13 Ways You Might Not Realize Floods Are Like Health Care

Hurricane Harvey has officially dissipated, but it has wiped out the Federal Emergency Management Agency (FEMA) disaster relief fund, and despite Congressional efforts to provide additional funds, Hurricane Irma will probably require yet another injection of relief funding before the end of September. Like most people, we at M2 are thinking about our friends and family – and all people – in the affected areas and are donating money to local organizations lending a hand.

Unlike most people, though, we at M2 are also noticing the ways these disasters and the National Flood Insurance Program mirror the issues we grapple with in health care and the ACA repeal and replace debate.

Disaster relief and health care are essentially social issues that force the government to decide who they will help and when. Which is better: paying for those affected by disaster or significant health care needs, or helping people to buy insurance against those possibilities?

If the government “helps people buy insurance,” in other words, provides subsidized insurance, how much of the premium should be subsidized? For whom should the premium be subsidized? This year the U.S. Government Accountability Office (GAO) called the National Flood Insurance Program (NFIP) high risk, in part because of a simple math problem that all insurance products must address. What happens if you can’t charge a rate high enough to cover the cost of insuring the risk?

The GAO wrote, “Since the program offers rates that do not fully reflect the risk of flooding, NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses.” Slightly different language, but same concept as the current fight over cost-sharing reduction (CSR) payments to health insurance companies: the government subsidizes the cost of insurance for certain people because otherwise the premiums would be too high for them to afford coverage.

Below are 13 ways you might not have realized floods are like health care (and why insurance is so important):

  1. Personal costs are likely to far exceed a person’s ability to pay for them
  2. When a catastrophe occurs, many people receive aid, and many who should have had insurance don’t, which may cost the government more than the insurance would have cost
  3. Government must decide how much subsidy is enough to entice participation, but not so much as to discourage personal responsibility
  4. States’ rights must be balanced against the federal government’s interest in sharing the expense of providing aid to people affected by catastrophic events
  5. A small percentage of policy holders account for a large percentage of claims
  6. Insurance is required by government, for at least some people
  7. Insurance is subsidized by government, for at least some people
  8. If premium rates are tied to actuarial rates, rates will skyrocket
  9. To reduce what the government spends on subsidies without raising premiums, insurance policies with higher deductibles may be offered
  10. Eventually Congress may establish a fee on all insurance policies sold to recover part of its costs for operating the federal program
  11. A constant debate rages about the length of waiting periods because too short of a waiting period allows people to buy insurance coverage when they already know they will have a claim
  12. There is some kind of national educational campaign to help people understand the importance of having insurance
  13. Proposals are floated to ban people from receiving assistance if they have had repetitive losses

In an article called, “The US Flood Insurance Market is a Mess,” (paywall) a reporter from The Financial Times asked a reinsurer from Bermuda how to fix the U.S. flood insurance market. His response could just as easily apply to the current health care debate:

“This is a big social issue. Should mortgage companies require more people to get flood insurance? Should the government provide reinsurance, or buy more reinsurance? There is no fast and cheap fix on offer.”

 

N.B. Our “13 ways” list would not have been possible without the information compiled by the American Institutes for Research, The Pacific Institute for Research and Evaluation, and the Deloitte & Touche LLP October 2002 report for the Federal Emergency Management Agency (FEMA) called A Chronology of Major Events Affecting the National Flood Insurance Program.