We are in the midst of a health reinsurance “moment” right now. The idea of reinsurance, and in particular, government-sponsored reinsurance, rises to the fore in cycles, and our current rash of state-based reinsurance proposals signals that we’re in the ascendant phase. Reinsurance is at once a clever technocratic device but also a powerful conceptual frame. In the health context, government-sponsored reinsurance can take the form of a policy where the reinsurer, in this case the government, assumes the obligation to pay claims incurred by a given beneficiary once those claims exceed an annual attachment point. CMS has, for example, built in a de facto reinsurance policy for ACA plans, kicking in 60% of medical costs for any ACA plan enrollee who has incurred over a million dollars in claims. As you can see from this example, the primary insurers with this reinsurance protection are partially shielded from the risks of large catastrophic claims requiring excessive capitalization.
But government reinsurance also represents the distinctive structure of public-private power in our era. How is risk backstopped today, and under what conditions? When does an outcome count as catastrophic such that our existing risk management institutions cannot be expected to absorb it or hold reserves to meet it? Who gets a bail-out, and who must take the consequences of their bad bets? The question of who enjoys government reinsurance is a lens that helps us penetrate many of the mysteries of our current political situation.
Part of my engagement with the reinsurance moment is the pleasure I take in discovering interesting writing, past and present, on the subject of reinsurance. A new and enjoyable entrant in this category is Govind Persad’s new article, Expensive Patients, Reinsurance, and the Future of Health Care Reform, forthcoming in Emory Law Journal.
Persad’s article starts with what I think of as his signature concern, that of expensive medical care that threatens to burst the limits of our health care resources. He then threads his way through to reinsurance as the corresponding tool for both mustering funds for this expensive care while spreading costs in such a way as to keep us within the resource horizon.
What to do about those expenses is, Persad rightly argues, a normative question, rather than a matter of expedient technical design. Others have analyzed the technical virtues of reinsurance. Persad provides a tripartite framework for the normative analysis. He identifies three interlinked considerations for fairly addressing the costs of expensive patients: 1) the breadth of cost-spreading, across a larger or smaller risk pool 2) the bounded scope of the treatment whose costs are shared in this way, and 3) progressivity of the incidence of those shared costs. Persad contends that broad sharing is justified to counteract brute bad luck, but the scope of what is shared must be closely bounded under Dworkin’s “hypothetical prudent insurance” ideal to avoid unfair economic burdens especially upon those who suffer the brute bad luck of poverty. But he then observes that if the economic load of expensive care in this highly inequitable world could be arranged progressively, strict boundedness can be somewhat relaxed, since the wealthier can be justly asked to absorb much of the burden.
And a policy of progressively financed, government-sponsored reinsurance to backstop our various fragmented insurance pools is precisely the device that can achieve these three conditions at once: breadth of sharing and progressivity of economic contribution, thereby allowing a looser boundedness that frees us from painful decisions about withholding expensive care.
There is much I agree with and much I disagree with throughout the piece, which itself is teeming with fact and argument. Indeed, the density of ideas is what I most enjoyed about the piece—and reading it was like running my own thinking through a clarifying sieve.
Here are some things I agree with. Plaudits to Persad for pushing back on the tendency of reinsurance proponents to dismiss, or even invisibilize the burdens and trade-offs. Reinsurance lends itself to this kind of avoidance. It can seem like the proverbial free lunch where everyone eats and no one pays. Hence the focus on its technical virtues: reinsurance certainly benefits the high-cost patients to whom it is targeted, but it also makes insurance more affordable for low-cost, low-risk, and financially straitened patients in at least four ways. First, insofar as primary insurers cede certain catastrophic claims to the government, the state is injecting a public subsidy. Second, even if reinsurance were financed purely through insurer fees, reinsurance reduces the primary insurers’ risk, and thereby reduces their need to load on a risk premium. Third, primary insurers with reinsurance need not incur or pass-on the administrative costs associated with aggressive risk selection designed to avoid high-risk individuals. And, finally, to the extent that risk stabilization helps to, as John Jacobi describes it, “induce private plans to participate in precarious individual and small group markets,” this may foster price competition that exerts downward pressure on premiums.
But the headroom to be gained from reinsurance is not infinitely elastic and it is indisputable what Persad points out: “The imposition of small burdens on many in order to help a few greatly is contested in ethical theory, and its endorsement may rest on cognitive limitations in visualizing the magnitude of the population who experience the small burden.” Moreover, the spiraling expense of these treatments is not a given but a function of political will. As Persad says, “The number of patients with yearly claims over a million dollars rose by 87% from 2014 to 2017.”He pegs many of the expensive treatments as “halfway technologies,” incentivized by policies and exclusivities that misprioritize the targets of pharmaceutical development. How can extortionate pricing for this marginally valuable care justify financial burdens on every single enrollee or taxpayer? Yet the government, having created this covariate cost risk through its regulatory abdication, may through reinsurance simply pass-on the cost. I think of Colombia in the late 1990’s and early aughts, when pharmaceutical companies opportunistically sponsored patients with dire health needs, typically of higher socioeconomic status, to sue successfully for state coverage of treatments like the newest brand-name cancer drugs of marginal efficacy, while the public benefit package was strained to the point of excluding key preventive vaccines. Reinsurance is not immune to that dynamic, and we need vigilance on that front.
Assuming the greater upstream regulation that Persad proposes to curb misdirected technological development, I take a somewhat broader view of who benefits from reinsurance. The trade-offs to me are not so crisp, insofar as the “many” who bear small burdens also benefit from advantages of mutuality. These advantages are ones that prevailing methodological individualism sweeps behind its own cognitive limitations, behind the temptation to fetishize individual choices, despite Dworkin’s heroic attempts to correct for their inevitable short-termism and other biases. The “many” who bear the burden now can easily become the catastrophic “few,” as the Health Care Cost Institute clearly showed in the 2018 study Persad cites in the article’s first paragraph. But even supposing any one of us manages to run the entire gauntlet without brushing up against a medical cost catastrophe, all of us, in the meantime, benefit from the knowledge that those in our community do not suffer from avoidable pain or fear, as that pain or fear could just as well be ours.