Government as Reinsurer: Potential Impacts on Public and Private Spending

Abstract

This paper analyzes the potential effects of alternative government reinsurance mechanisms on public and private expenditures in group and nongroup health insurance markets. High reinsurance thresholds, with the government taking responsibility for costs over $50,000 per year, would absorb a small share of private costs. Lower thresholds would have greater effects, but would increase government costs significantly. We also find that reinsurance would reduce the variance in expenditures considerably and should reduce risk premiums charged by private insurers. We conclude that focusing on small employers and the nongroup market could target government spending where costs are highest and insurance markets most unstable.