The Agenda

The Reinsurance Approach

A number of liberals are celebrating the CBO’s new score of the Kennedy-Dodd plan, now with an employer mandate. Coupled with a Medicaid expansion, which will of course impact the states, this approach will cost $1.3 trillion over 10 years rather than the dreaded $1.6 trillion and it will cover roughly 40 million of the uninsured. Of course, as James Capretta suggests, there’s a lot that can go wrong: these cost estimates rest on rosy scenarios of cost savings, etc.

As a mark of how far we’ve come, Senator John Kerry’s proposal from 2007 looks very attractive in comparison. At its core is the concept of federal reinsurance, an idea I’ve long wanted conservatives to embrace. 

One percent of patients account for a quarter of healthcare costs. And 2 out of 10 patients account for more than 80 percent of all healthcare costs. Under Kerry’s plan, the federal government would reimburse a percentage of these high cost cases if employers include preventative care and health promotion benefits in their health plans, make quality coverage available to all full-time workers, and implement practices proven to make care more affordable. This means lower costs and lower premiums for both employers and employees.

This concept of federal reinsurance, which was championed in a somewhat more modest form by Senator Bill Frist, is the brainchild of Brandeis University economist Stuart Altman, a Kerry advisor. As Altman has suggested, we can further limit the cost of reinsurance by limiting it to low-wage employers, those most likely to need the help.

One possible approach would be for the state to pay 75% of the expenses of cases that exceed $75,000. The state should require any insurance company receiving such premium assistance to operate an effective high cost case management program. Such programs, when well run, have been shown to both lower the total cost of care and improve the health outcomes of the patients treated. To moderate state spending, I would suggest that the state re-insurance system only be available to companies and individuals insured through the Connector and, only if the employers have wages that average less than $50,000 and if the insured has a wage of less than $75,000.

My long-term preference is for the logic of catastrophic coverage to replace the logic of insurance as pre-payment. The federal government’s responsibility should be providing social insurance against income shocks, not to subsidize health spending per se. The reinsurance approach can help get us there. 

Reihan Salam is president of the Manhattan Institute and a contributing editor of National Review.

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