Risk Reduction

Government-backed reinsurance could make health coverage more affordable for the middle class.
May 2006
Penelope Lemov
By Penelope Lemov  |  correspondent
Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.

I'm just beginning to get a handle on what reinsurance means and how it works. But Katherine Swartz, a professor at Harvard's School of Public Health, is an expert on the subject. And she believes it could address a major part of our current health insurance crisis--namely, that the fastest-growing component of the 46 million people without health insurance is middle class.

Reinsurance, Swartz says, could do for private health insurance what Fannie Mae did for homeownership: provide security for the mortgage market and thereby ease the way to the American dream. Reinsurance would take the worst risks out of the individual and small-business health insurance market.

Here's how it would work: The market is the growing number of people with middle (or even higher) income levels who work in jobs that, for one reason or another, do not offer health insurance--particularly if they are self-employed or work for a small business. As things stand now, one in 10 working-age, middle-class adults does not have insurance--mainly because the individual or small-business insurance premiums are unaffordable.

Prices are high in part because insurance companies are wary of adverse selection--that is, that people with problematic medical histories will sign up and there won't be lots of healthy people in the pool to balance out their needs. So, insurance companies tend to increase their premiums to cover their risk.

Swartz's argument is that governments have to do something to allay these legitimate fears of insurance companies. Some states do, of course, have high-risk insurance pools to take care of the most burdensome cases. But those pools, and the money the states spend on them, could be folded into the reinsured plan. Basically, reinsurance is insurance for health insurance companies or self-insuring corporations that want to protect themselves from the risk of health care expenses going above their estimates of what they can afford to pay.

Let's say there's a large, self-insuring company with 10,000 beneficiaries. It figures it can handle their health costs of up to $100 million a year. But the prospect of expenditures exceeding that amount would make the company very uneasy. So it goes to a reinsurance company and buys insurance to cover a set cost above $100 million.

This is how it works in the world of big business. But the same principle, Swartz argues, could be applied to the individual and small-business market--if governments were willing to step in to pay for the reinsurance.

In her book, "Reinsuring Health," which is due out in June, Swartz provides a thriving example of how this works in the public sector: Healthy New York, a statewide program, uses reinsurance to bring down the cost of health insurance for low-income residents--people earning too much money to qualify for Medicaid but not enough to reach middle- class earning levels.

Using tobacco settlement money to pay for the reinsurance, New York was able to cut insurance premiums by 50 percent. The approach should work even better for a middle-class program, Swartz suggests, since premiums wouldn't need to be reduced quite as much to make them affordable.

The real beauty of the reinsurance solution is its simplicity. Unlike state programs that subsidize insurance premiums for the individual and small-business market, there would be no elaborate set of paperwork to qualify people. And no stigma attached to the program.

There is, however, a cost--estimates run between $5 billion and $20 billion per year, nationally. Swartz has done some "back of the envelope" figuring to put the numbers in perspective. Taking the highest cost estimate--$20 billion--and assuming that might help 20 million middle-class people gain health insurance coverage, she pegs the cost to taxpayers at $1,000 per person. Swartz then compares that to the tax break available for employer-sponsored health insurance. In 2004, she notes, this "subsidy" built into the tax code cost the U.S. Treasury $140 billion--or about $850 per person for the 165 million people with employee-based insurance. "So the reinsurance program would cost about the same per person as the current way we subsidize employer-group coverage," she says.

While there is little movement on the federal level, several states-- notably, Vermont and Massachusetts--are looking or have looked at reinsurance as a means of making health insurance available to those priced out of the market. "We've done this before," Swartz says. "Where government takes the worst risk, the private market can flourish. With reinsurance, individual and small-group markets would function and be more accessible.