Morningstar Magazine - October/November 2017 - 44

Spotlight: HSAs

What Is Your Healthcare System
and Why Does It Matter?
Four models rule the developed world.
The U.S. system is the most inefficient.
GLOBAL

Paul D. Kaplan

Citizens of industrialized countries other than the
United States must find the debates over
healthcare in the U.S. puzzling. After all, they have
had universal healthcare for many decades
while the U.S. lacks any such system, despite the
passage in 2010 of the Affordable Care Act
(otherwise known as the ACA or Obamacare).
Of course, it is more complicated than that.
The United States has some of the best healthcare
services in the world for those who can
gain access to them, largely through employersponsored private health insurance. On the
other hand, Canada, which boasts of its system of
universal healthcare, has some of the longest
waiting times in the industrialized world for many
procedures and treatments.
The fact is, neither the U.S. nor Canada has too
much to boast about. In a recent study, the
Commonwealth Fund ranked the healthcare
systems of 11 industrialized countries.1 While the
U.S. came in dead last, Canada came in just
two places ahead, in ninth place. Similarly, in the

World Health Organization's ranking of 190
countries, Canada is ranked 30 and the U.S. is
ranked 37.2
How the healthcare system works in a country
has a large impact on the financial, as well
as physical, well-being of that country's people.
The systems around the world affect investors
differently with respect to taxes, insurance
premiums, coverage, and out-of-pocket expenses.
I believe that the best way to approach the
financial aspects of health is the same as with
other aspects of financial planning, through
the life cycle.3 Just as human capital, financial
capital, asset allocation, the need for life insurance,
the role of annuities, and all other cash flows
change in a systematic fashion as a person moves
from beginning a career, to midcareer working
years, to retirement, and finally to old-age,4
the costs and needs of healthcare change as well.
How well a country's healthcare system meets
the needs of its citizens over the course of their
lives is a major factor in that system's effectiveness.
The Economics of Health Insurance

Risk Pooling
Healthcare insurance, like all insurance, is based

on risk pooling. In health insurance, a risk
pool consists of many individuals, each of whom
faces a small probability of having expensive
healthcare needs. By charging each person in the
pool a premium, an insurer has enough money to
pay for the large healthcare costs of those
few in the pool that end up needing it and pay the
expenses of running the pool. If the insurer
is a for-profit entity, it will set the premium high
enough to make a profit.
This basic risk model has always been the basis
of the private part of the U.S. health insurance
system. This is why, historically, U.S.
insurance companies would not accept people
with pre-existing conditions into their regular
plans.5 To do so would increase the level of
payouts and, thus, require a rise in premiums. All
people with pre-existing conditions could
do was to join special plans for them that had
very high premiums.
The ACA outlawed rejecting people with
pre-existing conditions from health insurance
plans. In an attempt to keep premiums
from rising, the law imposes a fine on anyone who
does not purchase health insurance. In this
way, healthy people join the risk pools and, thus,
keep premiums down. However, because many
healthy people see little benefit from having health
insurance, they would rather pay the fines
than buy the insurance. Hence, under the ACA,
premiums are rising for those that stay insured
while millions choose to remain uninsured.
Universal Coverage
A solution to the problem of creating risk pools
that contain enough healthy people in the mix to
contain the costs of providing expensive
healthcare to those who need it is to create what
I call intergenerational pools. An intergenerational

1 Schneider, E.C., Sarnak, D.O., Squires D., Shah, A., and Doty, M.M. 2017. "Mirror, Mirror 2017: International Comparison Reflects Flaws and Opportunities for Better U.S. Health Care,"
July. White paper.
2 In contrast, the Healthcare Access and Quality Index, which rates 195 countries based on mortality from causes amenable to personal healthcare, tells a different story. On this measure,
Canada does reasonably well, coming in 17th, while the U.S. is ranked much further back in 35th place. The highest scoring countries are the tiny nations of Andorra and Iceland.
3 For an introduction to life-cycle analysis, see Paul D. Kaplan, "Investing Over the Life-Cycle, Part I," pp. 54-56 of this issue of Morningstar magazine.
4 For a comprehensive treatment of these matters in the context of life-cycle analysis, see Roger G. Ibbotson, Moshe A. Milevsky, Peng Chen, and Kevin X Zhu, "Lifetime Financial Advice: Human
Capital, Asset Allocation, and Insurance," Charlottesville, Va.: Research Foundation of the CFA Institute, 2007.
5 In employer-sponsored plans, the insurance company could not drop individuals but could drop the company as a whole. This was the risk that a very small company faced if one of its
employees developed a catastrophic health condition.

Morningstar October/November 2017

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