Reauthorization of National Flood Insurance Program

Word today that President Obama has indicated his support for a Senate bill to reform and extend the National Flood Insurance Program (NFIP). Here is WSJ coverage of the proposed changes, which would reduce subsidy for second homes, commercial property, and homes with a history of flooding, reducing the cost of the program by $4.7 Billion over the next 10 years.

I wrote the words below just as Hurricane Irene was bearing down on the North Carolina coast last August, that provide an overview of how the U.S. has done flood insurance for the past 45 years or so. Many fascinating issues about public v. private insurance, aggregate cost benefit analysis and distribution of the costs and the benefits, and the role of government in society. I also did a 5 part series comparing principles embedded in the NFIP to health care. I will write more about that later.

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Flood insurance is provided in the United States by the federal government via the National Flood Insurance Program (NFIP), in two ways. First, the government directly provides coverage for some properties. Second, the government works in concert with around 90 private insurers who function as servicing contractors. In the second case, the profits from such flood insurance are private, but the losses are socialized as private insurance companies bear none of the underwriting risk associated with this insurance. How did this come to be the case?

As this American Academy of Actuaries monograph (July 2011) on the NFIP notes (p. 30):

National Flood Insurance Program and Health Policy-5

This is the last in a series of posts considering what the 43 year old history of the National Flood Insurance Program (NFIP) could mean for health policy, with special emphasis on Medicare. Previous posts are linked below.

• Overview of National Flood Insurance Program
• NFIP and Health Policy-1: Why were NFIP and Medicare passed?
• NFIP and Health Policy-2: Distribution of risk in NFIP and Medicare
• NFIP and Health Policy-3: Who is responsible for mitigating risk?
• NFIP and Health Policy-4: Government/private insurance company interaction

This post focuses on how we should decide if the NFIP, or Medicare is worth continuing/reforming? Getting rid of either is a stretch, since they have both been around since the the 1960s. However, there is renewed interest in the NFIP given the cost of storm cleanup, and Medicare is perpetually the focus of reform discussion.

The cost outlay of a program is not the correct way to assess its merit. Instead, you need to know the costs and benefits as compared to the default alternative. When these programs were created, that was flood risk being uninsurable, and half of the elderly being uninsured. A careful consideration of the following is needed to decide what to do as compared to the default case:

• costs
• benefits
• distribution of same

If you end the NFIP now, you will not end floods, and certainly won’t end the federal government’s role in responding to flood damage. Cost/benefit analysis (CBA) can be used to decide whether to undertake or continue a program as compared to a plausible alternative. It is imaginable that a CBA could conclude that the costs outweigh the benefits and that the NFIP should be discontinued, due to the benefits being highly concentrated but the costs broadly spread. More likely is that the program will be reformed. Medicare will obviously be reformed in some way.

Once you have decided that you will do something (say treat  back pain in the Medicare program, or seek to mitigate flood risk on the Outer Banks), you can then move on to cost-effectiveness analysis (CEA). Here the question is given that we will do something, what will we do? What provides the best bang for the buck?

I think that the NFIP could be subjected to CEA to determine if the subsidies provided in their current form are appropriate, and to prioritize flood mitigation strategies. If we picked a standard amount we were willing to pay per unit of flood risk mitigation, I suspect we could muddle through successfully, and reform the NFIP. I am less optimistic about using CEA as a practical tool in Medicare. There are huge differences in how much we do pay to save a statistical life year across settings, demonstrating we have context-specific standards. And when it comes to health care, our technical ability to identify the cost effectiveness of treatments is far greater than is our willingness to use this information to make hard decisions.

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.

• Overview of National Flood Insurance Program
• NFIP and Health Policy-1: Why were NFIP and Medicare passed?
• NFIP and Health Policy-2: Distribution of risk in NFIP and Medicare
• NFIP and Health Policy-3: Who is responsible for mitigating risk?

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

National Flood Insurance Program and Health Policy-3

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.

• Overview of National Flood Insurance Program
• NFIP and Health Policy-1: Why were NFIP and Medicare passed?
• NFIP and Health Policy-2: Distribution of risk in NFIP and Medicare

Today’s post addresses the question: who is responsible for mitigating risk in the NFIP and in health care? Since the inception of the NFIP, three principles have guided this program:

• identification of risk and the development of maps that delineate flood risk (roughly 5 risk bands, with elevation serving as a risk adjuster within bands)
• flood plain management, designed to mitigate risk of flood
• the provision of flood insurance for uninsurable properties

Austin noted yesterday via twitter (@afrakt) that the development of the risk assessment maps necessary for premium setting of federal flood insurance has had other benefits, namely enabling and encouraging mitigation of risk via flood plain management (levees, dams with release capabilities to control watershed water flow, requirements to build dwellings on stilts in some areas, and the like). Mitigating flood risk was an explicit goal when the NFIP was created in 1968. Clear identification of areas at extreme risk have enabled other mitigation efforts, for example local codes requiring that manhole covers/entrances to sanitary sewers be a certain elevation with respect to a predicted flood level (in Durham, N.C. they apparently must be higher than the water level of the 100 year flood; it is possible this is a state regulation). I am not an expert in flood plain mitigation, but it seems clear that the early-1970s identification and classification of areas by risk of flood that was brought about by the passage of the NFIP in 1968 has enabled a great deal of mitigation by federal, state and private entities that has reduced the risk of flood loss.

What about the role of mitigation of harm in health care? This one flummoxed me. There are both many responsible for mitigation of risk and at the same time, no one is actually responsible. This could be a long post, but instead I am just going to sketch some general categories.

• The individual. All of us have responsibility for, and can influence our health, within bounds. There are certain behaviors that are associated with poorer health outcomes, but there is no guarantee of a good outcome if we avoid such behaviors, and no guarantee of a poor outcome if we engage in bad behaviors. And of course everyone eventually dies. Individuals and groups have known barriers to undertaking activities that could be understood as prevention or mitigation of risk, but the individual bears some responsibility to mitigate health risk in our own lives.
• Basic public health from which you cannot opt out. I recall a professor from my school of public health training noting that the most effective preventive measure ever devised was the systematic removal of feces from drinking water. After this, he noted, everything else paled in terms of bang for the buck. Chlorination of water, meat inspection, restaurant and food service sanitation grading and monitoring, are all examples of health risk mitigation that occurs whether you want it or not (public good).
• Health regulations from which you can opt out. Vaccinations are the classic example of a public health function that are delivered or provided through a variety of settings such as local health departments, private physician offices, workplace health fairs, and the like. States have laws requiring vaccination to attend public schools, and going to school often triggers compliance. However, religious exemptions are granted for vaccines, some cannot be vaccinated due to health reasons, and some persons avoid public schools and so are not vaccinated. Also included in this category are broad health information campaigns from government or foundations aimed at encouraging healthy behaviors (don’t smoke, wear a bike helmet, gun safety, etc.) and which may be avoided and which also have uncertain efficacy.
• Excise taxes. Products such as tobacco and alcohol are subject to excise taxes, and the increased cost reduces use. In some cases, a portion of the funds from such taxes may be used to fund programs designed to further mitigate/prevent harm, such as via smoking cessation or prevention campaigns, which are efforts that fall in the category above (regulations from which you can opt out).
• Insurance companies. They have some incentive to invest in health, but at younger ages, the fact that persons tend to change jobs and therefore health insurance lessens this motivation (if company A invests this year, perhaps company B reaps the benefits down the road). Medicare has a clearer incentive, but likely gets involved much too late for some efforts. Still, payment policy for things like vaccines and screenings should be viewed as mitigating risk of disease, however there are a variety of questions about efficacy and cost effectiveness. It is key to identify the goal of such prevention efforts if one wishes to evaluate them: to improve health, decrease costs, or both? Update: Austin’s great post of this morning is relevant here.

Identification of flood risk by the NFIP has clearly enabled and spurred mitigation of flood risk, which is a benefit that was a specific motivation of creating the program. Further, the NFIP can mandate the purchase of flood insurance for certain properties at great risk, forcing financial protection upon the property owner. The boundaries of who identifies risk, and who has responsibility to mitigate risk are fairly clear in flood insurance. Further, success is clear: avoiding flood, and providing for the financial protection against same if it does take place.

The concept of mitigating health harm is inherently more complicated in almost every way. Outside of basic public health services focused on clean drinking water and the food supply, the responsibility for mitigation of health harm is more diffuse, the efficacy is more uncertain, and the goal not as clear (save money, improve health, both?). What constitutes success? The notion of flood invokes images of protecting ones property against an outside force (nature), while  mitigation of health risk outside of the broadest public health examples often seems to encompass individuals and other interested parties seeking to motivate a variety of types of change, that often boil down to us being at war with ourselves–knowing there are things we should do, but having trouble doing them.

Federal Flood Insurance Links

On Saturday afternoon August 27, I wrote this overview of the National Flood Insurance Program. A few round up links that I will add to this post as I see them:

• Suzy Khimm asking whether the federal government should subsidize building in flood prone areas
• Matt Yglesias noting that the hatred of federal spending seems to miss subsidies such as the NFIP that subsidize living in flood prone areas
• The Raleigh (N.C.) News and Observer noting that six breaches/inlets have been cut between the proposed new bridge I discussed in this post and Frisco, N.C. on Hatteras Island which makes the new bridge a candidate for “bridge to nowhere” if Hatteras Island and NC 12 cannot be stabilized
• The Bipartisan Policy Center (Domenici/Rivlin) deficit reduction plan (p. 115) included a proposal to eliminate the subsidy for flood insurance provided to dwellings built prior to the flood risk assessments done by the Army Corps of Engineers in the early 1970s. Premiums for structures built since then are supposed to be set at a level to recoup the expected value of future loses (though there are some problems here that need to be addressed that prevent this from happening; for example, premium increases are capped at 10% annually). Ending this “grandfathered subsidy” would save the following cumulative amounts through the years noted according to Domenici/Rivlin:

• Kevin Drum focuses on the market failure aspect of federal flood insurance.
• Patrick Appel in the Daily Dish links to the debate and provides some reader comments that note exasperation with knee-jerk rejection of federal flood insurance subsidy
• Felix Salmon wants premiums in the NFIP to reflect the true cost of losses

National Flood Insurance Program and Health Policy-2

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.

• Overview of National Flood Insurance Program
• NFIP and Health Policy-1: Why were NFIP and Medicare passed?

This post will compare the distribution of risk in the NFIP and the Medicare program, and consider what this means for reform of these two programs. The spending in both is highly concentrated, and the universal and mandatory nature of the programs serve to spread the costs of this concentrated risk. Spreading the risk means that those of lower risk cross-subsidize those at higher risk, though it is easier to determine which is which in the NFIP than it is in Medicare.

• In the NFIP, 1% of the insured properties incurred 38% of the flood losses from 1978-2004 according to GAO. Note this is assessed longitudinally.
• In Medicare, around 10% of the beneficiaries incurred 42% of the total costs in 2006. Note this is assessed cross-sectionally.

There are some differences in the concentration of spending in the two programs that have important implications.

• The degree of risk due to flood is fairly clear, especially given the detailed risk assessments constructed by the Army Corps of Engineers that are used to create risk bands for the purpose of setting premiums. An identifiable subset of dwellings are at extreme and repeated risk of flood, while many others have virtually no risk. Thus, most homes and businesses in the U.S. will almost certainly never flood.
• The concentration of risk figure noted above for Medicare is focused on a given year, and this phenomenon is reproduced each year. However, an individual who has very low Medicare spending one year is not guaranteed to have low use the next year. And because everyone dies, and health care expenditures are strongly related to age and death (they rise quickly in the last year, and especially the last few months of life), almost no Medicare beneficiary dies without first having substantial health care expenditures. The high users of medical care are not a readily identifiable group in the same way that the properties at extreme and repeated risk of flood loss are.

What does this mean? While both the NFIP and Medicare provide a cross-subsidy of the “sick and at risk” by the “well and not at risk”, the subsidy is more profound for flood insurance than it is for Medicare. That is because of the relative certainty of identifying who is at the highest risk of flood, and more precisely, the fact that most dwellings are at essentially no risk of flood. It is far less precise to identify who is at risk of having larger Medicare expenditures (though women systematically cost Medicare more than men, even after accounting for longevity differences). And while the well subsidize the sick in Medicare, you cannot be sure that you will not shift into the sick category tomorrow (or your parent, or your spouse, or your child some day). And most importantly, the extreme risk concentration noted in the NFIP is identified over time and the lower bound of zero risk is quite certain, while in Medicare the zero risk lower bound is virtually unheard of for someone who attains age 65 as shown by the figure below from Spillman and Lubitz (2000).

In the case of the NFIP, we need an explicit discussion of whether such an extreme cross-subsidy of dwellings in high flood risk zones is worth it (do the benefits outweigh the costs, are the distribution of same acceptable?). In particular, should subsidies of insurance premiums for properties built prior to flood risk assessments in the early 1970s continue?* The same questions about benefits, costs and distribution of same can of course be asked about Medicare. However, in the case of Medicare, if you are worried that you are not receiving enough health care and you resent cross subsidizing the sick, just wait, you may shift groups tomorrow.

*Bipartisan Policy Center deficit reduction guidance proposes ending this subsidy, see pg. 115 on document.

Update: Austin sends along this post on persistence of spending with evidence of some high users remaining high for a two-year period. This is not Medicare only but includes spending from the program. What doesn’t exist in health care is an identifiable nearly certain zero risk, and that does exist for risk of flood.

National Flood Insurance Program and Health Policy-1

I wrote an overview post on the National Flood Insurance Program (NFIP); go and read that first. While that program is important in its own right, this week I will write a series of posts under this series heading considering what the 43 year old history of the NFIP could mean for health policy. 

In this first follow up post, I want to focus on a basic question: why were the NFIP (1968) and the Medicare (1965) programs passed in the first place?

In both cases, they were passed because the result produced by the market in their realm was unacceptable to society. In the case of the NFIP, the inability of private insurance to cover flood damage was the overriding motivation for the program’s creation:

The NFIP created a system of federally guaranteed flood insurance to fill the void. In the realm of health care, there was private health insurance in the mid-1960s, but around half of the persons age 65 and older had none, this outcome was viewed as socially unacceptable, and Medicare was created to provide the elderly with guaranteed health insurance coverage.

There are costs and benefits associated with any governmental program and both should be thought about clearly. When teaching Introduction to Public Policy (PPS 55) at Duke two Falls ago, I gave students the assignment of completing a cost:benefit analysis of a proposed replacement bridge to span the Oregon Inlet on the North Carolina Outer Banks. The question was: build it or not?

I think a cost:benefit evaluation of the NFIP is similar to the decision to build this bridge. In assessing the bridge, there were a variety of fairly straightforward costs (land, construction, materials, maintenance, environmental) and benefits (commerce, time saved not having to take the ferry, safety of replacing an old, dangerous bridge). The correct discount rate to use is always tricky for a depreciating asset, but most students dealt with this similarly so it was not the deciding factor for their judgments. In the end, the students in this class split down the middle over whether this bridge should be built or not and the answer they gave tended to hinge on two factors:

• the value they assigned to the intangible benefit of people having easy access to the beauty of the Outer Banks.
• who had standing, meaning whose costs and benefits should count.

Those who advised not building the bridge were more likely to put a small (or zero) value on the intangible aspects of increasing access to the otherwise difficult-to-access Outer Banks. Those who said the project should be built tended to assign large benefits to these intangible categories.

Similarly, this issue of standing was a key determinant in the decision. The majority of the costs of the project were going to be shared by the entire State of North Carolina as well as the Federal government, and persons saying the project should be built had an expansive view of who shared in the intangible benefits (the entire state, or even entire nation) to outweigh the costs. A narrow view of standing and therefore benefits, perhaps limiting it to the people that actually use the bridge themselves, almost inevitably rejected the project because the costs outweighed the benefits in this formulation as most North Carolinians, much less most Americans, will never cross the Oregon Inlet by bridge.

There is no obviously correct way to complete this cost:benefit assessment that is completely technical; profound value judgments must be made, principles discussed and debated. The calculus is similar for the initial decision to create the NFIP, and to continue it.

What does this tell us about Medicare? The recent round of blog discussion around whether the Medicare age should be raised above 65 (Austin and Aaron have a round-up here) has mostly focused on technical questions about who should bear a sliver of the overall costs of the Medicare program (and health system, generally): federal government, beneficiaries, employers, states. The noisy fray has forgotten the big picture, which must include costs and benefits. The program was passed in 1965 because it was unacceptable for half of the elderly to be uninsured. If we had not done so, we would certainly spend lots less on health care today (lower costs). However, we would also have lower benefits in the form of less care provided to the elderly, which has improved people’s lives (lifespan increase, quality of life/reduction of disability). While some aspects of a cost:benefit analysis of Medicare may be fairly straightforward, the decision in 1965 as well as many of the reform options under consideration will likely turn on intangible and/or hard to measure variables:

• the value of human life, and more explicitly the value of life extension and disability reduction.
• any value assigned to providing coverage for all elderly persons, and preventing some of the elderly from falling through the cracks. You might label this a positive consumption externality where you get benefit from someone else getting care.

Questions about Medicare reform must be asked. However, in doing so, we should recall why we passed it in the first place, and decide what we desire for the program in the future. There are costs and benefits of all public policy decisions. Some of them are straightforward, while others may be more intangible and hard to measure. We need to think through all of them comprehensively, debate and discuss them, and then make decisions and move ahead.

 

National Flood Insurance Program

This post provides an overview of the National Flood Insurance Program; I have a hunch we will be talking about it this fall. Posts next week will consider lessons this program may provide for health care.

Flood insurance is provided in the United States by the federal government via the National Flood Insurance Program (NFIP), in two ways. First, the government directly provides coverage for some properties. Second, the government works in concert with around 90 private insurers who function as servicing contractors. In the second case, the profits from such flood insurance are private, but the losses are socialized as private insurance companies bear none of the underwriting risk associated with this insurance. How did this come to be the case?

As this American Academy of Actuaries monograph (July 2011) on the NFIP notes (p. 30):

The National Flood Insurance Act of 1968 filled this void and provided flood insurance for properties that were otherwise uninsurable. The creation of the NFIP has meant that homes and businesses could be built in places where they almost certainly would not have been absent this insurance. That was the overriding public policy goal of the NFIP. This outcome of course has costs and benefits in both a net, as well as a distributional sense. Further, the NFIB has had a sunset date for its entire existence, meaning it must be reauthorized to continue to operate, at intervals set by Congress. The next sunset date is September 30, 2011, and neither the House nor the Senate has moved to reauthorize the program, which will cease to operate even for those who have paid premiums on that day absent congressional action.

Since its inception, three principles have guided this program:

• identification of risk and the development of maps that delineate flood risk (roughly 5 risk bands, with elevation serving as a risk adjuster within bands)
• flood plain management, designed to mitigate risk of flood
• the provision of flood insurance for uninsurable properties

A related goal has been to reduce the reliance on federal flood relief after catastrophic events.  Why could private insurance not cover such flood prone properties? Two main reasons. First, the goal of private insurance companies is to earn a profit, and they at least must earn excess premiums to cover their cost of capital (they have to pre-fund losses), whereas the U.S. government can easily borrow money to cover catastrophic flood events after they occur. Second, private companies could not compel the purchase of their product absent legislation, so would face tremendous adverse selection problems and/or no one buying their insurance. Into this situation stepped the federal government in 1968, and with a variety of modifications, it has remained the only flood insurance provider in the United States for the past four-plus decades.

Several notable aspects of the NFIB:

• can compel the purchase flood insurance if the property resides in Special Flood Hazard Area (SFHA) (since 1974)
• around 80% of covered properties are assessed full-risk premiums based on Army Corps of Engineers models; the other 20% have subsidized premiums because the covered dwelling was built prior to the identification of SFHAs in 1974
• because of subsidized premiums, in some years the NFIP will run a loss, in others a “profit”
• there are a variety of reasons that full risk premium policies may not in fact represent the expected value of future damages (the goal for such premiums)
• has a statutory limit on the aggregate amount of money that can be borrowed to pay out damage claims; this limit was $1.5 billion from 1996-2005; after Hurricanes Dennis, Katrina, Rita and Wilma the cap is now $20.725 billion; once the cap is exceeded, no claims may be paid
• Hurricane Katrina alone cost the NFIB $17.75 billion
• Individual policies are limited to $250,000 for dwelling/$100,000 for contents for a home; $500,000/$500,000 for a business
• Annual premium increases are capped at 10% annually
• risk of loss is highly concentrated; 1% of the insured properties resulted in 38% of the losses incurred by the NFIP from 1978-2004
• 60% of the single family dwellings covered by the NFIP are in the South; 38% in Florida alone
• Perceptions of regional bias are incorrect; the true risk of flood differs by region of the country (a similar risk band property on the Florida coast would have the same premium as a home by a mountain river in Colorado; there are just more such similarly-risky properties in Florida)
• Over time, more insured property has been serviced by private insurance companies, with the federal government holding all the underwriting risk
• One large private insurer ceased participation in the program in 2010 because Congress 3 times in 2010 allowed the sunset date for NFIP to lapse but then reauthorized the program retroactively. All told, Congress has done this 11 times since 2002. Even though private insurers are not liable for losses in such cases, they fear bad publicity.
• Very active Hurricane seasons in 2004, 2005 and 2008 have lead to a call for a comprehensive review of the NFIP
• I suspect that call is getting ready to get louder…..