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PART II Public Policies to Make Private Insurance More Available T he need for government policies to help small firms and individuals obtain health insurance is urgent. But policies focused only on providing subsidies to help people purchase private insurance are inadequate because they fail to address the way insurers respond to adverse selection in the individual and small-group markets. In this part of the book, we shift our focus to examine three approaches that the federal government or state governments could take to reduce insurers’ fear of adverse selection. In chapter 5, we look closely at two of these approaches: formal highrisk pools and an equivalent of high-risk pools that requires insurers to pay fees that are then redistributed to any insurers that experience adverse selection. High-risk pools, which have been in existence since 1976, are now operated in thirty-three states.1 A variation of high-risk pools is an assessment mechanism that compels insurers to share the costs of high-risk people. Often these assessments, which are managed by a state’s insurance department, operate as complements to high-risk pools rather than as substitutes. The concept of assessing insurers to share the burden of high-cost people within a state is well established for a wide variety of other insurance products, most notably auto insurance. In chapter 6, we examine government-sponsored reinsurance as the third approach to reducing insurers’ concern about adverse selection. Reinsurance is insurance for insurers—it provides them with protection against the small risk of enrollees’ medical expenses exceeding expectations by more than some stated amount. The idea of government reinsurance for the private health insurance market is not new. It was seriously considered fifty years ago and emerged again as a little-noticed part of a national health insurance reform proposal almost twenty-five years ago.2 Reinsurance as we know it today is more sophisticated than it was fifty or even twenty-five years ago. Private market reinsurance is available for a wide variety of insurance products and possible events. Risk REINSURING HEALTH can be shared between the buyer and seller of reinsurance in a dazzling array of imaginative and complex ways. Private market reinsurance is available for many types of devastating situations because the government has become the ultimate rescuer when huge losses occur or potential losses threaten to cause economic dislocation. The concept of government rescue is now well established—witness the government’s role in the savings and loan crisis of the 1980s and the assistance given since 1978 by the Federal Emergency Management Agency (FEMA) to regions that have suffered destruction from natural disasters. More recently, in November 2002, the federal government assumed responsibility for catastrophic losses due to terrorist attacks. The Terrorism Risk Insurance Act calls for the government to pay 90 percent of the costs of any terrorist attack after losses exceed $10 billion. As a result of this legislation, the markets for liability insurance and catastrophe reinsurance are functioning again and offering terrorism coverage. The shifts in the economy that are causing so many workers to lose access to employer-group health insurance are laying the seeds for a social disaster unless we can make it easier and cheaper for people to purchase insurance in small groups or as individuals. The largest obstacle to this is insurers’ fear of adverse selection. Short of requiring everyone to purchase coverage, government shouldering of responsibility for the highest -cost people would significantly lessen the consequences of adverse selection . The three approaches we examine in the next two chapters differ in their incentives for insurers to continue to use selection mechanisms and in how monies are allocated to insurers. But as a group, they have more potential for making private coverage accessible to workers and their families than proposals to provide tax credits. They reduce insurers’ risk from adverse selection while tax credits and other subsidies do not. 84 ...

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