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.


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