National Flood Insurance Program and Health Policy-4

I wrote an overview post on the National Flood Insurance Program (NFIP) that is linked below; read that first. While that program is important in its own right, this week I am writing a series of posts considering what the 43 year old history of the NFIP could mean for health policy, with special emphasis on Medicare.

This post will focus on the role of the federal government and private insurance companies in the NFIP and the Medicare Advantage program. The NFIP was created in 1968 because flood risk was deemed to be privately uninsurable, and the federal government has borne all of the underwriting risk of flood insurance ever since. However, private insurance companies sell and service policies, including claims adjustment, and they are paid for these efforts. The distribution of premium dollars in the NFIP is shown below (p. 45).

Around 3 in 10 premium dollars go to private insurance companies for administrative expenses (WYO or Write Your Own policies), including profit, and around 6 in 10 dollars goes to pay for expected annual losses, paying off past losses and pre-paying unusual annual losses. The other 1 in 10 dollars are for other administrative costs incurred by the federal government directly providing flood insurance.

The Medicare Advantage Program provides an option whereby beneficiaries can choose private insurance plans in lieu of traditional Medicare as their health insurer. By comparison, the median administrative expenses going to private insurance companies in Medicare advantage plans in 2006 was 8.1% (this number was harder to find that I expected; let me know if you have an alternate source). Several points:

  • More of the premium dollar goes to administrative expenses in private company serviced flood insurance (called WYO allowances in figure) ~30% as compared to 8.1% (median) in Medicare Advantage; 30% is twice as high as the 15% to be allowed to not go toward care for private plans sold in exchanges under the ACA. Update: 20% can go to admin for individual policies, 15% for group.
  • The federal government holds all the underwriting risk in the NFIP, whereas private insurance companies take on the risk for Medicare Advantage beneficiaries
  • Selection effects exist in both programs. In the NFIP, private companies decide what properties they will provided coverage for, with and the federal government directly insuring the remainder; in Medicare Advantage, private companies decide in what geographic areas to offer and market their plans. Both mechanisms likely serve to get the “least sick and at risk” into private plans.
  • The benefits offered by Medicare Advantage plans differ, whereas the value of benefits available in the NFIP are capped ($250,000 dwelling loss, $100,000 contents)
  • The benefits offered by the NFIP have declined in real terms as the $250,000/$100,000 caps have been in place for some time, while those for Medicare Advantage have risen
  • In both programs there is have been policy goals related to premiums that have been hard to achieve. In the NFIP, premiums are expected to cover the expected value of losses, but that has not always happened due to things like annual premium caps, and subsidy of grandfathered properties. In Medicare Advantage, earlier payment rates were set below average with a goal of saving money, which did not occur because healthier persons selected into the plans

About Don Taylor
Professor of Public Policy at Duke University (with appointments in Business, Nursing, Community and Family Medicine, and the Duke Clinical Research Institute). I am one of the founding faculty of the Margolis Center for Health Policy, and currently serve as Chair of Duke's University Priorities Committee (UPC). My research focuses on improving care for persons who are dying, and I am co-PI of a CMMI award in Community Based Palliative Care. I teach both undergrads and grad students at Duke. On twitter @donaldhtaylorjr

4 Responses to National Flood Insurance Program and Health Policy-4

  1. Jonathan H says:

    “…in Medicare Advantage, private companies decide in what geographic areas to offer and market their plans. Both mechanisms likely serve to get the “least sick and at risk” into private plans.”

    You’re forgetting that Medicare Advantage now pays risk-adjusted premiums, reducing or even reversing the incentive to pursue lower risk members. I haven’t seen hard data on the effect of the new policies for risk pools, but I know that it has a real financial impact, and it would be surprising if there were no effect on plan behavior.

  2. Don Taylor says:

    @Jonathan H
    Over the long history of MedAdvantage (or earlier versions of Medicare HMOs) it has never been clear to me whether the selection effects resulted from successful marketing or simply that sicker folks were less likely to make a jump like that. Even with risk adj aspects, premiums are still set administratively based on county of residence. So, I think there are still two sources of selection: where plans are offered, and then selection that comes from patients choice.

  3. Dennis Byron says:

    Some random observations:
    1. You write: “The NFIP was created in 1968 because flood risk was deemed to be privately uninsurable, and the federal government has borne all of the underwriting risk of flood insurance ever since. However, private insurance companies sell and service policies, including claims adjustment, and they are paid for these efforts.” Take the words “sell and” out of the last sentence and that’s an accurate description of Medicare Parts A and B as well. Not sure if the comparison with just Part C — which appears to be the trend in this series — is the way to go.
    2. Medicare doesn’t let you die over and over again and still get insurance. I’m not getting the thing about insuring properties more likely vs. less likely to flood since those of us less likely to have floods don’t buy the insurance. I guess you are saying our tax dollars get used?
    3. How does NFIP “compel?” Are there “catchup” penalties (put more money in the pool) if someone does not sign up right away the way it works for Medicare Parts B and D?
    4. If you think comparing with Part C is the way to go, you need to distinguish between types, particularly other vs SNPs and even between HMOs vs PPOs, etc.
    5. Are you suggesting in your reply to JonathanH that the concept of seniors choosing Part C over a combo of A/B/D/Medigap and then choosing among the dozen or more C choices in their county is an example of insurance company cherry picking?
    6. Thanks for building the bridge. We spent a great week in Salvo

    • Don Taylor says:

      @Dennis Byron
      NFIP puts properties into 5 risk bands, with the 6th being not at plausible risk. In the worst of the risk band, insurance is compelled if the property is bought with a mortgage with any linkage/backing to the fed govt. Others have flood insurance made available to them. For example, we used to live in a house that had a corner of the lot in a 500 year flood plain so we had access to insurance, but weren’t compelled. I was not/am not sure of my bottom line of what the NFIP says about Medicare….not saying part C of any flavor necessarily the way to go. Just think interesting to look at the two programs, esp with respect to govt involvement. I do think long history of Medicare HMOs is a selection story (healhiest in). Not clear to me if marketing or driven by patients in and of themselves. Two years ago I would have said abolish Part C; Austins writing has convinced me we could construct a Part C option that could be useful. Salvo beautiful; you won’t be going there any time soon. Today’s Raleigh News and Observer notes there are 6 breaches between Oregon Inlet and Rodanthe, and two are “joining”. Talk of needing two temp bridges

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