Government Insurance Programs

This article will focus on government insurance programs. The article provides a description and analysis of the main types of government social insurance and risk insurance programs including government health insurance, government unemployment insurance, government urban housing credit and insurance, government terrorism insurance, government crop insurance, and government flood insurance and risk mitigation program. The advantages and disadvantages associated with different types of government insurance programs will be discussed. In addition, the issues associated with employer-paid health insurance mandates will be addressed.

Keywords Crop Insurance; Flood Insurance; Health Insurance; Risk Mitigation; Social Insurance; Terrorism Insurance

Insurance & Risk Management > Government Insurance Programs

Overview

U.S. government insurance programs address social problems and protect people and institutions from risk. Examples of social insurance programs include Social Security, disability insurance, survivor insurance, unemployment insurance, and Medicare insurance for those individuals aged 65 and older. In 2005, social insurance programs accounted for 37 percent of federal government spending (Feldstein, 2005). According to the Congressional Budget office, about half of fiscal year 2013 federal spending was on Medicare, Medicaid, the Children’s Health Insurance Program, and Social Security. Examples of risk insurance include federal deposit insurance, terrorism insurance, crop insurance, and flood insurance. As of 2006, the federal government, and federal-sponsored institutions, have made or guaranteed loans for mortgages, education, agriculture, and business of almost $1.5 trillion and insured nearly $7 trillion in earthquake, flood, hurricane, deposit, and terrorism risk. Ultimately, government insurance programs are both financial and social programs (Kosterlitz, 2006).

The private insurance industry is limited by its own willingness and ability to finance risk, in the case of natural catastrophe or terrorism insurance, or invest in or subsidize the needs of a particular people such as the elderly or the poor, in the case of health insurance for the poor and elderly. In many areas of life, with great risk or expense, the government must subsidize or develop an insurance program that addresses and meets the need or addresses the problem rather than relying on the private insurance industry. For example, the government recognizes the need for flood insurance but, in most flood-prone areas of the United States, no comprehensive flood insurance is available from private insurers. The federal government responded to this problem by creating the National Flood Insurance Program. The Nation Flood Insurance Program works with private insurers and individuals to mitigate flood risk and provide guaranteed financial support (Freeman, 2004).

All government insurance programs suffer from the problem of moral hazard. Moral hazard refers to the risk that the presence of a contract will affect the behavior of one or more parties. In the public and private insurance industry, coverage against a loss, in some instances, increases the overall risk-taking behavior of the insured individual and leads to carelessness with personal property or personal health. In the government-citizen relationship, moral hazard refers to the scenario in which citizens do not reduce the risk of their behavior if the federal government bears the costs of insuring the behavior. When citizens cannot or do not reduce their risk, insurance costs rise. The private insurance industry addressed the problem of moral hazard by restricting benefits through co-pays and deductibles. The federal government, with the mandate to provide equal rights under the law, works to reduce preferential or discriminatory practices in its operations, including insurance programs. In government insurance programs, once eligibility criteria are met, citizens will receive a largely-uniform package of benefits. This non-discriminatory approach to government insurance programs puts government insurance programs at great risk for the problems associated with moral hazard (Freeman, 2004).

This following section provides a description and analysis of the main categories of government social and risk insurance programs including government health insurance, unemployment insurance, urban housing credit and insurance, terrorism insurance, crop insurance, and flood insurance and risk mitigation program. The advantages and disadvantages associated with different types of government insurance programs will be discussed. In addition, the issues associated with employer-paid health insurance mandates will be addressed.

Applications

Government Social Insurance & Risk Insurance Programs

The government offers both social and risk insurance to citizens. Social insurance addresses social problems and risk insurance helps insurers and citizens mitigate the risk and bare the expense of high-risk activities and ventures. In some instances, insurance programs can be classified as both social insurance and risk insurance. For example, federal housing insurance, aimed at promoting and supporting urban housing, addressed the social problem of declining home ownership in urban areas of the United States and reduces the loan-risk for many private insurers who have partnered with the government to provide urban home loans and mortgages.

Government Health Care Insurance Programs

The federal government's main health care programs, Medicare and Medicaid, were established in 1965. Congress enacted Medicare and Medicaid to ensure that poor and elderly Americans would not be denied access to health care. In 1965, the Social Security Act, passed in 1935, was amended to provide government-financed medical care for at-risk segments of the population. Title XIX of the Social Security Act was passed to create a Federal and State entitlement program to fund medical assistance for certain individuals and families with low incomes and resources. Medicaid is the largest source of medical and health-related services for America's poor (Carlstrom, 1994).

Federal and state governments have different roles and responsibilities in the Medicaid system. The federal government is responsible for ensuring standardized and uniform insurance requirements. State governments are responsible for implementation and administration of the program. Medicaid benefits, eligibility, services, and payment can and do vary by state. Individual states establish their own eligibility standards; determine the type, amount, duration, and scope of services; set the rate of payment for services; and administer their own program.

The Medicaid program provides healthcare insurance for the following groups: Children under age 6 whose family income is at or below 133 percent of the federal poverty level (FPL); pregnant women whose family income is below 133 percent of the federal poverty level; supplemental security income (SSI) recipients; recipients of adoption or foster care assistance; and all children born after September 30, 1983 who are under age 19, in families with incomes at or below the federal poverty level. The Medicaid program provides healthcare insurance for the following groups at the discretion of individual states: Infants up to age 1 whose family income is less than 185 percent of the federal poverty level; institutionalized individuals eligible under a special income level set by each state; individuals who would be eligible if institutionalized, but who are receiving care under home and community-based services waivers; aged, blind, or disabled adults who have incomes above those requiring mandatory coverage but below the federal poverty level; recipients of state supplementary income payments; working-and-disabled persons with family income less than 250 percent of the federal poverty level; and uninsured or low-income women who are screened for breast or cervical cancer by the Centers for Disease Control.

State Medicaid programs must offer medical assistance, basic services, and optional services. The basic services covered by Medicaid include the following: Inpatient hospital services; outpatient hospital services; prenatal care; vaccines for children; physician services; nursing facility services for persons aged 21 or older; family planning services and supplies; rural health clinic services; home health care for persons eligible for skilled-nursing services; laboratory and x-ray services; pediatric and family nurse practitioner services; nurse-midwife services; federally qualified health-center services; early and periodic screening, diagnostic, and treatment services for children under age 21. Optional services, determined by individual states, provided by Medicaid include the following: Diagnostic services; clinic services; intermediate care facilities for the mentally retarded; prescribed drugs and prosthetic devices; optometrist services and eyeglasses; nursing facility services for children under age 21; transportation services; rehabilitation and physical therapy services; and home and community-based care to certain persons with chronic impairments.

Medicare, which is implemented and overseen by the U.S. Department of Health and Human Services, is a health insurance program for people age 65 or older; people under age 65 with certain disabilities; people of all ages with renal disease. Medicare includes three main elements: Hospital insurance, medical insurance, and prescription drug coverage. An individual's Medicare hospital insurance is, in a sense, pre-paid with the payroll taxes paid during the span of that individuals working life. Medicare hospital insurance covers inpatient care in hospitals, hospice care, and home health care. Individuals pay varying premiums for Medicare medical insurance. Medicare medical insurance covers doctors' services and outpatient care. The Medicare prescription drug coverage is provided by private companies and requires a premium for participation. The Medicare prescription drug coverage helps lower prescription drug costs. Medicare and Medicaid coverage often overlap when people are enrolled in both programs. In those instances, Medicare pays for any and all services for which it is responsible. Medicaid is considered to be the payer of last resort.

The Patient Protection and Affordable Care Act of 2010 imposed new regulations on private insurance and created online marketplaces operated by states or by the federal government to enable camparison shopping by people seeking insurance. The goal of the act was universal health insurance in the United States, and to ensure that the high quality, high cost plans called for in the act were feasible for private insurers, all Americans were required to buy insurance. Tax credits were made available to people with income between 100% and 400% of the poverty line who could not find affordable coverage. For workers without employer provided health insurance, a plan could be obtained from healthcare.gov. or one of the state exchanges. The act also increased the Small Business Tax Credit up to 50 percent of the employer’s contribution to provide health insurance for employees (hss.gov).

Unemployment Insurance

The government provides unemployment benefits to members of the workforce through the federal-state unemployment insurance (UI) system. The Federal-State Unemployment Insurance Program, overseen by the Department of Labor's Employment & Training Administration, provides unemployment benefits to eligible workers who are unemployed through no fault of their own, and meet other eligibility requirements of state law. The federal-state unemployment insurance system was created in 1935, during the Depression, to accomplish two main goals: First, provide temporary wage replacement for unemployed workers who have demonstrated a strong attachment to the labor force. Second, assist in stabilizing the national economy during downturns in the economy. Federal and state governments have different roles and responsibilities in the federal-state unemployment insurance system. The federal government is responsible for ensuring standardized and uniform insurance requirements. State governments are responsible for implementation and administration of the program. Unemployment benefits can and do vary by state (McMurrer & Chasonav, 1995).

Eligibility requirements for unemployment insurance, including benefit amounts and the length of time benefits are available, are determined by the individual state law. In general, there are two main eligibility criteria that must be satisfied to receive benefits. First, the unemployed person must meet the state requirements for wages earned or time worked during an established (one year) period of time referred to as a base period. Second, the person seeking benefits must have become unemployed through no fault of their own.

Unemployment benefits, which cannot exceed a state-determined maximum benefit, are based on a percentage of an individual's annual earnings. Unemployment benefits, in the majority of states, can be paid for a maximum of 26 weeks. To maintain benefits during the twenty-six week benefits period, the unemployed person may be required to engage in state-specific job training programs and register for work with the State Employment Service. Benefits, in some circumstances, can be extended beyond 26 weeks through the Federal-State Extended Benefits program. As a result of the 2007-2008 recession and the prolonged downturn that followed, unemployment remained staggeringly high. Federal unemployment benefits were extended to 96 weeks in some states before being cut back in 2012, using a formula based on a state's unemployment rate. Unemployment benefits are considered to be taxable income and must be reported on federal income tax returns.

Urban Housing Credit & Insurance Programs

In the United States, 150 million Americans live or work in American cities. Cities, with high concentrations of population and annual spending power, influence both national economy and position in global economy. Despite substantial resources, American cities are considered to be in crisis as evinced by state and city fiscal budget deficits, unemployment, struggling public schools, and decreasing home ownership (Living Cities Initiative, 2006). To address these problems and support and promote urban housing, the government has developed major credit and insurance programs. The government's main housing credit and insurance programs include mortgage insurance and loan guarantee programs. These programs are administered by different government agencies. The Department of Housing and Urban Development (HUD) oversees mortgage insurance while the Department of Veterans Affairs oversees loan guarantee programs. The government has formed partnerships with numerous lenders to support and promote loans and credit for those individuals and businesses wishing to purchase urban housing or open businesses located in urban areas. Government supported credit activities include the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, and the Government National Mortgage Association (Quigley, 2006).

Terrorism Insurance

Terrorism insurance has been reworked and remade in response to the events of September 11, 2001. While insurance coverage has historically included coverage for terrorism risk, the magnitude of the losses resulting from the September 11, 2001 attacks on the World Trade Center demonstrated to the private insurance industry that terrorism insurance was too great a risk to undertake without government backing. The Terrorism Risk Insurance Act (TRIA) of 2002, implemented by the U.S. Department of Treasury, established a temporary partnership between the private insurance industry and government insurance programs to cover losses from foreign terrorist attacks on American soil, ships, aircraft, and international missions. The law calls for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism. President Bush extended the Terrorism Risk Insurance Program from December 22, 2005 through December 31, 2007. The government has two main goals for the Terrorism Risk Insurance program. First, the federal government desires to protect consumers by addressing market disruptions and ensuring the continued widespread availability and affordability of property and casualty insurance for terrorism risk. Second, the federal government intends to allow for a transitional period for the private markets to stabilize, resume pricing of such insurance, and build capacity to absorb any future losses, while preserving state insurance regulation and consumer protections (Robinson, 2005).

Federal Crop Insurance Programs

The U.S. Department of Agriculture has a risk management agency to assess, oversee, and implement the federal crop insurance programs. Federal crop insurance programs were established following the Great Depression of the 1930s to aid farmer's in their recovery and to boost the American food-growing capacities. The Federal Crop Insurance Corporation was established in 1938 to facilitate, support, and subsidize transactions between farmers and private insurers. The Federal Crop Insurance Act of 1980 expanded the crop insurance program to many more crops and regions of the country. The U.S. agricultural price support system and crop insurance includes protections for wheat, corn, oats, soybeans, cotton, sugar, peanuts, tobacco, rice, milk, and other goods (Marcus & Modest, 1986). The Federal Crop Insurance Act strengthened the crop insurance program as a means of replacing expensive government disaster assistance programs (Dismukes & Glauber, 2005).

Natural Catastrophe Insurance Programs

The monetary costs of natural catastrophes, such as earthquakes, hurricanes, tornadoes, and floods, are covered by insurers, citizens, the federal government, and state governments. Federal and state governments provide disaster relief to cope from and rebuild after natural disasters but do not have a comprehensive natural catastrophe insurance program. The government has an insurance program for floods alone. There is currently legislation, entitled the Homeowners' Insurance Protection Act of 2007, proposed to create a national natural catastrophe insurance program. The proposed government natural hazard insurance programs could take two forms: Government acting as insurer and government acting as re-insurer. Government, as an insurer, assumes direct liability for losses with the private insurance sector bearing some portion of loss. Government, as re-insurer, provides financial support to the private insurance market. Both approaches tend to rely on the private sector to provide needed administrative support (Freeman, 2004).

The federal flood insurance currently available through the National Flood Insurance program is managed by the Federal Emergency Management Agency's (FEMA) Mitigation Division. The National Flood Insurance program includes three parts: Flood insurance, floodplain management, and flood hazard mapping. Currently, 20,000 communities across the United States participate in the National flood insurance program. The program requires that participating communities adopt and enforce floodplain management ordinances to reduce future flood damage. If communities comply with these flood prevention requirements, the National Flood Insurance program makes federally guaranteed flood insurance available to homeowners, renters, and business owners in these communities.

Issues

Employer-Paid Health Care Mandate Bills

Currently, employers, particularly in the small-business sector, are lowering healthcare costs by cutting benefits, making employees pay more, or dropping healthcare coverage. The U.S. Census Bureau reports that, in 2004, the number of Americans without health insurance rose. The uninsured are increasingly turning to government health insurance programs, such as Medicaid, for healthcare. In 2004, 27.2% of Americans participated in government health insurance programs. Workers, particularly low-wage workers, turn to government health insurance programs for health needs (Fong, 2005).

While government insurance programs were developed to meet real need and share and mitigate the risk and expense of high-risk, the programs were not developed to subsidize the health-care costs of large corporations (Schoeff, 2005). In some instances, large corporations, such as Walmart, have been accused of encouraging their thousands of low-wage workers to enroll in government health care insurance rather than offering company benefits and insurance. As a result of this alleged practice, the policymakers have developed health-care mandate bills. Employer-paid health care mandates could require employer-paid health care for all workers, require companies to report the number of their employees who receive government-funded health care, or require employers with more than 10,000 workers to spend at least 8 percent of payroll on health benefits.

While the government struggles with increasing expenses associated with rising Medicaid and Medicare enrollment, the health-mandate bills are one of the many solutions to cut associated health-care and administrative costs. Other options for reducing Medicaid and Medicare costs include reduced services, fee for services, reworking eligibility criteria, and lowered doctor and hospital reimbursements (Carlstrom, 1994).

Conclusion

In the final analysis, government insurance programs are strategies for addressing social problems and mitigating risk. The success of these programs is, in some instances, compromised by the moral hazard of the insured and corporate tendency to optimize their profits by not offering insurance benefits and instead relying on government support for workers. Ultimately, unemployment insurance programs have been shown to raise unemployment. Retirement pensions have been shown to induce earlier retirement and decrease saving (Feldstein, 2005). Government insurance programs will continue to undergo reform as new social needs, political tensions, and economic cycles emerge.

Terms & Concepts

Congress: The United States' government legislature granted the power to make laws.

Federal Government: A form of government in which a group of states recognizes the sovereignty and leadership of a central authority while retaining certain powers of government.

Federal Poverty Level: The guidelines issued annually by the U.S. Department of Health and Human Services used to determine eligibility in a wide variety of Federal and State programs.

Health Insurance: The insurance of human beings against bodily injury, disablement or death by accident or accidental means, or the expense thereof, or against disablement or expense resulting from sickness.

Insurance: A contract under which one undertakes to pay or indemnify another as to loss from certain specified contingencies or perils.

Mitigation: Efforts taken to reduce either the probability or consequences of a threat.

Social Insurance: A compulsory public-insurance program that protects against various economic risks such as loss of income due to sickness, old age, or unemployment.

Unemployment Insurance: The Federal-State Unemployment Insurance Program, overseen by the Department of Labor's Employment & Training Administration, that provides unemployment benefits to eligible workers who are unemployed through no fault of their own, and meet other eligibility requirements of state law.

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Chou, S., Liu, J., & Hammitt, J. (2003). National health insurance and precautionary saving: Evidence from Taiwan. Journal of Public Economics, 87(9/10), 1873. Retrieved July 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=10925389&site=ehost-live

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Government insurance programs. (1979). Journal of Risk & Insurance, 46, 743-750. Retrieved July 2, 2007, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5170211&site=ehost-live