Insurance Bonuses: Arguing For Tontines
People between the ages of 19 and 29 make up a third of all uninsured Americans under retirement age. And for many of them, that's a choice. But that puts a strain on the health-care system. Host Guy Raz talks to Tom Baker, a University of Pennsylvania law professor who's proposing a 19th-century solution to this very 21st-century problem: tontines. The health insurance policies would pay a cash bonus to people who buy insurance and then don't use it. The practice was outlawed 100 years ago.
GUY RAZ, host:
About a third of uninsured adults below retirement age are between 19 and 29 years old, the so-called Young Invincibles.
Many can't afford health insurance and those who can often go without it. The reason: Well, why pay for something you might not use?
So two law professors, Tom Baker from the University of Pennsylvania and Peter Siegelman from the University of Connecticut have come up with an unusual solution. Revive the idea of tontines.
These were insurance schemes banned in most states here in the U.S. at the beginning of the 20th century, after a series of corruption scandals.
But Tom Baker says bringing tontines back could actually encourage more people, especially the young and healthy, to buy insurance.
And what exactly is a tontine?
Professor TOM BAKER (Law, University of Pennsylvania): In its very pure form, a tontine is a contribution made by a group of people to a fund, and the last one living collects all the money. And in the health context, what we're proposing is that people who are in a health insurance pool will pay a little bit extra than they would ordinarily for the health insurance. And the people in the pool who turn out not to need the heal insurance during the time of the tontine, which we would say three years would be a good number.
At the end of that three years, the people who didn't use their health insurance divide up among themselves the earnings on the amounts that people paid to participate in that tontine connected to the health insurance pool.
RAZ: So you would essentially be gambling on your good health.
Prof. BAKER: That's right. But if you think about it, insurance is a gamble. Insurance is something that you buy that pays, you know, on a contingent basis - do you get sick or not. And from an economic prospective, it's pretty easy to prove that people really ought to be buying insurance. Because insurance is a magical transformation device that allows us to shift money from times when we don't need it very much, to times when we do need it very much.
But it turns out that lots of people don't behave in that rational way. And we think particularly young people because we think they're overly optimistic about their health outcomes. And so if, you know, adding a little spice to the insurance makes it more appealing, we think that's good.
RAZ: You see, I see a lot of potential for mischief here. You know, like poisoning your co-workers and stuff. I mean, if you know you're all in the same pool and if they get sick and you stay healthy, you're going to make more money.
I mean, my God, I can just see detectives all over this, all over this scheme.
Prof. BAKER: Well, you won't be surprised to hear, and you probably know, that tontines have been a recurring theme in literature, detective novels. And I think the evidence that people have actually done that is pretty slim.
There are things I am worried about, and this is something that my wife has told me about many times, is I'm concerned that someone may not go to the doctor if they're close to the end of the period. And they are looking at that 1,000 or $2,000 bonus that'll be for them, if they just don't go to the doctor for the next few months. And that I do worry a little bit about.
RAZ: That's Tom Baker. He's a law professor at the University of Pennsylvania. He co-authored an article with Peter Siegelman from the University of Connecticut, promoting tontines in the latest issue of Regulation magazine. It's a quarterly put out by the libertarian CATO Institute.
Tom Baker, thank you so much.
Prof. BAKER: Thank you very much. Transcript provided by NPR, Copyright NPR.