Reform of financing for health coverage: what can reinsurance accomplish?

Reinsurance is one way that insurance companies pool risk, in this case, across insurance companies. Under conventional private practice, primary health insurers, including self-insured groups and HMOs, voluntarily contract with reinsurers to share some risk and some premiums. Because the primary carrier mainly wants to protect its solvency against unpredictable variation in claims experience, it normally reinsures only the "high end" of claims risk. This retrospective coverage of unusually high losses helps primary insurers take on more risk than they otherwise could. But it does not help secure affordable coverage for people with prospectively known high risks. Some plans for reforming private health insurance also invoke reinsurance-like mechanisms, especially in the markets for individual and small group coverage. There, reinsurance serves as part of a strategy for requiring that primary insurance be made available to all applicants, regardless of risk. Reinsurance or similar rules for allocating the burden of unusually high risks can help keep any one private insurer from having to bear a disproportionate share of high risks, and thus extend the reach of private insurance markets through regulation. But reinsurance alone does not reduce the underlying high cost of providing such primary coverage. Nor can reinsurance alone provide the resources to cover the uninsured, ensure that insurers will want to cover them, or make them voluntarily buy private coverage. Only some combination of new subsidies and mandates can do that.