rather than spending money for something the think they don’t need.

Baker’s and Siegelman’s paper is available on the Social Science Research Network at papers.ssrn.com/sol3/papers.cfm?abstract_id=1350423.


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