How does any health insurance plan deal with catastrophic illness? This is the Achilles heel of private insurance, especially of the individual or small group policy variety. In 2004, John Kerry, of all people, came up with a useful suggestion. It is the concept of reinsurance, a well known factor in other types of insurance but subject to the moral hazard problem. Part of the problem is that the Kerry legislation is an example of cost shifting, like so much else of government health care. Here is the concept:
Fully reforming the healthcare system will require that the federal government begin shouldering some of the burden to help alleviate costs. One percent of patients account for a quarter of healthcare costs. By the same token, 2 out of 10 patients account for more than 80 percent of all healthcare costs. . To make healthcare more affordable, there must be a better way to share the immense burden of insuring the chronically ill and seriously injured.
Part of the reason that businesses and health plans today fail to cover their workers is an aversion to risk — a fear that they will be saddled with a sick employee whose high premiums will bankrupt them. Take a small business with just five employees, for example. If one worker has a major heart attack, the cost of care for the other four shoots up, potentially causing the company to drop health coverage entirely.
But there’s a way to combat these costs. And Washington should make employers and healthcare plans an offer they can’t refuse.
It’s called “reinsurance.” Reinsurance means that if employers agree to offer all their workers preventative care and quality coverage, then the federal government will reimburse them for a significant portion of the costs of their chronically ill employees.
Preventive care is overrated but there are provisions, like weight and smoking rules, that could reduce the risk. These are real concerns as the example shows.
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.
Raymond Arth, who owns Phoenix Products in Avon Lake, Ohio, said he could not blame his insurer, Medical Mutual of Ohio, for the increase; for every $1 he had paid in premiums, the insurance company had paid out $2.08 in claims. Medical Mutual could not afford to take that kind of risk again and Arth could not afford the higher premium, so he went searching for a new policy.
Such catastrophic claims account for less than half of 1 percent of all claims but generate 20 percent of the nation’s health care costs, according to the latest federal data. To cover those costs, insurers such as Medical Mutual boost premiums, often forcing companies and individuals to dig deeper in their pockets or go without care.
This is the reason why reinsurance has a lot of attractiveness. There is a problem, though. If the risk is assumed by others, a characteristic of all health insurance, the motivation to control costs is weakened. Cost shifting, once again.
At the center of Kerry’s ideas is his proposal to have the federal government reimburse employers 75 percent of medical bills over $50,000 that a worker runs up in a year. The reimbursement would, in effect, make the government a secondary insurer and ease costs for employers, workers and private insurers.
In exchange for the benefit, Kerry would require employers to offer insurance to every worker and to provide health programs that detect and manage chronic illnesses such as high blood pressure early enough to prevent the diseases from worsening.
There is merit in this idea but there must also be some effort at cost control. Medicare shows what can happen when there is little effective control of costs. What do we do ? Taking over the entire national health care system at one stroke is not the answer but this proposal might be part of an answer.
Tags: health care
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