Re-insurance is used to help insurers the cost of unpredictable, high cost events. Government re-insurance likely had a beneficial effect of attracting new firms to the market when Part D was rolled out in 2006. However, to what extent is re-insurance important for the Part D market compared to in the commercial market. A paper by Frakt and Miller (2018) cites some statistics.
…in commercial insurance markets, about 1 percent of policyholders reach a catastrophic level of expenditures at which reinsurance kicks in, and reinsurance costs account for 10 percent of spending (Milliman 2015). But in Part D, about 8 percent of enrollees (and growing) trigger reinsurance payments, which accounted for about one-third of the nearly $100B combined enrollee and government spending through Part D in 2016.
While Part D re-insurance is certainly broader than in commercial markets, this should not be entirely surprising as Part D insures many elderly individual with multiple comorbidities who may be at risk for catastrophic costs in any given year. Frakt and Miller recommend lowering government reinsurance. On the one hand, this approach would reduce government expenditures and shift more risk to private insurers. At the same time, this recommendation would also increase the premiums that beneficiaries pay and could reduce the number of firms entering the market and the number of plans available on the market from which patients can choose. In short, there are some clear trade-offs to consider in this proposal.