October 27, 2004

Healthy Mae

Several readers (by which I mean two, and hey, that's enough for me!) have written in (over, um, a long-ish time frame) asking what I think about Bill Frist's proposal for a "Healthy Mae"—a private alternative to Kerry's health reinsurance plan. After all, isn't that a clever, sensible solution to a complex problem? Alas, Frist hasn't given out many details for his plan, but here's what I suspect will happen.

Frist has in mind a secondary insurance market, with Healthy Mae doing what Freddie Mac and Fannie Mae do in the mortgage market. Those two firms buy up mortgages from banks, package a bunch of them together, and sell them as tradable securities to investors. The idea is that, by freeing up liquidity, banks will have more money to lend to homeowners, that they can lend at a lower rate, and that they can take more risks on low-income homeowners. In turn, Freddie Mac and Fannie Mae make money because they're endorsed by the government, and for some reason can borrow at a spectacularly low rate (their bonds have lower yields than any save for the U.S. Treasury). Oh, and if Fannie and Freddie fail, most investors expect that U.S. taxpayers will bail them out, even though the companies' debt offerings clearly say this is not the case.

Right then. So a Healthy Mae would probably buy up insurance policies, bundle them up, and sell them off to investors. This would thereby free up liquidity held by insurance companies, who would presumably have incentive to offer lower premiums, and cover the sickest of the sick, since Healthy Mae would be take responsibility for the most catastrophic illnesses, and presumably it would be large enough and supported enough by the government to take these shocks.

Let me state clearly: If it worked, this would be far, far preferable than John Kerry's idea of using the U.S. government (and taxpayer money) to cover catastrophic costs. But "if it worked" is the key phrase. Would Healthy Mae lower premiums? Doubtful. A study by Wayne Passmore of the Federal Reserve found that Freddie and Fannie lower mortgage rates by only the slimmest of margins (7 basis points). I don't know what that would translate into as far as insurance premiums go, but it would be tough to beat the 10 percent reductions that most economists think Kerry's plan will offer.

More importantly, would Healthy Mae induce insurance companies to cover the sickest of the sick? The short answer: I don't know. The long answer: Seems dubious. The trick is in what sorts of carrots and sticks you have for insurance companies. Unfortunately, the Republican party has shown itself willing at every step of the way to give wide, wide latitude towards insurance companies. A Healthy Mae policy crafted by Bill Frist and Tom DeLay would likely be a boon to insurance companies and Healthy Mae shareholders first, and a health care policy second. It would be all carrot and no stick. Plus, there's always the risk that taxpayers will have to bail out the whole system if Healthy Mae gets, um, sick. But if that's the case, why not make the federal government the ultimate risk pooler in the first place? That's what Kerry's planning to do. I don't think it's a perfect option, but I don't trust the Republican Party to craft a workable private-sector option, either. And judging from the outcry over Medicare Plan B, I imagine no one else really trusts the Republicans either.
-- Brad Plumer 5:12 PM || ||