The Case for Reinsurance

Government-provided reinsurance—essentially, insurance for insurance companies—can relieve health insurers of the risk of "adverse selection," or disproportionate enrollment of individuals with extraordinarily high medical costs. Although few states have tried it, reinsurance has the potential to lower health plan premiums and make coverage affordable to more people. A new Fund study explains how states can make it work in their small-group and individual markets.

In Reinsurance: How States Can Make Health Coverage More Affordable for Employers and Workers, Katherine Swartz, Ph.D., examines long-established reinsurance programs in New York and Arizona that have achieved significant success.

The Healthy New York program creates a back-up reservoir of funds to help pay for catastrophic cases. By contrast, Arizona's Healthcare Group provides protection to insurers for the risk that a large number of enrollees may have above-average but not necessarily extraordinary expenses.

As other states consider establishing reinsurance programs, Swartz advises them to consider: 1) the type of reinsurance to provide; 2) the need for transparency as to why someone has high expenses; 3) the threshold level of expenses for activation of the reinsurance; and 4) setting up an auditing or verification of claims submitted for reinsurance. States also must evaluate their funding sources and estimate the costs of the programs.

Although established primarily with the working poor in mind, reinsurance holds promise to lower health insurance costs for all, Swartz says.