REINSURING HEALTH REINSURING HEALTH Why More Middle-Class People Are Uninsured and What Government Can Do Katherine Swartz Russell Sage Foundation • New York The Russell Sage Foundation The Russell Sage Foundation, one of the oldest of America’s general purpose foundations, was established in 1907 by Mrs. Margaret Olivia Sage for “the improvement of social and living conditions in the United States.” The Foundation seeks to fulfill this mandate by fostering the development and dissemination of knowledge about the country’s political, social, and economic problems. While the Foundation endeavors to assure the accuracy and objectivity of each book it publishes, the conclusions and interpretations in Russell Sage Foundation publications are those of the authors and not of the Foundation, its Trustees, or its staff. Publication by Russell Sage, therefore, does not imply Foundation endorsement. BOARD OF TRUSTEES Thomas D. Cook, Chair Alan S. Blinder John A. Ferejohn Alan B. Krueger Kenneth D. Brody Larry V. Hedges Cora B. Marrett Christine K. Cassel Jennifer L. Hochschild Eric Wanner Robert E. Denham Kathleen Hall Jamieson Mary C. Waters Christopher Edley Jr. Melvin J. Konner Library of Congress Cataloging-in-Publication Data Swartz, Katherine. Reinsuring health : why more middle-class people are uninsured and what government can do / Katherine Swartz. p. cm. Includes bibliographical references and index. ISBN (cloth) 978-0-87154-787-3 ISBN (paper) 978-0-87154-788-0 1. Insurance, Health—Government policy—United States. 2. Medically uninsured persons—Government policy—United States. I. Title. HG9396.S93 2006 368.38′200973—dc22 2006040505 Copyright © 2006 by Russell Sage Foundation. First paper cover edition 2007. All rights reserved. Printed in the United States of America. 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RUSSELL SAGE FOUNDATION 112 East 64th Street, New York, New York 10021 10987654321 For Frank Contents About the Author ix Preface xi Acknowledgments xiii Chapter 1 A Health Insurance System in Crisis? 1 PART I Why People Lack Health Insurance Chapter 2 The Growing Ranks of the Insured: Who Lacks Health Insurance? 15 Chapter 3 Why Employer-Group Health Insurance Is Cheaper—and Why Those Who Have It Are Lucky 44 Chapter 4 How Health Insurance Markets Work 60 PART II Public Policies to Make Private Insurance More Available Chapter 5 Two Approaches: High-Risk Pools and Assessments to Cover High-Risk People 85 Chapter 6 A Third Approach: The Government as Reinsurer for Small-Group and Individual Markets 101 PART III Getting from Here to There Chapter 7 The Need for a New Health Insurance Structure 125 Appendix Precedents for Government Assuming Responsibility for the Worst Risks 137 Notes 149 References 181 Index 193 About the Author KATHERINE SWARTZ is an economist and professor of health policy and economics at the Harvard School of Public Health. Preface Since the mid-1970s, the federal government has conducted nationally representative surveys of the U.S. population to learn more about those who do not have health insurance. Twenty-five years ago two-thirds of the uninsured lived in poverty or had incomes just above the poverty level, and two-fifths were children. For policymakers determined to re- duce the number of uninsured, the message was clear: expand Medicaid and create programs aimed at children. The country made progress in both of these directions—but to the consternation of many, the number of uninsured continued to rise. As of January 2006, the U.S. had 45.5 million uninsured people. Among these are almost 14 million middle- class people; being uninsured is an increasingly common problem for middle-class adults. The growth in the number of middle-class people among the unin- sured requires us to take a new look at the reasons why people are unin- sured. It also requires that, in addition to programs targeted at the poor and near-poor, we develop new policies to provide incentives for insur- ers to make health insurance more widely available. These are the sub- jects of this book. Acknowledgments As my family and friends know all too well, Reinsuring Health has been a long time coming. I wrote this book with the hope that it would con- tribute to the public’s understanding of why so many Americans are uninsured and what might be done to remedy the situation. I would dearly like to see this great country develop a policy that would guaran- tee health insurance for all Americans. The first version of the book was almost completed while I was on leave and in residence at the Russell Sage Foundation during the 2000– 2001 academic year as a visiting scholar. I am most appreciative of that opportunity and for the generous support of the people at the founda- tion. Eric Wanner deserves special thanks for his support of the project. The Robert Wood Johnson Foundation also provided generous financial support, including funding for the initial project that ultimately led to this book. I am grateful to David Colby for his many expressions of encouragement for the writing of the book. The Harvard School of Public Health also provided financial support during the last year when I sub- stantially revised the book. Thanks also go to Arnie Epstein, chair of my department, for encouraging my efforts to address a wider audience than my academic colleagues. While I was writing the first draft of the book, I was fortunate to spend a month at the Rockefeller Foundation Conference and Study Center in Bellagio, Italy, when my husband was a fellow in residence there. I wrote more in that one month than I have ever been able to write anywhere else, and I thank the people there for that. I owe enormous debts to the many people who read all or parts of the working drafts of the book. They were generous in giving their time, and their constructive comments, questions, and suggestions greatly im- proved the book. Joe Newhouse read both of the working drafts and provided insightful comments and suggestions. I appreciated his con- stant reminders to be precise, even when trying to simplify explanations. My father, Clifford Swartz, also read both working drafts. He also asked good questions that made me rework explanations. I am not sure whether both are gluttons for punishment, but I am enormously grateful to them for the detailed comments and suggestions they made. Linda Blumberg, Judy Feder, Deborah Garnick, Alan Monheit, and Steve Zuckerman all provided extremely thoughtful and detailed com- ACKNOWLEDGMENTS ments on the first working draft. I hope they will see where their atten- tion to details and suggestions for reorganizing the book’s themes re- shaped the book. Each deserves special thanks. I also am grateful to Bruce Abbe of Communicating for Agriculture for his many comments and suggestions relating to chapter 5 and state high-risk pools. His com- ments made me rethink and rework my discussion of these pools. Ed Pasterick of the Federal Emergency Management Agency also provided details and comments that greatly improved my understanding of the federal government’s role in flood insurance (see the appendix). Janet Rosenbaum, a student in the Harvard Ph.D. program in health policy, gave me very useful feedback on four of the chapters of the first working draft. Particularly helpful were my discussions with Karen Pollitz about the differences between the uninsured people I interviewed and those she has written about who lack health coverage. Finally, two anonymous reviewers provided very useful comments and suggestions for ways to improve the book, and I am grateful to them. Despite their extensive input, all these people may not agree with everything I say, and they certainly are not to blame for errors that may remain. I do not want to name the uninsured people I spoke with, but I am very grateful for their willingness to spend time talking candidly about their circumstances and experiences. I only hope that this book helps get them health insurance soon. Other people talked with me about reinsur- ance and those industries and parts of the economy where there has been a marked increase in the use of nonpermanent employees. I am grateful especially to Ari Wolfe, Meghan McGuire, Lee Koromvokis, Steve Gunther, Steve Barley, Michael Hartman, Harry Shuford, Barbara Helfgott Hyett, Elise Peterson, Susan Houseman, Paul Osterman, Thomas Kochan, Oscar Reyes, Frank Ellero, Franklin Shaffer, Peter Buer- haus, Susan Garfield, Tamara Swartz, Beth Cooper Lawrence, Nanci Healy, Susan Walker, Cathy Perron, Nick Lemann, Jaci Coleman, An- drew Cooper, Nancy Hallberg, Deborah Jackson Weiss, and Judith Mol- dover. I am indebted to a number of friends and colleagues who provided me with information or explanations that were otherwise hard to find; Laurie Pascal, Julian Pettingil, Patricia Swolak, Randy Ellis, Michelle Mello, and David Autor were particularly generous in this regard. Jim Mayhew of the Centers for Medicare and Medicaid Services and Jim Rice of the Bureau of Labor Statistics’ Quarterly Census of Employment and Wages were more than generous in helping me find data I could not find myself in libraries or on the Web, in some cases because it is now considered “old.” I could not have described the uninsured and the changes in their characteristics over the last twenty-five years without the help of three xiv ACKNOWLEDGMENTS outstanding graduate students in economics at MIT: Cynthia Perry, Eliz- abeth Oltman Ananat, and Jessica Cohen.