Why Not Try Health Care Reinsurance?

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So here's an idea that was floating around a great deal during the 2004, but seems to have lost its luster in 2009:  health care reinsurance.  (for the ultra-wonky version, go here) The idea is that the government pools the high-risk patients and assesses the cost across the pool, making cherry picking much less attractive, and underwriting the marginal high risk patient less expensive.  As ideas go, I'm still troubled by the potential implications for future government action.  On the other hand, if we're going to have health care reform, I'd certainly support this over almost all the alternatives.

So why has it died on the vine?  Mostly, I suspect, because it doesn't control costs well

A recent study by Evergreen Re was completed in conjunction with Ingenix/Reden & Anders, Minneapolis. The study found that the frequency of members with paid claims greater than $1 million per 100,000 commercial members rose from 0.07 in the year 2000 to 1.1 in 2005, and will increase to 2.4 (low trend) and possibly 3.6 (high trend) by 2010.

In addition, members with paid claims greater than $2 million, once virtually unheard of, are presenting with increasing frequency. The Evergreen Re study found that the rate of $2 million claims per million commercial members rose from 1.1 in 2006 to 1.7 in 2007, an increase of 55% in one year.  Frequency is projected to increase to 1.9 or higher (as high as 7.0, if we were to assume 11% annual trend) by 2010.



On the other hand, when you look at the major cost drivers, I'm not sure we should be trying too hard to control them:

The four largest sources of $1 million plus claims are premature babies/infants, organ transplants, cardiovascular disease, specialty drug therapies and cancer treatment.

For example, the number of organ transplants has doubled in the past 10 years.  There are more than 100,000 Americans on the organ transplant list and approximately 25,000 solid organ transplants are performed every year.  The average billed charges for a multiple organ transplant now approaches $775,000.  In addition, bone marrow transplants, now used to treat some 70 different diseases, increasingly cost more than $500,000.

In response, many health plans are turning to more sophisticated case management and risk transfer strategies, and more care specialty drug programs. The former can convert an unpredictable and potentially catastrophic risk to a flat monthly expense, allowing plans to budget for claims throughout the year.

Rising costs for specialty drugs are also contributing to catastrophic claims. Specialty drugs are used to treat serious or chronic medical conditions such as multiple sclerosis, hemophilia, hepatitis and rheumatoid arthritis. They're typically injectable and usually can be self-administered by a patient or family member.

The Blue Cross Blue Shield Association, Chicago, reports that total specialty drug costs will rise from $40 billion in 2005 to $90 billion in 2009. One major health plan, BCBS Massachusetts, reports that less than 1% of its members are taking specialty drugs, but they account for 20% of total pharmaceutical costs.

The administration of specialty drugs, although frequently associated with transplantation, is really a broader, separate issue. An effective specialty drug program--one that provides appropriate formulary inclusion and cost control for the plan--will typically address benefit plan design and pharmacy network management for a variety of conditions in addition to transplants, including cancer, Hepatitis C, rheumatoid arthritis, and multiple sclerosis. As health care delivery occurs locally, solutions must be customized to the specific needs of a plan and the populations it serves.

Okay, so technically that's five. Notice what's not on the list, because it's largely paid for by Medicare:  all the useless end-of-life interventions for elderly patients with very slim chances of regaining an active life. 

This is why our heroic interventions for preemies are so controversial among health care wonks.  They're insanely expensive.  But I just don't think that any system, public or private, is going to be able to cut back on this kind of care.  I'm familiar with the utilitarian arguments:  very premature babies (the ones who cost so much) are overwhelmingly likely to either die, or to have serious disabilities.  I've had a lot of serious conversations with people connected to the health care system in various ways, and most of them think the drive to save ever-more-premature babies is questionable at best.  But ultimately, I don't think that's a question that can be made by "society", at least not in America.  We will save preemies, and we will pay fantastic sums to do so.

Alternatively, the government might reinsure people.  If your out-of-pocket costs exceed, say, 20% of your income, the government picks up the rest of the tab, with a sliding scale for those under or near the poverty line.  Maybe make it 10% for those who have insurance.  It's progressive, maintains the incentive for a private insurance market, and has pretty minimal moral hazard problems--no one is going to shell out 20% of their annual income in order to qualify for a bonus knee surgery.

That, too, probably won't do much to contain cost inflation.  But so far, none of the other options on the table cut costs either--certainly not any of the options that are likely to pass the Senate.  So why not bring back subsidized reinsurance?  It's sufficiently different from the existing options that Democrats can claim they got a win, rather than a watered-down version of what they wanted.  It protects all Americans from the fear that an illness will bankrupt them.  And it just might work.  Perhaps I'm missing some compelling reason not to explore this option.  If so, I'm sure my readers will tell me what it is.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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