Reinsurance Gains Traction Among Legislators and Employers

By Jeremy Smerd

Oct. 9, 2006

Health reinsurance programs have generally been designed to help small employers and individuals afford health care premiums. But the concept is gaining support among large employers, like Wal-Mart, that would benefit if employees they did not cover found affordable health insurance elsewhere.

   Reinsurance is essentially insurance for insurers. It is meant to subsidize the cost of health care incurred by older and sicker individuals. State-funded reinsurance pools, which exist in at least 20 states, are intended to mitigate the costs associated with the riskiest cases and help reduce premiums for individuals and smaller companies.

   Now reinsurance is gaining political ground on a national level, and support exists among large employers who face pressure because they do not insure a large portion of their employees.

   On PBS’ “The Charlie Rose Show” in July, Wal-Mart CEO Lee Scott said he would like to see government play a role in the “catastrophic side” of health care.

   The company’s chief health care lobbyist, Kate Sullivan Hare, said Wal-Mart was working with other large employers to develop a “private reinsurance mechanism.” Who is covered by the program, though, and at what amount have not been sorted out.

   “We haven’t specified that level of detail,” Hare says.

   For employers in industries with high turnover rates and a small percentage of employees who are covered by health benefits, a reinsurance program could be an affordable way to provide health insurance, says Deborah Chollet, a senior fellow at Washington, D.C.-based Mathematica Policy Research Inc. Wal-Mart would not receive any direct financial benefit from a reinsurance program, but it could help their image, she says.

   “I think it simply helps to mitigate the political pressure to cover more of their workers,” Chollet says. “For everybody that doesn’t have a group health option-not just workers at Wal-Mart-there needs to be a health insurance option.”

   Reinsurance differs from efforts some states have made to create high-risk pools that provide coverage to people who, because of prior conditions, have been denied coverage by insurers. Reinsurance helps ease the risk of every covered person and defrays the cost of coverage by paying a portion of the most expensive health care bills.

   “A sick person is offered the same premiums as a healthy person,” Chollet says. “You cannot be denied coverage.”

   National reinsurance has political appeal to both Democrats and Republicans and works to address a fundamental imbalance in the way health care spending is accumulated. According to a recent Watson Wyatt study, the sickest 4 percent of employees account for nearly half the health expenditures in any given year, while the healthiest 72 percent make up just 11 percent of health expenses.

   “Why are we trying to shave off dollars on the front end of prevention and basic services?” says Kathleen Stoll, director of health policy for Families USA, a group that advocates coverage for uninsured Americans. “We have to understand what drives up the cost of health care: high claims from a small number of people.”

   Whether the federal government pays for some of the cost of high-risk enrollees is a question that will likely depend on the spending priorities of Congress, Stoll says.

   Sen. John Kerry, D-Massachusetts, made reinsurance part of his platform during his failed presidential bid in 2004, and Sen. Bill Frist, R-Tennessee, floated reinsurance in a policy speech not long after. But it was Oregon Sens. Gordon Smith, a Republican, and Ron Wyden, a Democrat, who in July introduced the first national legislation on reinsurance. That legislation, which is in the Senate Finance Committee, would create demonstration projects to decide the best way to set up a national reinsurance program that would offer insurance to people suffering from catastrophic illnesses or who have exceeded their lifetime maximum coverage under their insurance plans.

Jeremy Smerd writes for Crain’s New York Business, a sister publication of Workforce Management.

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