Pre-fund VA health benefits?

Michael Cannon and Christopher Preble have an interesting suggestion in the New York Times–pre fund Veterans benefits via private insurance

We propose a system of veterans’ benefits that would be funded by Congress in advance. It would allow veterans to purchase life, disability and health insurance from private insurers. Those policies would cover losses related to their term of service, and would pay benefits when they left active duty through the remainder of their lives.

To cover the cost, military personnel would receive additional pay sufficient to purchase a statutorily defined package of benefits at actuarially fair rates. The precise amount would be determined with reference to premiums quoted by competing insurers, and would vary with the risks posed by particular military jobs.

This is an interesting idea, and I am not conceptually opposed to the use of private insurance to meet health care commitments to veterans. I suspect this idea is ultimately found to be unworkable, and the best place to get a sense of why are a quick look at the problems in the private long term care insurance market (general post on insuring LTC). The following problems are likely to be particularly tricky with Cannon & Preble’s proposal:

  • when you set up an insurance contract with a potentially long lag time between initiation and collection of benefits, there is a very real question of whether the company will be around when needed. Private insurers are exiting the long term care insurance market in droves currently. With major medical insurance, for example, the contract is only for the coming year. For an 18 year old enlistee, their point of need may be 5 or 6 decades away.
  • The longer the lead time, the harder it is to get the premium straight and/or the benefits appropriate. Both the insurer and the covered person are at risk here. LTC insurance is denominated in dollars per day (instead of care), and if you have say a 5% rider, and the true cost rises 5.1% for 30 years, that turns out to be a big miss.
  • The reason private insurers are leaving the LTC market are because of the difficulty of underwriting LTC risks. It might be simpler with the military in the sense of you don’t have (presumably) 19 year olds with pre-existing reasons to make them more likely to have disability/complicated long term health claims, while private LTC insurance is rife with selection (bad risks want to buy). The exposure to military service is what is causing the need. I am unsure of how well one could underwrite need based on military job?
  • One problem with private LTC insurance policies is that while premiums cannot be raised on individuals, they can be raised for an entire class of policies if losses overshoot what underwriters expected. Regulators are left with the un-enviable choice of the insurer saying they will go bankrupt or premiums are raised on everyone. This often leads persons to drop premiums, leaving them uncovered when they have LTC needs. You can say that folks in the military/vets shouldn’t make bad decisions, but the plain reality is that politically we won’t let such actions harm people. So, the insurance will not ever really be private. This is probably the biggest problem with the proposal.
  • I am open to the use of private insurance to meet the needs of vets, especially for the non-specialized services that many need. However, it seems much more likely to be a pay-as-you-go as compared to a pre-fund set up, though I give credit to Michael C for proposing a solution (I often hector him about him only being against stuff).

This discussion would be useful to have while we are talking about starting a war, as it would help to make the true costs more evident.It is quite possible that is both the main point, and the most useful aspect of this proposal.