LFG Marketing | June 2019
Dana Goodman and Darius Lakdawalla are the founders of Precision Health Economics, a company that “produces advanced health economics research.” One aspect of their research is quantifying the economic benefits of innovative medical treatments, as well as better ways to pay for them.
In the middle of a March 2019, Wall Street Journal commentary discussing new immunotherapies for cancer treatment, Goodman and Lakdawalla drop this mind-bending statement:
“Studies are beginning to show that life insurers could save lives and help their bottom line by purchasing cancer treatment for their clients.”
Wrap your head around that idea: Life insurers should consider paying for cancer treatments on the people they have insured.
To explain why, the article presents the following hypothetical:
A 57-year-old man with health insurance is diagnosed with metastatic skin cancer, a disease which is “almost universally fatal within five years.” However, a new drug protocol offers “a reasonable chance for a durable cure,” i.e., treatment will have a positive, lasting effect. A full course of treatment is anticipated to cost $120,000.
Goodman and Lakdawalla write: “As soon as the diagnosis is made, the incentives of the man and those of his health insurer diverge.”
The incentive of the 57-year-old man is simple: he wants the best treatment available, and he wants it as soon as possible.
An array of factors makes the health insurance company less-than-eager to authorize payment for this treatment. The company wants to honor its obligations in the most financially prudent way possible, which might mean insisting on less-expensive treatments at the outset, approving the desired treatment only if the initial prescriptions prove unsuccessful.
Beyond costs, there are deeper issues, ones that come very close to being moral hazards. If the 57-year-old should have a full recovery, and switch to a different insurance plan (maybe because he changes employers), the first insurer has subsidized a competitor; the new insurer is receiving ongoing premiums, but the old insurer is stuck with the bill. And there’s an even darker thought: if the man dies, the health insurer’s financial obligations are done. Which leads to an uncomfortable question: Is it in the health insurer’s interest to pay for the best treatment available?
In the hypothetical scenario, the insurance company limits the claim to $96,000, leaving the 57-year-old with a $24,000 bill, and a tough decision: how to pay it or to forgo a chance at a cure.
But wait…there’s a plot twist:
“Let’s say our patient has a $250,000 life-insurance policy.”
Specifically, it’s a 30-year term policy purchased when the man was 40. From Goodman and Lakdawalla’s perspective, the incentives of the man and the life insurer are similar; both want him to live as long as possible.
For the life insurance company, every month of added life is a bonus, both in postponing the payment of benefits and in collecting additional premiums. If the 57-year-old can’t afford the new drug treatment, the insurance company will likely end up paying a $250,000 death benefit to the man’s heirs. On the other hand, if he makes a full recovery, the insurance company has up to 13 years to collect premiums, after which the policy would expire – without a death benefit being paid.
The longer the man lives, the better it is for him and the life insurance company. Which is why the company ought to consider paying the $24,000 out-of-pocket costs.
Of course, the man’s recovery and living past 70 are not guaranteed. But Goodman and Lakdawalla estimate that paying the $24,000 bill would result in $28,000 of savings for the insurer. It’s a win-win: The 57-year-old gets the best available treatment to extend his life, and the insurance company accrues a financial benefit for keeping the policyholder alive.
Interesting Idea. But…?
- While it sounds new, it’s a variation on something old. The scenario described in the article is theoretically plausible, but it’s not a contractual feature of current life insurance policies. However, it does resemble other instances under which life insurers will make partial benefit payments before a death occurs. The online “comments” section for the article included the following:
“Most life insurance companies offer a terminal illness rider and/or a critical illness rider. These allow the policy owner to access the death benefit, within a defined limit, if the insured is diagnosed with a terminal or critical illness while the policy is in force. The benefit can be used to help pay for needed medical treatment (or anything else).”
Note: Riders may incur an additional premium or cost. Riders may not be available in all states.
- This scenario is possible only because the 57-year-old bought a policy when he was insurable, and kept it in-force. It’s a hypothetical, but we can assume the man didn’t buy the policy at 40 because he was hoping to pay for cancer treatments.
One of the under-emphasized features of life insurance is that the death benefit can be a valuable asset - while the insured is still alive. Some financial professionals and consumers are so focused on accumulation they might overlook these “living benefits.” When integrated with other assets, life insurance gives policy owners some options to leverage the future value of a guaranteed death benefit. If you haven’t already, you should connect with financial professionals who understand these unique possibilities.
Life insurance guarantees are based on the claims-paying ability of the insurance company and payment of all required premiums
Lifetime Financial Growth, LLC is an Agency of The Guardian Life Insurance Company of America® (Guardian), New York, NY. Securities products and advisory services offered through Park Avenue Securities LLC (PAS), member FINRA, SIPC. OSJ: 244 Blvd of the Allies, Pittsburgh, PA 15222 (412) 391-6700. PAS is an indirect, wholly-owned subsidiary of Guardian. This firm is not an affiliate or subsidiary of PAS. 2019-80670 EXP 05/2021