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Reinsurance Pools: The Bipartisanship May Be Refreshing, But Whose Bucks Will Fill Them Up?

February 8, 2005—Among the few health coverage ideas on which Democrats and Republicans seem to agree is creating a reinsurance system to lower premium costs in the hotbed of the uninsured, the small employer market.

On the left, Sen. John Kerry, D-Mass, made reinsurance a key element of his health overhaul plan in last year's presidential campaign. On the right, Majority Leader Bill Frist, R-Tenn., endorsed a similar idea in the Senate and Nancy L. Johnson, R-Conn., chair of the Ways and Means Health Subcommittee, has expressed interest in offering legislation in the House.

There's some key industry support too; the National Association of Health Underwriters, which represents insurance agents, is pitching the idea. But because federal money figures into some proposals, pools may no go nowhere this year.

GOP thinking these days in Congress about how to cover more people centers on restructuring insurance, whether through health savings accounts or slimming down benefits for much of the Medicaid population to free up money to cover other uninsured people.

"We really cannot spend our way to covering everybody with affordable insurance," Heritage Foundation Vice President Stuart Butler said Tuesday in remarks to a conference sponsored by the National Association of Health Underwriters (NAHU).

But new forms of pooling people are one way to restructure the purchase of insurance and reinsurance—insuring health insurers for their unusually expensive enrollees—is an important dimension of that, Butler said.

Reinsurance allows insurers to offer coverage to high-cost people who otherwise would drive up premiums for those who are low or medium risks, he said.

One way to financially assist insurers with high-cost cases is through federal funding of a reinsurance mechanism, as in the Kerry plan. Kerry would have had the federal government pay a high percentage of that portion of treatment costs exceeding $50,000 for an episode of care. Kerry estimated that his plan would lower premium costs by 10 percent.

But Kerry's approach creates "enormous" incentives for insurers to shift risk to the government rather than think of ways to manage that risk, Butler said.

And if the federal government ends up paying for a growing number of high-cost cases, then it will respond by rationing care or fixing prices, said Butler, a conservative who opposes the Kerry approach.

Instead, Butler said a better approach would involve a federal-state partnership in which different approaches to reinsurance could be tested. A NAHU official said that while the federal government could be the source of money for reinsurance, it could be funneled to state reinsurance pools, which would have independent boards in charge rather than the federal government.

This approach "would not create a new government-run bureaucracy," a NAHU position paper says. "The government would subsidize reinsurance premiums, but not become the reinsurer itself. It would bolster the private system, and make coverage more affordable for all small employers."

Although there are now 19 active reinsurance pools, they are funded by premiums paid by the participating insurers. But they are too small to deliver significant savings to the insurers, NAHU said. Federal money would allow greater savings and spur the creation of more state pools.

But how much federal money? Another NAHU official suggested that the cost could be in the tens of billions but certainly not as high as $100 billion. And the payoff could be big for small employers—premium savings of up to 20-to-30 percent, she said. But given the huge federal deficit, it's not clear that GOP leadership is going to be proposing a significant federal investment, despite the interest of key House leaders like Johnson.

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