Reinsuring Risk to Increase Access to Health Insurance

At least 41 million Americans are currently without health insurance in any given month (U.S. Bureau of the Census, 2002). They are uninsured for a variety of reasons, and most people who lack coverage are affected by more than one reason. Two generalizations can be made, however. First, a majority simply cannot afford to purchase health insurance unless it is heavily subsidized. Most do not have access to employer-sponsored coverage and so must purchase any insurance in the non-group (individual) health-insurance market - a market where, as I explain below, insurance is typically twice as expensive as employer-group coverage if it is not denied outright. Since about two-thirds of the uninsured have incomes below $35,000, non-group health-insurance premiums often exceed 10 percent of their incomes. The second generalization is that, to an important extent, high premiums in the non-group market and denial of coverage reflect market failure due to asymmetric information. Insurers can never know as much as an individual does about his or her health, family history of health problems, and tendency to seek medical care. Because of this asymmetry, it is impossible for an insurer to set premiums that accurately reflect the non-random portion of health-care costs for different individuals. The non-group market is the only health-insurance option for people without employersponsored coverage. Tax-related subsidies as proposed by members of Congress and the Bush administration do not address the market-failure problems and so are unlikely to make insurance much more affordable. To increase access to health insurance, risk in the non-group market needs to be shifted to a broader population base. In what follows, I first describe the three distinct health-insurance markets in which people can obtain health insurance, and the special nature of competition among insurance companies in the non-group market. Then I make the case for government to act as reinsurer and assume the risk of extremely high-cost people. Efficiency in the non-group health-insurance market would be improved if the government reinsured the market. Equity also would be increased if the government acted as reinsurer because more uninsured people would have access to insurance. Finally, I describe precedents for this role for government in other markets, and why tax-related subsidies will not succeed in increasing health-insurance coverage unless the risks of extremely high costs are shifted to the government.