John Kerry’s Reinsurance Bill: Will It Work?

John Kerry has introduced a bill that provides Federal reinsurance for high-cost medical cases. This was one of the key provisions of his 2004 healthcare platform. He wrote an editorial for the Boston Globe recently detailing his plan.

My friend Bob Laszewski outlined his concerns about the proposal in a recent blog post. “This isn’t cost containment,” says Bob, “it’s cost shifting.” He writes that the proposal “is well meaning but wouldn’t do anything to reduce our nation’s overall … cost burden,” adding that the proposal is “popular among some big companies with tons of legacy health care costs looking for someone dumb enough to take them off their hands.”

So who’s right: My friend Bob, or Sen. Kerry (who I also know and respect a great deal)?

My answer is both. Here’s why: I agree with Laszewski that the Kerry plan as currently designed is essentially a cost-shifting strategy. I also agree that it reduces financial incentives for appropriate management of both medical cost and quality. If it resembles the 2004 plan it doesn’t eliminate that incentive altogether, since payers will still be responsible for 25% of cost. Still, payers will have less reason to be manage hospital expense or appropriateness of surgical interventions, to name just two examples, since most cost for hospitalizations and surgeries will now be borne by the taxpayer.

Nevertheless, Kerry had identified a fundamental problem that urgently needs solving. A 2004 Washington Post article summarized it this way:

“All it took was one cancer case and one chronic illness — two employees out of 50 — and the health insurance premiums of an Ohio faucet company jumped from $200,000 to $350,000 in a year.”

So what’s the real solution? The answer lies in first recognizing the public function insurance (and reinsurance) is intended to serve. Insurance isn’t the same thing as financing. In its present form, it was created to serve two purposes:

1. It shares risk among large groups of people to prevent financial catastrophes to individuals or businesses.
2. It encourages risk-averse behavior – for only those aspects of risk that can be controlled – by providing financial reward in the form of reduced premiums.

The U.S. allows private insurance on the premise that it will fulfill these two social functions. The problem with the Ohio faucet company case is that the insurance system failed to serve its two primary roles. First, it didn’t distribute the risk widely enough to shield this small business from significant financial harm. Second, it punished that company for circumstances beyond its control, namely a chronic illness and a cancer case.

Isn’t that the problem we should be addressing?

Sen. Kerry observed that ” 2 out of 10 patients account for more than 80 percent of all healthcare costs.” That’s true, but this Pareto-style disproportional distribution is common to all forms of insurance. Simply assuming primary financial responsibility for the 2 patients out of 10 won’t address the underlying issue.

Here’s another way to solve the problem:

1. Establish underwriting guidelines (at the state or national level) that require genuine risk distribution.
2. Implement a Kerry-style Federal reinsurance program – but charge a variable premium (possibly from a base of 0) based on simple, measurable quality and cost management measures Administer the program using an underwriting model adopted from best practices in the reinsurance industry, combined with defined policy goals.

You could carry out either step independently of the other. My advice for Sen. Kerry would therefore be to modify the bill so that it includes true underwriting functionality, promoting good healthcare quality and avoiding waste through a process of diligent review and rate-setting. You don’t necessarily need to create a new bureaucracy, either – you could bid the program out competitively.

And if the Federal government finds itself in the mood to take on medical costs, here’s a wild idea for debate and discussion: Why not have a government initiative to fund preventive and wellness services? Once again private industry is buzzing with chatter about wellness, as it does every ten years or so. But employers and insurance companies will never do it right. As long as employees keep changing jobs and insurers, the private sector won’t have any incentive to invest in saving money for somebody else a few years down the road.

Wellness is a low-cost area with big rewards. Unfortunately, those rewards don’t usually go to the ones paying for it. The Kerry bill provides incentives for wellness, but why not spend more money in that area – maybe with the reinsurance premiums collected from insurers and employers who aren’t managing their medical programs well?