Post by Baker Siegelman on Mar 18, 2009 23:36:46 GMT 4
Tom Baker
University of Pennsylvania Law School
Peter Siegelman
University of Connecticut - School of Law
March 4, 2009
U of Penn, Inst for Law & Econ Research Paper No. 09-07
Abstract:
Over one third of all uninsured adults in the U.S. below retirement age 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. This paper proposes a new form of health insurance targeted at this group. It would pay a cash bonus to those who turn out to be right in their belief that they did not really need health insurance. The concept comes from the tontine life insurance that fueled the rise of the U.S. insurance industry in the late 19th Century. Tontine life insurance 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. A largely forgotten casualty of the 1906 pacification of the life insurance industry, the tontine idea holds great promise for making health insurance attractive to the invincibles today. These insurers seem to have understood some things about human nature that were largely forgotten over the intervening 100 years, only to be rediscovered more recently under the rubric of behavioral economics. The tontine feature frames the health insurance purchase as a smart investment, rather than a way to spend money for something the customer does not think he needs. Tontines also make insurance more attractive to the uninsured, without wasting funds by subsidizing those who are already covered. Our contribution is to identify a particular class of individuals (the invincibles), show how a specific cognitive bias accounts for their irrational behavior (optimism bias), and design an insurance mechanism (tontines or deferred dividends) to overcome the effects of this bias.
papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1353382_code711466.pdf?abstractid=1350423&mirid=2