by Susan H
It seems that health insurers are serving as exchange and clearing firm for “health futures” traders. Traders of “health futures” are potential patients, and health care providers. Patients are synthetic buyers of futures on health care provision, doctors and providers of medical goods and services are short sellers of those futures. The exchange and clearing firm (health insurer) represents that it serves to stand as guarantor in the middle of all those trades. But health insurers have not proven to be trustworthy guarantors.
Imagine if a cattle rancher bought a corn future, paid for it, and assumed it would provide, upon delivery, the food to keep his herd alive. But upon delivery date of the future the rancher is told by his clearing firm that not only was that trade arbitrarily deemed invalid, but the cost paid for the future was forfeited to the clearing firm. The rancher is told to read the voluminous futures contract terms of agreement, which allows the exchange and clearing firm to alter the terms at their discretion.
Imagine the impact on a short-seller of corn futures, who as seller of those futures is obligated to deliver the corn he has paid to plant, toiled to grow and harvest, who has maintained a very expensive stable of farming equipment and the overhead of arable land… but is arbitrarily denied payment for the corn future, or paid at a lower rate than the trading price originally quoted. And the clearing firm is keeping that extra premium. That’s how that futures exchange is allowed to operate.
The logical result would be that cattle ranchers could not feel any confidence in planning for future needs through this clearing firm and exchange. And without confidence in a payment system, farmers could not always take the risk of the expense of planting crops. So, farmers and cattle ranchers would have to meet and deal in person, on a real time basis. And stray calves would get fed . . . that’s how the farmer and the cowman operate.
But they don’t need to. The terms of regulated futures and options contracts can be written on a cocktail napkin: description of a (typically fungible) product, agreed price of underlying product, delivery method, and expiration date of contract.
If there were a regulated futures exchange operating along the lines of the Chicago Board of Trade (CBOT), willing buyers and sellers could meet and there would be stiff, swift, unambiguous penalties for non-performance. Potential patients might buy a block of 5 MRI futures with a two-year expiration cycle, and if they didn’t need the MRIs they could trade them for endoscopy futures, or give them away to a charity. Young health care providers could fund the build-out of their new practices by shorting futures: the futures premiums would provide seed money.
Competition, liquidity, and price transparency make for wonderfully fair and stable prices. Those forces have been kept out of the health care market for some time now. Health care futures traders of America, let’s make a market.
Susan H is a regular reader.
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