Managed Care - April 2008 - (Page 50) Using Option-Based Contracts To Improve Health Outcomes A system in which individual insurance policies may be purchased for separate medical products and services is based on a medical options market and takes its cue from the financial sector Damon Douglas, dual PharmD/MBA candidate University of Maryland School of Pharmacy, Baltimore, Md. Imagine that the insurance world did not revolve around the aggregation of medical products or services but rather involved the use of options, which allow for individual and separate transactions between payers, providers, and members. In this new world, the medical options market would be the dominant scheme of implementation. Options are financial instruments that convey the right, but not the obligation, to engage in a future transaction involving some commodity or futures contract. There are a number of different types of options, but the main ones are the call option and the put option. Buying a call option provides the right to buy a specified quantity of a security or commodity at a set price at some time on or before expiration of the option. This contract hedges the buyer against fluctuations in the asset’s price. Buying a put option provides the right to sell. When the option holder chooses to exercise the option, the party who sold, or wrote, the option must fulfill the terms of the contract. Author correspondence Damon Douglas, dual PharmD/MBA candidate University of Maryland School of Pharmacy 20 N. Pine St. Baltimore, Md., 21201 USA E-mail: douglas.damon@gmail.com Phone: (215) 923–5955 In this new scheme, entities may purchase individual insurance policies on separate medical products and services. We will explore how this may be implemented in clinical scenarios. Also, we will explore how this scheme may promote favorable clinical and economic outcomes. With this proposed scheme, instead of one insurance policy, an individual could select single policies on only those products and services needed for a particular patient. This individual, who could be a physician, employer, legal guardian, parent, spouse, or the member himself, would bear the financial risk for the patient’s health. As with existing insurance models, these individual policies would each have a premium and a future guaranteed price on the underlying product or service. Also, like current insurance models, these individual policies would have an expiration date. The separate medical product and service insurance policies would be sold directly by physician offices, diagnostic laboratories, and pharmacies. Each policy would oblige the entity to provide the underlying product or service to the policy buyer. Patients would purchase these policies in collaboration with a professional who was certified to assess their risk, ideally their primary care provider. Option contracts provide a flexible means of breaking health insurance into tradable components that can be sold directly through health practice entities. In this proposed medical options scheme, the asset may be a medication, a diagnostic procedure, a period of hospitalization, or a physician practice service. SELF-OWNERSHIP Ownership of the individual option contract by the person who will use the service fosters the ability of this scheme to promote favorable health and economic outcomes. As a buyer’s private property, an option may be tradable on an open market. Therefore, the bearer of the contract has a vested interest in reducing inherent risk before the contract’s expiration. Lowering risk decreases the intrinsic value of the option to the owner; this allows the owner to sell the option and achieve a source of cash flow. In the medical options world, if everyone else’s health behavior is riskier, then the owner of the option would gain because everyone else would push the price of the option higher. The other extreme is that everyone else is health conscious, and seeks to lower risk, and finally reduces the price of the option for everyone. Thus, everyone loses the amount of the contract premium and no one wins. The reality exists between these two extremes, however, and serves as the midpoint or equilibrium in this game theory model. My hypothesis is that the cash received from selling hospitalization options or intensive care options, for 50 MANAGED CARE / APRIL 2008
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