Strategies for financing healthcare costs over the long term
*Robert D. Lieberthal, Jefferson School of Population Health 

Keywords: health finance, cost curve

My objective was to show how the large, stochastic element of the healthcare cost curve limits the availability of health insurance. I wanted to determine how investment policies can mitigate the problems of forecast error in macroeconomic models of future healthcare spending. I fit average per capita insurance premiums over time to an adaptive expectations model of medical spending growth. I calculated the correlations between the forecast errors and investment returns for stock and bond market assets. I studied health insurance premiums from the U.S. using the National Health Expenditure data. I used asset returns for broad indices of U.S. and foreign stocks and bonds. A simple adaptive expectations model can fit some of the annual variation in healthcare spending. Significant forecast errors remain with short term forecasts, but these errors are uncorrelated with returns to assets insurance companies generally utilize. The unpredictability of the healthcare cost curve will continue to be an impediment for multiyear forms of health insurance, such as guaranteed renewable health insurance and long term care insurance. Health insurance companies should use a broad, diversified investment portfolio as their optimal investment strategy. Insurance regulators should be focused on longer term lines of health insurance, with a special scrutiny of risky or unconventional investment policies. Funding public programs, such as Medicare, cannot be improved by investing the Trust Fund in riskier assets, whether directly or via privatization.