The Role of Reinsurance in Financing Children’s Health Care Part II: Case Mix Effects

any states are struggling to ensure that all children receive adequate health care. States often face challenges in attracting plans to deliver high-quality health care to children. Some plans are reluctant to serve children in state-sponsored programs because of the perceived financial risk of serving children, particularly those with special health care needs who are disproportionately represented in public health insurance programs. Because risk adjusting is unavoidably imperfect even when health status is fully accounted for, plans can suffer large financial losses even when the premiums they receive for serving children are risk adjusted. Reinsurance can complement risk adjusting by providing protection against extreme financial losses. In limiting this downside risk, reinsurance also can reduce a plan’s incentive to avoid serving high-risk children whose medical needs may exceed projected needs. Reinsurance can serve this dual role of reducing financial risk and limiting incentives for favorable selection by limiting 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”), but is responsible for only a fraction (e.g., 20 percent) of the expenditures on the child in excess of the attachment point. Many states require health plans to purchase private or public reinsurance offered through the state. Moreover, there is growing interest in reinsurance products, particularly with the state and/or federal government serving as