How to securitize health insurance policies

Would never work.

It's an interesting thought, but I don't think it's feasible politically, and there's some ethical hazard concerns here as well. The main issue is, do you think the average member of the public trusts a wall street banker to be counterparty to health insurance claims after everything they've seen over the past three years?

Honestly, I think people trust HMOs a heckuvalot more than they trust bankers right now. And when it comes to finance- and certainly health- trust is a lot more important than squeezing an extra 2% out of the cost. Especially right now.

The traditional insurance companies can remain as plan administrators and counter parties to the derivatives that guarantee the soundness of the trusts. Wall street bankers can step aside once finishing the structuring and origination works ( traders can still trade them though.)

It won't work at all. Forgetting that policies are "custom" to their invidual payee or that insurance has it's own further set of rules and regulations, what you are proposing is essentially the securitization of an options contract.

These issues with insurance exist for mortgage as well. If it can work with mortgage, it can work with insurance too.

I won't dispute that it "can" work in this twisted quant world of ours. That doesn't mean it's not a dumb idea. That is to say, unless your intent is to securitize health insurance and then foist the bullshit security off on unsuspecting investors, a la synthetic CDOs.

You have to remember that health insurance laws vary widely from state to state, and that archaic anti-trust exemptions protect the health insurance business from virtually every federal oversight that applies to every other business in America - except health insurers.

That's why Obamacare was such a giveaway to the insurance companies, and was somehow ruled unconstitutional in the past 48 hours. I'm still scratching my head over that one; forcing people to buy health insurance is clearly unconstitutional, but that's never been a basis for ruling against a measure in my lifetime.

Don't worry Eddie- the lobbyists are hard at work on the SCOTUS to get this populist ruling overturned.

Getting Wall Street involved in healthcare is a terrible idea that will end with hedge funds bribing doctors to give patients AIDS to satisfy a short position.

Whether a claim can be denied is spelled out in the policy. Much more likely is that activist investors lobby plan administrators to contain the runaway medical cost, which is exactly what our society needs; isn't it?

You can stick with Aetna. But other people might work with Aetna to securitize their policies.

This is a great idea. Bring this idea to your bank before the next guy does.

One person (the inventor, a college student) says it's a great idea. Everyone else says it sucks. Please let us know which firm goes for this so some activist investor can short it and then have a laugh about Wall Street trying to get involved in healthcare with a few key congresspeople.

If you want to fix medical costs, look at how to fix the system first instead coming up with new ideas to profit from a broken system. Securitizing Health Care Plans won't do much to control costs. Approrpiate overhaul and regulation in the medical industry (Such as requiring a medical degree or a high degree of qualification for people reviewing health care claims in order to determine whether the treatment is appropriate and/or reducing the level of beuracracy involved in the insurance process) will do more than proposed securitization would.

Claim deniles are not entirely spelled out in a policy. I've seen denials happen despite there being medical merrit to the claim and IMEs confirming the benefit for having a procedure or whatnot done. There is no rhyme or reason to how insurance companies run their business. As I said before, how can you securitize a custom options contract?

By pooling many of them together and package them you can securitize them. A plan administrator without its own money on the line, as in the case of my proposal, is far less likely to deny claims than the traditional insurance companies which have their own money on the line. It's good for the consumers.

This is a great idea. Bring this idea to your bank before the next guy does.

Again you're not answering my question, you're just repeating what the basics of securitzation are. You can't take a collection of options, group them together and securitize them because there is no ability to accurately group things that have derive their price from an underlying asset. Unlike Mortgages, where you can create a group of loans that all have the exact same characteristics, health care policies will differ at every single point, making them entirely unique to the individual (in this case, the underlying asset), which is why they, like any other form of insurance, are considered to be an Options contract. It's a long term bet on protection that is unique to the underlying owner.

To answer your point though, say you create a securization pool worth $10,000,000 across a total of 500 policies. What happens when entire capital pool is used up because you have enough policy holders who undergo surgeries that are billed at $100,000+ a pop and use all the capital? Then what happens? You need back surgery and the insurance securitization pool is now out 150,000 for a 2 Level PLIF to cover your surgery. What about the guy who needs to go in for an emergency bypass that costs $100,000 or the $20,000 for a reconstructive breast reduction surgery that has to be done in conjunction with a $75,000 surgery related to breast cancer? How about the costs associated with pregnancy and deliverying a baby? What happens when you run out of funds and can't pay out? Does it go into default? Do the policies now get canceled and these folks need to apply for a new policy that may get resecuritized and have this happen to again? It's not good for the consumers. It won't lower costs and will just create new problems before the old ones are fixed.

Just because something works for mortgages does not mean it will work for options.

I'm just trying to work through the process here.

Ok, so theoretically, securitizing health insurance policies would lower the cost of capital for the insurance company. Because actuarial science within the mechanism of insurance is one of the most proven forms of risk assessment and management, the investor would have a very safe investment--probably safer than MBS and CMBS.

I work in real estate asset management--we are paid a fee out of the fee stack. We do our job independently and to the letter of the law. I'm not entirely sure why some of you guys are saying that a health insurance securitized servicer wouldn't act independently and in accordance with the law.

double post

Frieds, you could securitize pools of policies that are relatively standard, say United Health's policy with General Electric employees. Those are very generic policies. Also, health insurance in a pool is relatively easy to predict by actuaries in comparison to, say, commercial real estate or even bonds. There's a pretty incredible record among these firms.

>I'm not entirely sure why some of you guys are saying that a health insurance securitized servicer wouldn't act independently and in accordance with the law.

Oh the servicer probably would- the question is what would investors do.

This is securitization, which obviously means the potential for taking out short interests in folks' health. What would happen if an unscrupulous person were to get involved and hoped that all of Aetna's policyholders in Wyoming got cancer- or AIDS?

I can only imagine what would happen if Tony Soprano got in on this market. What we're actually seeing right now is a lot of this securitization getting unwound.

Well, this pains me to say, but government regulation (puke!). Something along the lines of secrecy or privacy policies. But I see what you're saying.

Even today people can take short positions on health insurers. Separating servicers from investors removes one big conflict of interests and is very good for the consumers.

I normally hate government regulation, but the bottom line is that this opens up a can of worms that is much easier handled by the government just forbidding it than tracking down all of the Tony Sopranos and people willing to play Mengele for the right price.

I can see where all of this is going and securitization is absolutely terrible news for policyholders. If this crazy idea ever went through, I would go to Mexico for all of my healthcare and pay out of pocket- I would feel safer getting treated there.

If increased granularity is a concern, we can always limit the minimum pool size. Even today, the annuity underwriters would profit from the death of the annuity holder. So would you consider annuity business evil? Securitization removes the conflict of interest when the investor is also the servicer, which is the cause of all those denial of claims. Securitization, by removing this conflict of interest, should drastically reduce the number of claim denials.

I am actually very proud of my invention. It has something for everybody. It would appeal to the republicans who love the free market solutions, as well as as the democrats who hate the claim denials. It would add jobs, i mean good jobs at good wages, to the financial sector; and by doing so, help the economic recovery.

If I mention this in my resume, will I land a gig at a BB? Just kidding.

This is a great idea. Bring this idea to your bank before the next guy does.

From the mouths of babes...

I will sit back, wait and see which bank comes up these securities first.

Well, where do I even begin… For starters, this sounds like you are recreating the MBS bubble that crashed in 2007 without thinking about the full effects of what can/will happen here.

So, where do I find fault with this:

1) Can someone please explain to me how you can securitize an options contract? No one has yet answered that question. I am seriously getting pissed off that no one here can come up with a good answer to how you securitize something whose value is reliant upon an underlying asset (in this case, human life) that is constantly changing in value? Until you can explain that, I’m just going to assume that you have no idea what you’re talking about. Insurance, by its very nature, is an extremely long dated options contract. Explain how I can securitize a long dated options contract that is written between two parties and then we can talk seriously.

2) There’s the fact that you cannot bet on human life in this country. In fact, it’s considered illegal in most of the world, to bet on human life. By following your proposal, you have essentially allowed for speculation on the health of a group of people, much like taking out a contract on someone’s life. Great idea, especially when you consider the types of people that would not be averse to causing problems in order for these securities to end up dropping in value.

3) There is the obvious issue of payouts. So, you have securitized these health insurance policies and taken in some value of money to cover payouts. What your proposing sounds like the Doctors will receive full and fair value for their services, meaning they will be paid in full. Am I right in assuming this? Clearly, I can assume the following about you. First, you know nothing about how medical billing and insurance payouts work. Second, you don’t know how much medical procedures and care actually costs. Third, you are not factoring in any other costs of doing business. Great, so you’ve securitized the health insurance policies, but you haven’t reduced the costs of practicing medicine, and in turn, the costs associated with health care at all.

4) Speaking of payouts, what happens when the security runs out of money and defaults. You really can’t funnel capital between your second, third, fourth and fifth derivatives of a CDO into the lower order derivatives and you’ve effectively caused a massive default scenario to occur. So, what happens when all the funds are used and no new payout can occur? Have you resolved that problem yet. In the same vein, your idea requires that health care premiums increase in order to meet an expected interest rate payout in order to take on investors into this crazy idea of yours. How can you argue that the cost of care will decrease when you’ve added in an entirely new price increase to cover the newfound cost of care?

5) Government Regulation on both an individual state and federal levels. Enough Said.

6)What does this do to resolve the issues associated with the increasing costs of health care in general? How does this reduce the costs incurred at all levels and make it more affordable for anyone to have health care? How are you factoring in any real change if all your doing is saying “let’s be unscrupulous bastards and monetize health care instead of actually fix it”. Fix the god damned problem with the system before you find new ways to make money in it.

Frieds, I think you misunderstand my idea. I will try to answer your questions one by one. But first of all, MBS issue was not the fault of securitization per se. The culprit is overly loose, or sometimes fraudulent underwriting practice, not securitization. Securitization simply makes the market more efficient.

(1) In my proposal, the individual health insurance policy still goes through individualized, customized, underwriting procedure by the traditional insurers as it does today. All the individual and customized aspects are taken cared of at that stage. It is after the policies are issued that they will be pooled, packaged, and securitized. Also remember in my original post, I proposed the securities are structured for a fixed length of time.

(2) Nobody is betting on human life in this proposal. Investors have every incentive to wish the insured stay healthy. Short sellers of course are a different story. But isn't it universally true that short sellers wish disasters for the securities they short anyway, regardless what kinds of securities they are? But to win support for my idea, I don't mind if people want to ban or limit the short selling of such securities.

(3) In my proposal, doctors will get paid the market price of their services, no more and no less. Investors and the market will work hard to remove the waste in the medical care delivery system. It is the rampant waste, not doctors' pay, that is the cause of the runaway medical cost. The cost saving will not come from denial of claim, for which the servicers will have no financial incentives and will bear the legal consequences. It will come from the competition of these securities in the financial market and the resulting incentives for the issuers and investors to work with the medical care industry to wring out the waste from the system.

(4) The traditional insurers can write derivatives to guarantee the payout. Remember they as the original underwriters of the individual policies, are legally liable to guarantee the payout. Their risk and exposure is no more than what it is in the current system.

(5) Securitization occurs between the insurer and the bank, and has nothing to do with the insured. The original individual policies are still in force. So there is no insurance regulation issues.

(6) I covered that in (3).

As the son of an insurance executive, my best guess is that there would be very little short-selling of a proposed health insurance security based on the qualtiy of health of the overall pool because the record of actuaries has been nothing short of impeccable. It would be extraordinarily unlikely that in a several billion dollar pool that the actuaries will be substantially wrong in predicting the health patterns of the pool as a whole. Insurance has priced into it that x number of persons will have major health problems--bypass surgery, broken limbs, etc. Others will pay thousands of dollars and die in a car wreck or never need the insurance. It's all priced in.

The "shorting" of said security, in my estimation, would probably have much more to do with interest rates rather than the decline or strength of the health of the overall pool.

Well, regardless of the (im)morality or efficacy, I think you've got quite the thesis topic.

Seeing as I never implied that the MBS bubble was a fault of securitization, I just implied that it looks as though you're recreating the MBS bubble with a proxy security.

There's a reason my first point was my first point. Clearly you still fail to answer my question about how one can securitize an options contract. Just saying that they are pooled and packaged implies all you know is what the word securitized means. You're not actually answering my question about how you can create a structure based around hundreds of completely different unique options contracts (in this case, Insurance Policies) that don't have much in common with other policies. Until you can clearly and consicely answer that question, it is seriously hard to consider your response as a valid answer. If you can't answer it, say that you don't know instead of going around in circles and trying to avoid answering god damned question.

While investors may have every incentive to wish the insured to stay healthy, securitization of insurance policies effectively allows for speculation on human life since you are betting on payouts of policies. Just like CMBS were speculative plays on Mortgages, these would be speculative plays on Human health for a constantly depreciating asset. That, in the most basic sense, is a bet on someone's life. To counter your effective ban, how can you have a free market without the possibility of someone having a negative viewpoint on things. Why shouldn't I be able to take a negative viewpoint on a security. Nothing grows forever, especially depreciating assets.

To your third point, while it's great to talk in grandiose ideas, you still don't address the fact that there is more than just "waste" in the system. Additionally, how do you define what "Market Price" is for a surgery is, let alone the ancillary costs associated with surgery. Also, what do you define "Waste" to be? Great, so health care is "cheaper" under your idea but the cost of doing business goes up year after year because of costs you haven't even considered addressing that can't be handled by the investors and and the servicers. Your belief that claim deinals will reduce costs will only cause more money to be spent at a much faster burn rate, putting the security into default much faster. Where is the savings to be gained when you can flip policies without any concern for the consequence of it? Not just that, when you consider the entire cost of medical care, you're not counting Big Pharma's cut as well, because I'm sure they won't want their profits to erode under this. You won't reduce their costs because they will want their pound of flesh as well.

To your fourth point, why the hell would the insurer do that? Once its off their books, they have no incentive, as you put it, to protect the security from going bankrupt. Once you sell off the policies to be slaughtered, just like with mortgages, the initial underwriter has no further claim to them. It's off their books, so what do they care? Isn't that the point of securitization? Spread the risk across the owners of the newfound security, right? Again, you've created a security with a certainly high degree of default and no protection for anyone involved all while increasing the cost of health care, not reducing it. Oh, and how about the fee generation? Where does that fit in? Great, more costs are being added in without looking further than what the Wall Street origination desk will charge.

To your fifth point, and while I reiterate my claim that you know nothing about how insurance or the medical profession really works, you fail to consider two key points. The first is the various degrees of compliance laws and regulations that there are governing insurance. I would particularly note that you have HIPPA laws to contend with that would invalidate this since you would be effectively allowing any purchaser of these securities to have access to private, non-public information about the individual policy holders that would violate something, among other government and state regulation, called called HIPPA. That alone is a massive can of worms you can't resolve for. The second, and again, something you aren't considering is that industry regulations are tantamount to any agreement you might have. This is why insurance is regulated in such a way as it is. Your proposal works to circumvent strict regulation in order to protect the policy holder. As long as there is oversight by the government, it won't work.

To my 6th point, you really didn't answer my questions. You just refered me to a statement that would have no effect on what I asked at all.

End of story, this won't fix a broken system. This will just corrupt it even more.

My idea would rein in medical cost, expand coverage, end claim denials, and add jobs to Wall Street. It is very moral and effective.

VTech,

Those are valid points, however, the possibility of a shorted security is still present regardless of the accuracy of the actuaries. That is an entire can of worms that no one needs to consider. Regarding the correctness of the actuaries, I'm not disagreeing that they are wrong at all. In fact, I never discussed the actuaries because they are so spot on. The actuarial perspective is not something I would disagree with in the least bit. In fact, that's part of the reason why you can create such creative and custom health insurance policies and still not see a dent in the ability of insurance companies to service their clients.

The concern with this is that you are creating a finite pool with a clear drawdown ability that has no capital replacing what has already been spent. So regardless of how good the actuaries are, your capital in the security is going to erode as time goes on without new money coming into either cover spent funds or increase the funds available to the pool.

Monetarist,

Foregoing the fact that you have never dealt with insurance and know little about the health care industry, your idea will not do what your suggesting. It will not rein in medical costs and it will not expand coverage. How your idea is moral or effective is beyond me. You aren't being substantive to prove your points or make a valid argument. Nothing you've suggested will fix the problems we are facing. In fact, it will create new ones before we can even look to repair a broken system. Fix what we have now before we find ourselves further down the hole with new problems to face.

Blastoise,

Thank you! It was more of a retorical thing, as no one answers the question at hand.

As to the nature of an insurance contract and it's comparison to an option's contract, first it does have a set time frame for expiration. Policies are renewed every 6-12 months, depending on the policy, giving the current policy a limited life span or expiration date, as you so carefully put it. While you may not be issued a new health insurance card every year, you are given the opportunity to tweak or change your policy accordingly about 3-4 weeks prior to your current policy expiring and your new one taking effect. Even if you don't change it, you are writing a new yearly policy.

As to the premiums, while insurance does allow for the premium to be paid over time, the policy has a set total premium associated with the policy for the year, and if you so desire, you can pay it off in full on day one. The multiple payments are done to accomidate people since paying a massive premium at once is an extremely expensive proposition.

Are you saying that quants are smarter than actuaries? If so, that's almost too absurd to address. If not, I need to improve my reading comprehension. Actuarial science is one of the most difficult fields in the modern world. The education and testing for it is overwhelming. Unlike quants, the record of actuaries is beyond reproach--insurance companies are largely considered the safest and most secure of all institutions, unlike investment banks.

LOL. Reminds me of that Southpark.

Omoba De Jonz O, in the scenario you outlined, short sellers of various kinds (treasures, stocks, dollar) will profit. Insurance Backed Payout Obligation (IBPO) is not alone in this aspect.