Among the “immediate reforms” in the health-reform proposal Speaker Pelosi unveiled last week is a $10 billion bailout for health-benefit plans for retirees. (If you’re reading the House bill, it’s section 111, starting on page 56.) A minority of workers can look forward to retiree health benefits, and according to the Employer Health Benefits Annual Survey, employers who offer retiree benefits tend to be bigger employers, government rather than private sector, and unionized.
This provision puts $10 billion on the table as a reinsurance scheme. The federal government would pay 80 percent of the costs for each individual who has retiree coverage for those costs that are between $15,000 and $90,000 in a year. In CBO’s analysis (bottom of Table 3), the $10 billion would be used up by the end of fiscal year 2012. Either the program would be over then or the plans could come back and ask for more money.
Compared to the simplest way to do a bailout, a per person government subsidy, this is amazingly complex, and loaded with perverse incentives. The proposition that reinsurance (transferring costs beyond some dollar level) solves some problem has its origins in Sen. John Kerry’s presidential campaign and common sense has yet to prevail against it. To administer the program will require the government to set up an operation to do all the things an insurance company does: process claims, decide what costs will be allowed and which will not, handle appeals, etc. Either that or contract with one of those insurance companies to do all this for the government (the route Medicare took in 1965). And all for a program that will be gone in three years (unless it lives on). Those who oversee retiree plans will face incentives to sign contracts with providers that stick the government with costs; for example, sign contracts with hospitals that offer generous payment for high-cost services (where the government is providing free reinsurance) in exchange for better rates on outpatient services (where its less likely that someone will get to the $15,000 threshold.) With enough of that behavior, the bailout fund won’t make it to 2012.
— Hanns Kuttner is a visiting fellow at Hudson Institute.