NEFF: Refinance health care reform

February 18, 2017

viewpoint-neff-matthew.jpgWhile parts of the Affordable Care Act are popular, the law nearly killed the ability to finance health care risk. And the ACA failed to address the elephant in the room—that health care in the United States is an expensive, unsustainable drag on the U.S. economy.

The new administration wants to reduce the role of government in allocating health care. Accepting at face value the statements of congressional leaders and the president, there will be some form of “safety net,” a minimum standard of health care all citizens should be able to access, irrespective of ability to pay. Once that is defined, the question becomes how that access is allocated, and who bears the cost of that access.

Allocation of services should be moved closer to the private marketplace. The party best situated to manage cost and allocation of benefits (above the safety-net level) is insurance companies. If we define that role in an open, interstate market, the market will require maximum efficiency and customer satisfaction. If we foster true competition, we can discern the real cost of health care, unburdened by the distortions of the ACA. This will keep the insurance industry honest.

So how do we minimize the cost to the taxpayer? The party best positioned to manage the cost of delivery is, again, insurance companies. The financing, however, could be handled in another way.

One of the reasons for the high cost of health insurance is the unlimited risk we have asked insurers to bear (no pre-existing condition exclusion, no lifetime limit on benefits). Let the insurers transfer a certain amount of that risk to the government, through reinsurance, and this cost can be reduced. Through reinsurance, the government can define the risk pool, standardize data to project its long-term cost, and permit the market to buy into the risk. What the capital market won’t support will be left to the taxpayers.

This is not without precedent. Take a look at our mortgage market in the United States. In the last 35 years, mortgage documents have become standardized, record keeping has become homogenous, and defined data sets permit investors to make financial decisions about investing in securitized pools of risk (mortgages). These things occurred under the standardizing influence of Fannie Mae and Freddie Mac, what are referred to as government-sponsored enterprises.

Yes, bad things happened in the mortgage markets and to Fannie and Freddie in the past 10 years. But those things occurred because Fannie and Freddie lost their way and began to take higher levels of risk, to foster new levels of homeownership and to feed a market hungry for securitized mortgages.

Using a government-sponsored enterprise to manage insurance risk pools and provide reinsurance to the health care market would require a high level of discipline and management induced to reduce the cost to the taxpayer. But that risk can be managed by a vigilant government, and it allows the discipline of the capital markets to be brought to bear on the real problem: the cost of health care.

Insurers and a government-sponsored enterprise will build up data that permits projection of future costs—and analysis of expenses—in a way not currently possible. More transparent pricing will result, which will foster true competition. In the reinsurance contracts between the government and insurers, and the transparent pools of financing risk that a government-sponsored enterprise could create, that’s where the cost curve could truly be bent.•


Neff is founder and president of Neff Consulting and has worked for more than two decades in health care and health care financing.

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