Last Friday, the Heartland Institute sponsored a briefing event with Rep. Eleanor Holmes-Norton , D-D.C., concerning her bill to provide for tax-free insurance catastrophe reserving in the District of Columbia. About 25 people showed up on an unseasonably warm day to discuss cat reserving and the congresswoman gave a good speech outlining her goals and the purpose of the bill. One thing that came up in the discussion—and is worth thinking about more—is the idea that the proposal might well be ideally suited to providing a private replacement for our current publicly run system of terrorism risk insurance.
Allowing tax-free onshore reserves for terrorist attacks against the United States could provide a low-risk way to see if people were willing to write business. The private sector writes relatively little terrorism coverage today, and any revenue that might be lost by allowing for tax-free reserving would be well worth reducing the pressure on, and need for, the $100 billion federal Terrorism Risk Insurance Program backstop. If no company took the “bait” in the form of tax-free status, that would be a good sign that tax treatment alone wasn’t discouraging anyone from writing terrorism cover.
And this makes a lot of sense. More than a decade after 9/11, indeed, nobody really, honestly, knows exactly how to write terrorism cover. The private market is theoretically capable of doing it with a high enough risk premium but this might well produce a product that nobody will buy and thus, leave everyone uncovered against terrorism. The real problem is that we have a very small dataset of terrorist attacks: three significant ones in the past 30 years in the United States and the best information about them, with good reason, is closely held by military and intelligence agencies.
The best way to replace the current system, therefore, probably isn’t to commit to any one system, including Norton’s proposal or, indeed, one that I floated a few years back. Instead, it’s to try to authorize every possible way that the private market might try to replace TRIA and see what sticks.
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As she acknowledged, Rep. Norton isn’t the type of person who sees eye-to-eye with Heartland on many issues. While we’ve had plenty of Democrats involved with our events and ventures, it’s pretty likely she’s the first member of the Congressional Progressive Caucus to headline a Heartland event. And all this goes to show what I’ve often said: we’ll work with anyone—and everyone—who shares even some of our ideas. And Rep. Norton certainly qualifies.
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With Obamacare coming before the Supreme Court right now, lots of people are chattering again about what might happen if the court choses to overturn the individual mandate or even the law as a whole. I doubt that either will happen myself but that’s beside the point.
If the law is overturned, however, one of the big problems that would arise is this: the single most popular section of the law is its provisions that require insurers to cover preexisting conditions. This notion receives more than 70% support in most opinion polls and is even included in the Tea Party-inspired “Pledge to America.” For obvious reasons, however, doing this in a private market is essentially impossible without an individual mandate: if insurers must cover preexisting conditions and nobody has to buy insurance unless they want to, then many people could buy insurance only when they got sick and the risk pools at the heart of the insurance system would collapse.
Since the idea of covering preexisting conditions or providing insurance for sick people is popular, more than a few libertarians have floated the idea of something (that doesn’t exist right now in most markets) called “health status insurance” that would assure people the right to be covered in the future.
This sounds like a good free-market solution to a vexing problem but I don’t think that it’s workable at all.
First, it really has no place in the current health system that’s based on group coverage. Right now, almost all Americans get health insurance either from the government or an employer. People typically switch plans when they switch employers, their employer switches plans, or they become eligible for a government benefit. Since government health insurance mostly covers preexisting conditions, group plans provide most people coverage for preexisting conditions anyway, and employers must offer “COBRA continuation plans” (which also cover preexisting conditions.)
The entire idea of “health status insurance” isn’t really compatible with group health insurance. People covered by group or government plans (most people) have almost no reason to buy it. Likewise, people who join a group plan and drop individual coverage would have every reason to give up health status insurance even if they purchased it.
Second, the entire idea suffers from enormous adverse selection bias. People who are younger and will suffer the stiffest premium increases under the modified community rating that Obamacare imposes, will also have similar premium increases if health status insurance were to become widespread, since they would pay the health status premium on top of their individual premium. Furthermore, there’s reason to think that the adverse selection problems might be even greater: people who know about family genetic predispositions, plan to do risky things that might harm their health in the long term, and so forth would be much more likely to buy it. And they would have every reason to hide these things from insurers. This would make the product very expensive and discourage people from purchasing it.
Third, the product isn’t truly distinct from catastrophic health insurance coverage anyway. A “health status” policy that gives its owner the right to purchase insurance at a set price regardless of health condition is really just another way of structuring the individual retention (deductible) of a health insurance policy. It would have to be priced in essentially the same way as such a policy. And it’s difficult to figure out why anybody would buy or sell such a policy anyway.
Of these, only the first problem does seem soluble. If the country were to switch to the type of system I’d favor—universal age and income-related premium support to help everyone buy privately run health insurance—with no role for employers and only a limited one for the government, then it’s possible to see a real market for health status insurance emerging. But the other flaws would still exist. Basically, health status insurance is not a workable idea.
