Government Sponsored Reinsurance – How It Might Improve Insurance Markets Katherine Swartz Harvard School of Public Health NAIC Health Innovations Working

Government Sponsored Reinsurance – How It Might Improve Insurance Markets

Katherine Swartz Harvard School of Public Health

NAIC Health Innovations Working Group MeetingSeptember 22, 2008

Roadmap

• Who lacks health insurance – quick points

• Choice in targeting of subsidies: poor people, very sick people, insurers

• Government reinsurance program provides a back-end subsidy – and targets adverse selection concerns

• Reinsurance, requirements to buy coverage, and risk-adjustments to premiums

Katherine Swartz, Harvard School of Public Health Sept 2008

Who Lacks Health Insurance?

• 47 million Americans in 2006.

• 2.2 million more than in 2005, almost all of whom lost employer-based coverage.

• One in six nonelderly people.

• 29% had middle-class incomes.

• 57% are 19 to 44 years of age, 20% are children.

Katherine Swartz, Harvard School of Public HealthSept 2008

$10-19999, 17%

$20-29999, 17%

> median, 29%

< $10000, 16%

$30-48,201,

22%

Income of Uninsured in 2006

Probability of Being Uninsured by Middle Class Income for Adults,

1979 and 2006

21%

32%

6%

10%

0%

5%

10%

15%

20%

25%

30%

35%

1979 2006

< medianhouseholdincome> medianhouseholdincome

Katherine Swartz, Harvard School of Public Health, Sept 2008

17%

21.5%

12%10% 11%

14%12%

31%

27%

19%

15.3%13%

0%

5%

10%

15%

20%

25%

30%

35%

<19 19-24 25-34 35-44 45-54 55-64

Pro

ba

bili

ty

1979

2006

Probability of Being Uninsured by Age 1979-2006

Katherine Swartz, Harvard School of Public Health, Sept 2008

Implications

• Half of uninsured who are middle-class or not poor view premiums as too high for “value”

• High fraction of young adults are not insured – not good for risk pooling

• Nongroup and small group markets need stabilizing with more low-risk people


Subsidies• Usually targeted at low-income people

• But adverse selection creates risk in individual insurance markets – and higher premiums for people with incomes above “low income”

• Subsidies based on low income do not address adverse selection risk – they can exacerbate it become a transfer to insurers without altering risk to insurers


Risk of Adverse Selection

• “risk premium” for adverse selection risk

• Accurately predicting who is going to be in the top 1 or 2% of the expenditure distribution is impossible

• Left with “unaffordable” higher premiums and uninsured middle-class people


Forms of Competition

• Market segmentation– Companies specialize

• Selection mechanisms– Medical underwriting– Refusal to issue a policy– Exclusion of coverage for pre-existing

conditions– Many policies with different covered benefits


How to Address Risk Concerns

• Compensate insurers for covering people with extremely-high costs – keep insurers in market

• Shift burden of extremely-high-costs from insurers’ low-cost enrollees to broad population base


Reinsurance Targets Risk of Adverse Selection

• Reinsurance payouts based on who actually had high annual health spending – not predictions of risk

• Government-sponsored reinsurance is financed by broad tax base – shifts risk (and costs) of very sick people to general population

• Premiums decline, helping to stabilize private insurance market for everyone


Katherine Swartz, Harvard School of Public Health

13

Risk Sharing by Layers of Reinsurance: % of Risk Retained by Insurer

$0

$100,000

$200,000

$300,000

$400,000

$50,000A

B

C

A

B

C

100%

25%

15%

5%

100%

10%

15%

12%

OR

$ of expenses per person

Why Excess-of-Loss Design?

• 1st goal: reduce insurers’ risk of individuals with very-high-costs – so insurers reduce premiums back-end subsidy to everyone

• 2nd goal: align incentives for insurers to manage individuals’ medical care


What Determines Cost of Public Reinsurance?

- Number of potential enrollees- Threshold and range of expenses to

be covered – layers of coverage – and where the range is in distribution of medical costs

- % of risk (costs) retained by originating insurer in layers

- Relevant medical expenses


Which Markets to Include?

• Small group and individual markets

• Goal is to address insurers’ concerns with potential for adverse selection want them to reduce use of selection mechanisms and lower premiums


Estimates of Costs

• Estimates at the national level run from $5B to $20B for the small group and individual markets with $50,000 threshold

• Compare with tax treatment of ESI: tax subsidy of $1,000-$1,200 per person


Financing Mechanisms

• Goal is to reduce insurers’ concerns about adverse selection and expand coverage

• Need new funds – not fees or taxes on insurers

• Broad tax base desired – extremely high medical costs are due to random events


Government as Reinsurer for Very-High-Cost People

• Less incentive for insurers to risk select since ex post determination of who is very-high-cost

• Broader population base pays for costs of very-high-cost people

• Incentive for management of care of high-cost people

• Premiums decline implicit subsidy


Targeting of Subsidies

• Balance between well-targeted aid to low-income people and goal of universal coverage

• Hurdle to universal coverage is risk premium in individual markets – which reinsurance addresses

• Back-end, less well-targeted subsidies make insurance more widely affordable (Healthy New York)

• Both types of subsidies needed


Summary

• Risk of very high-cost people makes individual premiums high

• Government reinsurance shifts this risk to general population – reducing premiums and creating incentive to manage medical care

• Creating affordability – but no free lunch


Documents

Government Sponsored Reinsurance – How It Might Improve Insurance Markets Katherine Swartz Harvard School of Public Health NAIC Health Innovations Working