DIY Health Insurance - Can it be done?

November 21, 2010 8:22 AM

What's stopping people in the U.S. from forming health care co-ops?

I've noticed lately that there's been some news coverage in the U.S. about religious health care co-ops, where instead of the members paying for health insurance individually, they each pay a certain amount monthly into a common pool and use it to pay the bill when a member needs medical care. The costs seem to be much lower than what it would cost the same people to maintain health care coverage. Unfortunately, these co-ops also require people to be a member of a certain church and follow certain rules.

But what is stopping people from forming non-religious health care co-ops? You could have, say 50 people who are self employed or who otherwise aren't covered by employer health care pay $100 a month into a common pool and then use it to cover medical expenses when someone in the group gets sick or injured. It seems like it could even be done pretty informally, amongst perhaps a group of friends who already know and trust each other. Are there good reasons people don't do this? And if so, what are they?

posted by Jess the Mess to health & fitness (19 answers total)

because 50 people dropping 100 bucks a month won't really cover someone stuck with 100s of thousands of dollars in catastrophic care. That pool will drain pretty quick.
posted by Max Power at 8:29 AM on November 21, 2010 [4 favorites]

I'm not sure I'd want to mix money and friends in that particular way. If someone wants to get acupuncture for their condition/injury, but other people in the pool think that's a waste of money and they should see an orthopedist instead, well, that sounds like less fun than waiting on hold with an insurance company drone.
posted by rtha at 8:33 AM on November 21, 2010 [1 favorite]

50 people aren't enough to evenly distribute the cost of catastrophic illnesses. Your co-op could handle it when one person gets cancer, but would be wiped out when three people get it, which is statistically likely to happen eventually. There's also the issue of trust: People in religious groups are going to trust each other, and that would allow them to dispense with some of the heavyweight legal costs that otherwise would be inevitable in any financial arrangement that deals with life and death.

(disclaimer: purely speculation)
posted by qxntpqbbbqxl at 8:34 AM on November 21, 2010

Are there good reasons people don't do this? And if so, what are they?

Well, let's say you start this. Every month, you collect $5000. Mostly, people are healthy, and you bank this money, but occasionally someone uses some of it. Let's say that you save $4000 a month. Then, a year in, one member of your group finds out he or she needs a heart transplant. You've saved $48,000, plus some interest. Heart transplants cost about $800,000, plus a couple of thousand dollars for anti-rejection drugs every month. At that point, you're screwed.

Insurance companies have two strategies for dealing with this. The first is to have a really big pool. The second is to have re-insurance, which is the insurance that insurance companies get against losses that they can't handle. I think you'd need some sort of re-insurance to deal with the possibility that someone would get an illness that was too expensive for your collective to handle.

Maybe the religious folks are willing to take their chances, or maybe they think God is on their side and will guarantee that they don't need a heart transplant. It would scare me, I think.
posted by craichead at 8:35 AM on November 21, 2010 [1 favorite]

Not to mention that $5000 you got from the informal co-op to cover a dental emergency would probably be considered income by the IRS. And the way around that would be to go through all the hassles of forming....wait for it...an insurance company!

It's an evil treadmill we are stuck on this country when it comes to health care.
posted by COD at 8:38 AM on November 21, 2010

Oh, and also, the issue of negotiation with health care providers. Big insurance companies negotiate sweetheart deals with hospitals and HMOs, and they are able to do this by threatening to take their business elsewhere. That wouldn't work for a small insurance co-op, which would wind up paying a lot more for medical procedures and medicine.
posted by qxntpqbbbqxl at 8:39 AM on November 21, 2010 [1 favorite]

By the way, the 50 people and $100/mo. were just random numbers. It could also be, say, 1000 people paying $300/mo. After a certain amount a month, like say $700 per person, it would start not to be worth it of course, since you could get private insurance cheaper.
posted by Jess the Mess at 8:42 AM on November 21, 2010

If I were serious about this, I think what I would do would be to try to set up some sort of umbrella organization, and then have individual collectives that were all members of the umbrella organization. The individual collectives could make up their own agreements within a set of guidelines, and then they could all contribute some money to the umbrella organization to insure them against unforeseeable catastrophic illnesses and to negotiate with providers.

The problem, I think, is that some degree of catastrophic illness is probably guaranteed. I'm no actuary, but I wonder if you randomly selected fifty people and had them each contribute $100 a month, if the chances of someone needing more care than that wouldn't be better than the chances that no one would.
posted by craichead at 8:44 AM on November 21, 2010

Some companies self fund insurance. A company I worked for with about 200 employees did this. But they are money making operations to begin with so they don't have to rely on the 50 bucks a month from each employee. The company is also insured against catastrophic loss by a large insurance company
posted by Ad hominem at 8:56 AM on November 21, 2010

US insurers are not crazy. They're the way they are in reaction to real market pressures. Your co-op will have problems with adverse selection, billing errors, billing fraud, and price negotiations unless they do the same dickish, bureaucratic, and hostile things that insurers do. Once something goes sour and becomes a matter of law, expertise and deep pockets matter.
posted by a robot made out of meat at 8:58 AM on November 21, 2010 [1 favorite]

You know what might work? Require everyone in the collective to get catastrophic insurance, which is reasonably cheap. The collective only covers stuff that isn't covered by catastrophic insurance. And then you might be able to work out some sort of arrangement with a primary care provider, because I know that there are some who are willing to charge lower prices in exchange for not having to deal with insurance companies.

(Or maybe that wouldn't work. I don't know a lot about this stuff...)
posted by craichead at 9:04 AM on November 21, 2010 [2 favorites]

The math just doesn't work. Insurance is a business with high barriers to entry: regulation (state and national), high cash on hand required, complex IT infrastructure, complex process flow.

How would you handle things like risk adjusted pricing? How would you build the immediate cash cushion you need to pay for services? How about the IT systems needed to process claims? These are big ticket items that simply don't work without a large membership.
posted by 26.2 at 9:07 AM on November 21, 2010

There are freelance insurance organizations - isn't that ultimately the same thing?
posted by mdn at 9:10 AM on November 21, 2010

Healthcare co-ops can work -- if you have ~500,000 people.
posted by kindall at 9:38 AM on November 21, 2010

Someone above hit on the critically important thing: reinsurance. If you have health insurance, there's a damn good chance your insurance company has reinsurance coverage unless they're one of the gigantic national brands. Even then I wouldn't be surprised if they had some sort of reinsurance coverage.

This is because certain not-incredibly-rare conditions cost over a million dollars a year to treat and would sink most smaller insurers if they happened to get more than 2 or 3 of these folks in the pool.
posted by wierdo at 11:04 AM on November 21, 2010

The Ithaca Health Fund does something like this. They don't pay out for huge catastrophic things but handle a lot of intermediate health stuff. I seem to recall that they encountered a lot of hurdles getting this all set up but can't remember what they were exactly.
posted by jessamyn at 11:18 AM on November 21, 2010

In addition to the difficulties others have raised, remember that any viable insurance institution is going to need 1) adjusters who can investigate claims and make sure they're not fraudulent, and 2) actuaries who can set premiums differentially for people who are differently risky.

Both of these roles are expensive overhead, so if you're going to hire such people, you might as well expand your insurance pool to the point where you're getting full use out of each of them; thus it's (much) more efficient to run a large insurance plan than a small one.

All of which said: people form INFORMAL such groups all the time, especially in contexts where they already trust one another (or at least feel social pressure to pretend that they trust one another): they call these insurance pools "families" or "congregations". It's no accident that wealthy people are much less likely to make a collectionplate church their primary social outlet.

And I suspect that one reason that socially-oriented profligacy is so common among the poor -- receive a windfall, blow it immediately on one big party for all of your friends -- is that it serves as de facto insurance against the possibility that any one person will not receive any windfalls during a given duration.
posted by foursentences at 11:32 AM on November 21, 2010

There is no reason why you could not do this, but I suspect that when you did it, and solved all the problems that cropped up, what you'd end up with would be something that looked suspicious like (wait for it) ... an insurance company.

The only advantage you'd have over a "real" insurance company would be that you'd be non-profit. But there are non-profit health insurance companies, too. I think you would be hard-pressed to beat them without some sort of quirk (like requiring everyone to be a member of your church, and thus hopefully less likely to attempt fraud, and cut back on claims adjusters).

Ultimately I think it's a bit of a TANSTAAFL situation. Health insurance companies look and act the way they do because of the environment (social, legal, political, financial) environment that they work in. What you are trying to do is replace the insurance companies, but you would be subject to the same forces that make them the way they are — at least the non-profit ones. So it's reasonable to assume that what you'd end up doing is produce something like an insurance company.

Not that I think it's a terrible idea; maybe if some people tried to do this, they could highlight and campaign against some of the laws and regulations that help to entrench and encourage bad behavior by insurance companies.
posted by Kadin2048 at 5:05 PM on November 21, 2010

Two things jump to mind:

a) the way insurance companies make a profit is by investing the premiums. Not sure how that is useful, but I was very surprised when someone told me.

b) any small group of people is either going to want to not allow certain people they perceive as unfairly using the money to join; or they're going to begin looking at each other and fell like they have some right to regulate other's behavior (ie, "John Doe must stop eating red meat! I'm not paying insurance so that he can clog his arteries!!).
posted by MeiraV at 7:44 AM on November 22, 2010