A number of states have developed reinsurance programs as a way of stabilizing health insurance premiums, and it is important that disability advocates have a basic understanding of how such programs could lower premiums. Like anything else about health insurance, reinsurance programs can be done well or poorly.
People with disabilities have been subjected to bad models in the past to deal with high medical costs, including what are called risk pools and early versions of reinsurance that were poorly designed and couldn’t be sustained.
A reinsurance program is a pool of money that covers the costs of very expensive medical treatment. The programs are usually triggered by a threshold (say, $50,000), so that the costs beyond the threshold are covered by the pool. Such programs are currently being created through something called a 1332 waiver-a relaxation of the usual funding rules for health care. 1332 waivers can make it easier for people who have low income to afford and access health insurance.
To understand how reinsurance can stabilize and lower premiums, you need to understand how health insurance companies predict their health costs. Each year, a health insurance company has to set its premiums for the next year. So, it must predict what it will pay out for medical services before it can set those premiums. There are two kinds of medical costs that the companies have to predict:
- Ordinary medical costs that are typical ones and fairly easy to predict
- Catastrophic medical costs that are unpredictable (a lot like earthquakes are unpredictable)
Catastrophic medical costs can be big (millions of dollars), and you can’t be sure when they will occur. Some years you might get no catastrophic costs and other years you might get many. In setting the premium, you have to assume that you will get a significant number of catastrophic medical events, or the company will end up losing money on its health insurance product, and its stock will tank (and we can’t have THAT happen). So the company sets the premium higher than it would if it only had to deal with ordinary medical costs.
A well-designed reinsurance program allows the health insurance company to base its premiums only on predictable medical costs.
The reduction that results from a well-designed reinsurance program can be large. Maine had a good reinsurance program a few years ago, and it cut premiums by $2-5,000 a year.