The Role of Reinsurance in Financing Children’s Health Care Part I: Plan Size Effects

aced with limited budgets and rising health care costs, many states are struggling to ensure that all children within their borders receive adequate health care. Some plans are reluctant to participate in public health care programs for children because of the large and highly variable treatment costs that can arise in caring for children, especially those with special health care needs who are enrolled disproportionately in public health insurance programs. The substantial variation in treatment costs implies that even when the payments the plans receive from the states are risk-adjusted and cover expected health care costs, individual plans can suffer large financial losses if they happen to enroll children whose actual health care needs substantially exceed their expected needs. Reinsurance, which provides health plans with protection against very high health expenditures, can reduce the variation in profit earned by health care plans participating in children’s public health insurance programs. It can also limit the financial loss a plan incurs in serving individual children with unexpectedly severe needs, and can thereby limit the plan’s incentive to secure favorable selection by avoiding the enrollment of children who are considered to be high risks. Reinsurance limits the share of exceptionally high health care expenditures on a child for which the plan is responsible. Under a common form of reinsurance, the plan bears the full cost of its expenditures on a child up to a threshold (known as the “attachment point”),