States Take the Lead on Reinsurance to Stabilize the ACA Marketplaces
Recent actions by Congress and the Trump administration are likely to disrupt Affordable Care Act (ACA) marketplaces in 2019, leading to higher premiums for individuals and families. These actions include Congress’ termination of financial penalties for failing to obtain health insurance and the administration’s resistance to paying cost-sharing reductions for low-income purchasers of marketplace coverage, its encouragement of the sale of short-term policies and association health plans, and its defunding of advertising and outreach in federally facilitated marketplaces. Recent estimates suggest that there have already been small but significant declines in coverage.
A total collapse of ACA marketplaces is unlikely because of continuing federal subsidies for the purchase of insurance by individuals with incomes below 400 percent of the federal poverty level. But those not eligible for subsidies may face higher premiums in some states, and some may be forced to forgo coverage. Those who remain in the market may be sicker than average, leading to a higher-risk pool and fueling premium increases.
A key way to mitigate the adverse effects of these recent policies is by offering reinsurance, a policy that is garnering bipartisan support at the federal and state levels.
What Is Reinsurance?
Reinsurance was a critical feature of ACA marketplaces in their first three years. The marketplaces were new, and insurers faced considerable uncertainty about the health status of enrollees. The law thus offered insurers some protection against unexpectedly high claims through a reinsurance program. Reinsurance protects insurers by limiting their exposure to very high, unpredictable medical expenses incurred by their members by covering some of those expenses when they exceed a certain threshold. For example, the ACA stipulated that insurers with claims costs that exceeded a threshold amount for a particular individual — $45,000 in 2014 — qualified for reinsurance payments for 100 percent of the excess up to $250,000. The program was financed by fees on both individual and employer plans, including self-insured employers, and was thus deficit neutral. It is estimated that reinsurance reduced average premiums in the marketplaces by as much as 14 percent.
The ACA legislation phased down the reinsurance program over 2014–2016 since it was assumed that as insurers gained more familiarity with enrollees, they could price their products with greater certainty. After the program ended in 2016, premiums rose in 2017 more sharply than they had in prior years, an increase that was partly attributed to the loss of reinsurance.
Industry stakeholders and health policy experts have suggested that reinsurance could stabilize the individual market. Researchers Chrissy Eibner and Jody Liu of RAND estimated that reinstating the reinsurance program could reduce premiums in the marketplaces by 3.9 percent to 19.3 percent in 2020, depending on the generosity of the program. Because lower premiums also reduce what the federal government spends on tax credits, the researchers projected federal deficit savings of $2.9 billion to $13.1 billion. However, the researchers also assume that some of those fees ultimately would be passed on to people enrolled in private plans.
Federal reinsurance programs have appeared in a number of recent Congressional bills. Last year, ACA repeal-and-replace bills included reinsurance programs for the individual market that would be financed directly by the federal government. Senators Susan Collins (R–Maine) and Bill Nelson (D–Fla.) introduced a bill with a similarly structured reinsurance program at the end of 2017. And a recently introduced bill from Senators Jeff Merkley (D–Ore.) and Chris Murphy (D–Conn.) proposing that a Medicare plan be offered through the marketplaces and by employers also includes a reinsurance program.
Some of these proposals would fund reinsurance through upfront federal expenditures, rather than charging fees to insurers. Deficit reductions could be lower under this scenario, but may still be possible because the federal expenditures on reinsurance would be offset by savings on lower tax credit expenditures as premiums fall. However, the RAND researchers find that the cost to taxpayers would be about the same under both approaches, since insurers would likely pass on fees to their customers in the form of higher premiums.
States Take the Lead
In the absence of consensus in Congress on how to strengthen the marketplaces, several states have secured, or are seeking, approval from the federal government to establish state-based reinsurance programs through the ACA’s innovation waiver program. Under the waiver program, states can make changes to their marketplaces as long as they cover at least the same number of people and maintain the same levels of affordability. Reinsurance has been the most common innovation pursued by states.
Alaska, Minnesota, and Oregon have received federal approval to establish reinsurance programs. There are notable differences in their approaches:
- In Alaska, medical claims for individuals with at least one of 33 high-cost conditions are covered by the Alaska Reinsurance Program. The program was responsible for preventing the state’s last remaining insurer from leaving the individual market in 2017.
- In Minnesota, the reinsurance program covers 80 percent of claims for individuals up to $250,000 once a $50,000 threshold is passed. For the 2018 plan year, insurers submitted two sets of premiums, one assuming reinsurance and one without it. The rates accounting for reinsurance were approximately 20 percent lower.
- Oregon’s waiver application sought approval for a program that would reimburse 50 percent of claims between a yet-to-be-established threshold up to $1 million. The U.S. Department of Health and Human Services approved the proposal in October 2017.
Six more states have passed legislation or submitted applications to establish reinsurance programs.
- On May 9, Maine became the latest state to submit a waiver application to the federal government seeking funding for a state-based reinsurance program. Earlier this year on April 18, Wisconsin also submitted a waiver application for a reinsurance program.
- New Hampshire and Louisiana are developing similar applications, and New Jersey and Maryland passed legislation in April to establish state-operated reinsurance programs.
Experience with reinsurance programs clearly demonstrates their efficacy in reducing health insurance premiums in the private individual market. Implemented at the federal level, such programs also reduce federal spending and deficits. Though enterprising states are moving forward with these initiatives, a more comprehensive national effort to help private insurers manage unpredictable risks in individual health insurance markets has enduring appeal.