State and federal politicians have suggested that governments become statewide or nationwide reinsurers. Is this a sound move?

Proponents claim that requiring the government to take up the reinsurance function would lower premiums because insurers and employers would shift the most expensive patients to the government. But there is no free lunch. The money for the high-dollar claims would have to come from somewhere — i.e., taxpayers.

Proposals for the government to become the national reinsurer have found some traction in large part because so little is known about the important role played by private sector reinsurers.

Reinsurance is insurance for insurance companies. It protects a primary insurer from catastrophic losses and allows insurers to better predict and manage their risk.  Health insurers often use reinsurance to protect against major medical expenses that can arise from, for example, a premature baby or someone needing an organ transplant.

Because reinsurers bear the most expensive claims, they have a financial interest in ensuring patients with severe medical conditions get appropriate and timely care. As a result, reinsurers are heavily involved with chronic and catastrophic medical case management.

The largest insurance companies and employers usually do not buy reinsurance because their reserves are large enough to take care of almost any catastrophic expense. The primary reinsurance purchasers are small and medium-sized insurers and employers that self-insure, but want to limit their high-end exposure.

Proponents of a national, or statewide reinsurance system boast that health insurance premiums would be reduced for individuals and small employers. It is important to understand that bypassing private sector reinsurance doesn’t save money. Reinsurance premiums would be paid to the federal government instead of private companies or government expenses would come from some other source, such as tax revenues or an assessment on health care providers.

Proponents of national reinsurance claim their plan would make health insurance more affordable. But there are other and better ways to achieve that goal. For example, recent Health Savings Account (HSA) legislation will give more people access to less-expensive consumer driven policies. In addition:

• Providing tax credits for lower-income workers would help defray the cost of coverage.
• Increasing federal funding for state high risk pools would provide an effective safety net for uninsurable people.
• Giving people the opportunity to buy policies available and being sold in other states would expand access and options for lower-cost policies.