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Government Sponsored Reinsurance – How It Might Improve Insurance Markets
Katherine Swartz Harvard School of Public Health
NAIC Health Innovations Working Group MeetingSeptember 22, 2008
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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
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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
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$10-19999, 17%
$20-29999, 17%
> median, 29%
< $10000, 16%
$30-48,201,
22%
Income of Uninsured in 2006
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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
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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
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public Health Sept 2008
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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
Katherine Swartz, Harvard School of Public Health Sept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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 Sept 2008
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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
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public HealthSept 2008
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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
Katherine Swartz, Harvard School of Public Health Sept 2008
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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
Katherine Swartz, Harvard School of Public Health Sept 2008