What Is Reinsurance and Why Are States Pursuing It?

Reinsurance programs help to stabilize the individual insurance market

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The simplest way to think of reinsurance is as insurance for insurers. We buy health insurance in order to protect ourselves from a situation in which we'd have to otherwise spend a significant amount of money on medical care. Reinsurance, when it's used, kicks in and covers some of the cost (that the insurance company would otherwise have to pay themselves) once the total claim reaches a certain amount, or when enrollees have certain high-cost medical conditions.

The specific details of how the reinsurance program works will vary from one program to another, but the basic concept is that the reinsurance program picks up a portion of the cost instead of the insurer having to pay it. That translates into lower insurance premiums, so more people are able to afford health insurance.

United states map with prescription pills and dollars
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Growing Use

The Affordable Care Act included a temporary nationwide reinsurance program for the individual market, but it only lasted through 2016. States can establish their own longer-term reinsurance programs, however, and several have done so.

States are increasingly turning to reinsurance programs in an effort to stabilize their individual insurance markets (i.e., the coverage that people buy on their own, via the exchange or off-exchange, rather than through an employer or the government).

Alaska began operating a state-based reinsurance program in 2017, and 13 other states have followed: Oregon, Minnesota, Wisconsin, Maine, Maryland, New Jersey, Colorado, Delaware, Montana, North Dakota, Pennsylvania, New Hampshire, and Rhode Island. Georgia will have a reinsurance program in place as of 2022, and Virginia has enacted legislation to start the process of setting up a reinsurance program as of 2023.

How They Work

States could technically choose to fully fund their own reinsurance programs, but they'd be leaving a lot of federal money on the table if they did so. Instead, states are using 1332 waivers to ensure that part of their reinsurance funding comes from the federal government. Even though 1332 waivers can be used for a variety of innovative changes, virtually all of the 1332 waiver proposals that have been submitted have been for the purpose of establishing reinsurance programs.

In a nutshell, the idea is that the reinsurance program lowers the cost of health insurance, which means that premium subsidies don't have to be as large in order to keep coverage affordable, and that saves the federal government money (since premium subsidies are funded by the federal government).

By using a 1332 waiver, the state gets to keep the savings and use it to fund the reinsurance program. That money is referred to as "pass-through" savings since it's passed through to the state from the federal government.

States generally need to come up with some of the money for reinsurance on their own, so there's often an assessment on insurance plans in the state in order to raise the revenue that the state needs to fund its reinsurance program. But states can take creative approaches to come up with the funding they need.

When all is said and done, the reinsurance program results in lower premiums, since the insurers know that some of their high-cost claims will be covered by the reinsurance program. When premiums are lower, more people can afford to buy health insurance. That's especially true for people who don't qualify for premium subsidies since they have to pay the entire cost of their coverage themselves.

The end result of a reinsurance program is that premiums in the state's individual market are lower than they would otherwise have been, and more people have coverage. In the states that have implemented a reinsurance program, premiums have either decreased or have only increased very modestly. In some states, this has been in sharp contrast with very significant rate increases in prior years.

States That Have Implemented Reinsurance Programs

Alaska

Alaska was the first state to establish a reinsurance program, which took effect in 2017. It was funded by the state that year, but Alaska secured federal pass-through funding for their reinsurance program starting in 2018.

Under the terms of the Alaska Reinsurance Program, 100% of individual market claims are covered by the reinsurance program if enrollees are identified (via their medical claims) as having at least one of 33 high-cost medical conditions.

Under the terms of Alaska's 1332 waiver, the state received $78 million in federal pass-through funding for the calendar year of 2021.

Maine

Maine had a reinsurance program in 2012 (before the ACA's temporary reinsurance program took effect in 2014) and it was reinstated in 2019. The Maine Guaranteed Access Reinsurance Association (MGARA) requires or allows insurers to cede policies to MGARA when the insured has a high-risk medical condition, although as described below, this will change in 2022.

Ceding is mandatory when insureds' claims indicate that they have at least one of eight high-cost medical conditions (uterine cancer; metastatic cancer; prostate cancer; chronic obstructive pulmonary disease (COPD); congestive heart failure; HIV infection; renal failure; and rheumatoid arthritis). But insurers also have the option to voluntarily cede coverage when insurers have other high-cost conditions.

Once a policy is ceded to MGARA, the insurer transfers 90% of the premium (paid by the policyholder and/or premium subsidies if the plan was purchased through the exchange) to MGARA. In turn, MGARA then picks up the tab for some of the claims cost, depending on how high the claim is.

For ceded policies, MGARA will pay 90% of claims that are between $47,000 and $77,000, and 100% of claims that range from $77,000 up to $1 million. MGARA will also help to cover claims above $1 million, in coordination with the federal risk adjustment program (risk adjustment will cover 60% of claims above $1 million in 2019, so MGARA anticipates covering the other 40% in that situation).

But starting in 2022, Maine plans to abandon the condition-specific reinsurance model and switch to a claims cost model instead. This is referred to as a retrospective approach, since reinsurance coverage would only kick in after a claim has been processed, as opposed to having the insurers cede members to the reinsurance program based on their medical conditions. Maine is also working to merge its individual and small group markets so that they're both covered by the MGARA reinsurance program as of 2023.

Under the terms of Maine's 1332 waiver, the state received $31 million in federal pass-through funding for 2021.

Maryland

Maryland's reinsurance program is administered by the Maryland Health Benefit Exchange (i.e., the state-run health insurance exchange in Maryland) and took effect in 2019. The program will pay 80% of individual market claims that are between $20,000 and $250,000. The $20,000 attachment point is much lower than most other states have used, so Maryland's program will cover far more claims than other states' reinsurance programs. 

The significant impact of Maryland's reinsurance program is evident in the premium changes that insurers implemented for 2019: Before the reinsurance program was approved, insurers had proposed average rate increases of about 30%. After the reinsurance program was approved, insurers filed new rates (which were subsequently approved by regulators) that amounted to an average premium decrease of more than 13%.

Under the terms of Maryland's 1332 waiver, the state received $335 million in federal pass-through funding in 2021.

Minnesota

Minnesota's reinsurance program took effect in 2018. Known as the Minnesota Premium Security Plan, the reinsurance program will cover 80% of individual market claims between $50,000 and $250,000.

Under the terms of Minnesota's 1332 waiver, the state received nearly $78 million in federal pass-through funding for 2021.

New Jersey

The New Jersey Health Insurance Premium Security Plan took effect in 2019. It will reimburse individual market insurers for 60% of the cost of claims that are between $40,000 and $215,000.

Under the terms of New Jersey's 1332 waiver, the state received $223 million in federal pass-through funding for 2021.

Oregon

The Oregon Reinsurance Program took effect in 2018 and will pay 50% of individual market claims up to $1 million. The attachment point (i.e., the minimum amount that a claim must reach in order to be eligible for reinsurance coverage) is $90,000.

Under the terms of Oregon's 1332 waiver, the state received nearly $55 million in federal pass-through funding for 2021.

Wisconsin

The Wisconsin Healthcare Stability Plan (WIHSP) took effect in 2019. It will cover 50% of individual market claims that are between $40,000 and $175,000. 

Under the terms of Wisconsin's 1332 waiver, the state received almost $166 million in federal pass-through funding for 2021.

Colorado

Colorado implemented a reinsurance program as of 2020. The state's program is unique in that it provides varying levels of reinsurance in different areas of the state, with the largest benefits going to areas where premiums are the highest. Georgia will have a similar model when its reinsurance program takes effect in 2022.

Colorado's reinsurance program reimburses an average of 60% of claims that are between $30,000 and $400,000. But in the areas of the state where premiums are the highest, the reinsurance program pays 84% of those claims, whereas it only pays 45% in areas where premiums are currently the lowest.

Under the terms of Colorado's 1332 waiver, the state received almost $133 million in federal pass-through funding for 2021.

Delaware

According to Delaware's 1332 waiver proposal, the state's reinsurance program covers 75% of claims that are between $65,000 and $215,000. The program took effect in 2020. Delaware received $28 million in federal pass-through funding for 2021.

Montana

According to Montana's 1332 waiver proposal, the state's reinsurance program will reimburse insurers for 60% of claims that are between $40,000 and an estimated $101,750 cap. The 1332 waiver has been approved for January 1, 2020 through December 31, 2024.

Montana's reinsurance program received nearly $24 million in federal pass-through funding for 2021.

North Dakota

According to North Dakota's 1332 waiver proposal, the state's reinsurance program will pay 75% of claims that are between $100,000 and $1,000,000.

So compared with other states, claims have to be larger in North Dakota before the reinsurance program will kick in, but it will continue to pay the majority of the claim at much higher amounts than most states' reinsurance programs.

The reinsurance program began on January 1, 2020. The state received nearly $15 million in federal pass-through funding for 2021.

Pennsylvania

Pennsylvania's reinsurance program took effect in 2021. It reimburses insurers 60% of the cost of claims that are between $60,000 and $100,000. The state received nearly $92 million in federal pass-through funding for 2021.

Pennsylvania also switched to a state-run health insurance exchange (and stopped using HealthCare.gov) in 2021. This is expected to generate $40-$50 million in annual savings, which the state is using to fund its portion of the cost of the reinsurance program.

Rhode Island

Rhode Island's reinsurance program was approved by CMS and took effect in 2020. According to Rhode Island's 1332 waiver proposal, the program will cover 50% of claims that are between $40,000 and $97,000. For 2021, Rhode Island's reinsurance program received $10 million in federal pass-through funding.

New Hampshire

New Hampshire’s reinsurance program took effect in 2021. It covers roughly three-quarters of claims between $60,000 and $400,000. But the state’s waiver plan clarifies that the exact amounts that will be covered will vary from one year to the next, depending on how much funding the state receives for the program.

For 2021, New Hampshire received about $23 million in federal pass-through funding for the reinsurance program.

Not Yet Implemented: Georgia and Virginia

Georgia's reinsurance program will take effect in 2022. And Virginia enacted legislation in 2021 that will begin the process of establishing a reinsurance program that will take effect in 2023.

Other states may seek 1332 waivers to implement their own reinsurance programs in future years. Reinsurance generally has bipartisan support and the states that have implemented it thus far are seeing greatly increased stability in their individual markets, with much more muted premium increases (or decreases, in many cases) compared with prior years.

One hurdle, however, is securing the state's portion of the funding necessary to pay for reinsurance. Federal pass-through funding generally covers a significant chunk of the cost, although it varies from one state to another. But states still need to cover a portion of the cost, and that's been a non-starter in some areas.

The Colorado Senate, for example, rejected legislation in 2018 that would have allowed the state to establish a reinsurance program, over concerns that it wouldn't be fair to tax all health insurance plans in the state in order to cover the state's portion of the cost of reinsurance (Colorado's Senate had a Republican majority at that point, but gained a Democratic majority as of 2019; lawmakers' efforts to pass reinsurance legislation were successful when they tried again in 2019).

Wyoming's Department of Insurance endorsed a reinsurance program, and although reinsurance legislation passed in the Wyoming House in 2019 with nearly unanimous support, the bill died in the Senate when lawmakers couldn't agree to the 1% assessment that the program would have imposed on Wyoming's insurance companies.

So universal state-based reinsurance is certainly not a given. But it's likely to be adopted in more states as the market stabilizing effects of reinsurance become clear in the early adopter states.

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Article Sources
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