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Reinsurance for High Health Costs: Benefits, Limitations, and Alternatives

Author

Listed:
  • Dow William H

    () (University of California, Berkeley)

  • Fulton Brent D

    () (University of California, Berkeley)

  • Baicker Katherine

    () (Harvard University)

Abstract

Government-sponsored reinsurance for individuals with high health costs is a commonly proposed strategy to improve access and affordability in the individual and small-group health insurance markets. While reinsurance may have some benefits, other schemes may be more effective at accomplishing the same goals at lower cost. Reinsurance can be seen as a crude special case of risk-adjusted insurance subsidies. This paper estimates the effect of different reinsurance schemes on insurance premiums and insurers disincentives to enroll potentially high-cost individuals. We find that reinsurance is relatively ineffective at reducing cream-skimming incentives and argue that more sophisticated risk-adjustment schemes are more effective, particularly under community rating with guaranteed issue. Although in the past risk adjustment had been considered too complex to implement in practice, recent experience suggests that it is now feasible, and we argue that incorporation of risk adjustment would strengthen current health insurance reform efforts.

Suggested Citation

  • Dow William H & Fulton Brent D & Baicker Katherine, 2010. "Reinsurance for High Health Costs: Benefits, Limitations, and Alternatives," Forum for Health Economics & Policy, De Gruyter, vol. 13(2), pages 1-23, July.
  • Handle: RePEc:bpj:fhecpo:v:13:y:2010:i:2:n:7
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    References listed on IDEAS

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    1. Thomas Buchmueller & John Dinardo, 2002. "Did Community Rating Induce an Adverse Selection Death Spiral? Evidence from New York, Pennsylvania, and Connecticut," American Economic Review, American Economic Association, vol. 92(1), pages 280-294, March.
    2. van de Ven, Wynand P. M. M. & van Vliet, Rene C. J. A. & Schut, Frederik T. & van Barneveld, Erik M., 2000. "Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?," Journal of Health Economics, Elsevier, vol. 19(3), pages 311-339, May.
    3. repec:mpr:mprres:4253 is not listed on IDEAS
    4. Katherine Swartz, 2003. "Reinsuring Risk to Increase Access to Health Insurance," American Economic Review, American Economic Association, vol. 93(2), pages 283-287, May.
    5. Deborah Chollet, "undated". "The Role of Reinsurance in State Efforts to Expand Coverage," Mathematica Policy Research Reports 6a1891751984484ba20b0719c, Mathematica Policy Research.
    6. Ellis, Randall P. & McGuire, Thomas G., 2007. "Predictability and predictiveness in health care spending," Journal of Health Economics, Elsevier, vol. 26(1), pages 25-48, January.
    7. Brigitte C. Madrian, 1994. "Employment-Based Health Insurance and Job Mobility: Is there Evidence of Job-Lock?," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 27-54.
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    Cited by:

    1. repec:eee:pubeco:v:155:y:2017:i:c:p:21-37 is not listed on IDEAS
    2. Bijlsma, M. & Boone, Jan & Zwart, G.T.J., 2015. "Community Rating in Health Insurance : Trade-Off Between Coverage and Selection," Discussion Paper 2015-022, Tilburg University, Tilburg Law and Economic Center.
    3. repec:tpr:amjhec:v:2:y:2016:i:1:p:66-95 is not listed on IDEAS
    4. Timothy J. Layton & Thomas G. McGuire & Anna D. Sinaiko, 2016. "Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers," American Journal of Health Economics, MIT Press, vol. 2(1), pages 66-95, Winter.
    5. Timothy J. Layton & Thomas G. McGuire & Anna D. Sinaiko, 2016. "Risk Corridors and Reinsurance in Health Insurance Marketplaces: Insurance for Insurers," American Journal of Health Economics, MIT Press, vol. 2(1), pages 66-95, January.

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