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8Apr/130

New Meaning of “Investing in Your Health”: an idea for Health Insurance Exchange

As states race to implement Health Insurance Exchanges mandated under Affordable Care Act, I wonder whether they have chosen a wrong model - that of an overseer, an information provider and a mediator... Maybe we could have borrowed a paradigm from Stock Exchange market?
Some of the major hurdles facing Health Insurance Exchange implementation include
  • inherent complexity of the endeavor
  • insufficient experience on the state part in operating exchanges (as opposed to financial industry)
  • need to attract sufficient number of participants to become efficient and self-sustaining
It is a common pattern in software engineering to deal with complexity by introducing an abstraction layer,
and financial industry did just that with the concept of Exchange-Traded Funds and Mutual Funds to ease complexity of picking individual stocks. I believe that Health Insurance Exchange might have much more in common with exchange than insurance, and that the very same concepts are applicable here.
Imagine health insurance pools structured in a way similar to that of mutual funds/ETF according to some predefined criteria, and designed to cater to a certain category of consumer (again, analogy of industry sector funds). It is then sold as units of insurance to consumer through the exchange.
The role of the Exchange operators would be that of mutual fund managers:
  • design portfolios of insurance plans and sell units of insurance to consumer (after proper validation and categorization)
  • handle fund-to-fund exchange (when situation of the customer changes)
  • process refunds and assess charges
  • provide apples-to-apples comparison
  • etc.
The insurer and the insured will be decoupled: the former will roll out insurance plans, and the latter will buy as much insurance or as little as they need, and the State's Health Insurance Exchange would provide platforms for "health insurance pool" comparison and rating, and handle financial transfers (including state/fed subsidy portions)..
In a commercial twist to the idea: since the funds have an expiration date, the insurers might even pay dividends to the units holders based upon un-used portion of the plan (insert actuarial voodoo here :).
There might be even a secondary market where investors might buy funds from customers (original units buyers) if they can reasonably expect positive return due to under-utilization of the plan.