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.

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., 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 reinsurance program in 2017. Oregon and Minnesota joined them in 2018. Wisconsin, Maine, Maryland, and New Jersey will have reinsurance programs as of 2019. And other states, including Rhode Island, are likely to begin operating reinsurance programs by 2020.

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. Details about states that have submitted 1332 waivers and information about federal approval are available on the CMS website.

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. The money is often referred to as "pass-through" savings since it's passed through to the state.

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.

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, and 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 all of the states that have implemented a reinsurance program (or will do so in 2019), 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.

Participating States

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 percent 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 (the conditions are listed in Alaska's 1332 waiver details, in Section 3 AAC 31.540).

Oregon

The Oregon Reinsurance Program took effect in 2018, and pays 50 percent of individual market claims that are between $95,000 and $1 million in 2018. As of 2019, the attachment point (i.e., the minimum amount that a claim must reach in order to be eligible for reinsurance coverage) will be $90,000.

Minnesota

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

Maine

Maine had a reinsurance program in 2012 and 2013 (before the ACA's temporary reinsurance program took effect in 2014) and it will be reinstated starting in 2019. The Maine Guaranteed Access Reinsurance Association (MGARA) will require or allow insurers to cede policies to MGARA when the insured has a high-risk medical condition.

Ceding will be 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 will 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 percent 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 percent of claims that are between $47,000 and $77,000, and 100 percent 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 percent of claims above $1 million in 2019, so MGARA anticipates covering the other 40 percent in that situation).

New Jersey

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

Wisconsin

The Wisconsin Healthcare Stability Plan (WIHSP) will take effect in 2019. It will cover 50 percent of individual market claims that are between $50,000 and $250,000. 

Maryland

Maryland's reinsurance program, which will be administered by the Maryland Health Benefit Exchange (i.e., the state-run health insurance exchange in Maryland), will take effect in 2019. The actuarial modeling for the program indicates that it will pay 80 percent of individual market claims that are between $20,000 and $250,000. The $20,000 attachment point is much lower than any of the 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 premiums that insurers have proposed for 2019: Before the reinsurance program was approved, insurers had proposed average rate increases of about 30 percent. After the reinsurance program was approved, insurers filed new rates that reflect an average premium decrease of more than 13 percent.

Additional States

It's widely expected that other states will 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.

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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