Explaining Reinsurance in Healthcare

Reinsurance is a term many in the insurance industry are aware of, and it also plays a role in healthcare. When a tree falls through a homeowner’s roof or a business suffers a cybersecurity breach, they rely on their insurance companies to pay for the damage. However, this presents a conundrum: Who protects insurance companies if the risk of insuring is too significant? The answer is reinsurers, who provide a specific kind of insurance, called reinsurance, designed for enterprises in this industry. If your agency sells medical coverage, knowing how this process works and how it affects the company you work for is essential.

What is reinsurance in healthcare? It’s a way for healthcare providers to cover risks that would be untenable in any other industry. For example, companies often refuse to cover buildings that aren’t up to code, as they pose a higher risk of sustaining damage. Taking on that risk would be a poor business decision that affected other insureds, as the company would have fewer resources to compensate customers who lived in regulation-compliant houses.

However, this approach isn’t legal in the healthcare industry, nor is it ethical. A person with a preexisting condition will likely need more money from the insurance company than a healthy individual. Still, the provider can’t deny coverage even though the former is a higher risk than the latter. Denying a human being access to medical care for the bottom line is unacceptable. Yet, including high-risk individuals negatively impacts companies’ efforts to provide services for all customers.

Reinsurance allows providers to balance these needs. Rather than taking on all the risk, they only bear responsibility for a portion, with reinsurers accepting the rest.

Reinsurance in healthcare allows providers to operate without the fear of suddenly taking on more expenses than they can handle. This certainty means more consistent customer premiums, as insurance companies don’t have to raise rates to make up for a substantial loss. Maintaining lower premiums means insurance (and healthcare, by extension) is accessible to more people.

Companies can also continue to offer excellent coverage, as they don’t have to cut benefits as a cost-saving measure. Doing so can bring more customers in, making the company even more substantial, as a more significant customer pool means less risk overall. Since the Affordable Care Act requires companies to share their rates and benefits, maintaining a high quality of coverage is critical to staying competitive.

Reinsurers come in many forms for the healthcare industry. For example, some states have government programs encouraging competition within their healthcare insurance exchanges. The funding comes from the federal government as part of the ACA. The act also initially provided a federal program that has since ended.

Of course, only some states offer this option; many use those funds for premium subsidies. Large companies may seek multiple policies to disperse risk in states that act as reinsurers.

Fortunately, there are plenty of reinsurance companies in the private sector. Finding the right one is essential, as this arrangement is closer to a partnership than a customer and regular insurance company. Policy providers should think in the long term and research to ensure the reinsurer can adequately handle the determined risk.