Reinsurance: a health reform detail

I had a long flight today, which gave me the chance to catch up on some neglected reading. I was a little upset that my seatmate took my New York Times when I had stepped away, then gave it to the flight attendant as trash when he finished with it –and before I’d had a chance to read it! In any case it gave me more time to dig into the June issue of Health Affairs, which is all about the health care reform law and its implementation.

One of the more interesting pieces is The Three Types of Reinsurance Created by Federal Health Reform, written by Mark A. Hall, a law professor at Wake Forest. He lays out three purposes for reinsurance (defined as “insurance for insurers or for self-insured employers”)

  1. To subsidize the cost of health care in order to lower premiums
  2. To alter market dynamics to blunt the effect of adverse risk selection
  3. To ease actuaries’ anxieties about the impact of new government regulations

The new health reform law has three separate programs that correspond 1-to-1 with these principles:

  1. Reinsurance that covers early retirees aged 55-64, paying 80 percent of claims from $15,000 to $90,000 per person. The intent is to keep employers from dropping coverage on retired people who are too young for Medicare.  The program is funded with $5 billion and modeled on a similar subsidy program that was used to discourage employers from dropping retiree drug benefits as Medicare Part D went into effect. The new reinsurance plan is in effect from 2010 through 2013
  2. The second program, in place from 2014 to 2016, will make¬† payments to insurers issuing individual plans to members with high-cost conditions. $25 billion will be raised from insurers based on their market share, but this is not just moving the money around within the individual market. Rather all insurers will pay, including those who just administer plans for self-insured groups. This is essentially a subsidy from the group market to the individual market –making it feasible for health plans to insure high-cost members
  3. The third program –in effect from 2014-2016– consists of “risk corridors” in the individual and small group market, which will subsidize insurers whose medical expenses are >3% higher than expected via payments from insurers whose expenses are >3% lower than expected. No explicit funding is outlined for this one because the law implicitly assumes the assessments on low-cost insurers will equally the subsidies due to the high-cost insurers. As the author points out, there is no real reason to think this will be the case. (The article doesn’t explain how the “expected” amount is determined. I’m going to write the author and ask.)

The author is quite taken with the way these reinsurance provisions match the three legitimate purposes for reinsurance. I don’t know whether he had anything to do with their design.

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Update: the author responded to my email and said “expected amount” is one of the many terms HHS will need to define in the regulations.

June 14, 2010

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