Commoditizing Health Insurance – Putting the “Fun” in Fungible

Detail of "ŒUFS" (Eggs), illustration by Adolphe Millot from Nouveau Larousse Illustré [1897-1904], via WIkimedia Commons

These eggs are not fungible.

Here’s a 25¢ word for today: fungible.  Fungibility means that one thing can be exchanged for another.  It’s an important economic concept and is critically necessary for the functioning of our economy, but you don’t hear too much about it.  I also think it could be the answer to the problem of consumers selecting health insurance policies – more on that in a moment.  First, let’s look at fungibility.

When I say that our modern economy is built on the concept of fungibility, I’m not kidding.  take eggs, for example.  Think of the last time you went shopping for eggs.  You probably bought Grade A Large white eggs in a carton containing a dozen eggs.  You may have looked at them to make sure none were broken.  But, what you didn’t do, I’ll bet, is examine each egg for size, shape, weight and quality.  Why?  When you buy one egg, it’s the same as another of the same grade/quality.  One egg is as good as any other.  They’re fungible.

The fungibility of commodities is at the heart of creating a market for bulk goods like coffee, wheat, crude oil, gold and more.  All these commodities are traded on exchanges, just like stock and bonds.  Each commodity contract is standardized as to its quality, grade, quantity and location – the only area open to negotiation is the price.  Doing this allows decisions to be made very efficiently.  If you know you’re looking for 5,000 bushels of No. 2 Corn in March, then it’s a snap to find the price and decide whether or not you want to buy.

Health insurance contracts could take a lesson from this.

Think about the last time you shopped for health insurance.  If you don’t recall, you may be experiencing memory loss from a traumatic event.*  It was probably a pretty big pain, wasn’t it?  You had so many decision to make – high deductible or low, what are the premiums, what are the benefits, is my doctor in network, etc., etc.  By the end of the process, your head was probably spinning.  You probably picked the best thing you could, and hoped it would work.

What if you had, instead of a universe of custom contacts, a brief menu of standardized contracts?  Wouldn’t it be easier to make a decision?  Like the life insurance industry has done with life insurance contracts, only even simpler.  Of course, cookie-cutter contacts won’t do the job, so why don’t we use policy riders to customize the policy to the customer’s particular needs.  And, why don’t we standardize those riders?

Because, just informing consumers by creating informative labels won’t make shopping for health insurance easier.  I applaud the intent of the Department of Health and Human Services in their attempt to label health insurance policies.  The problem is that they’re ending up with an informative label made of six pages of this:

Detail of the Department of Health and Human Service's Template

Wow. This is simple and straightforward. Not.

That’s not going to help.

Six pages of small type doesn’t help you make a decision.  It confuses.  It’s helps the customer understand once they’ve bought the coverage, but trying to compare three or four policies to each other with this is going to be ugly.

That’s why I suggest that health insurance become standardized and commoditized.  If you want people to make better choices, you need to make the choices simpler and easier to compare.  Adding more information to the process doesn’t do that job.

* Thank you, thank you, I’ll be here all week.

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