What Is Reinsurance and Why Are States Pursuing It?

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.

This article will explain how reinsurance works to reduce pre-subsidy premiums in the individual/family market, and which states have established reinsurance programs.

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., 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 16 other states have followed: Oregon, Minnesota, Wisconsin, Maine, Maryland, New Jersey, Colorado, Delaware, Montana, North Dakota, Pennsylvania, New Hampshire, Rhode Island, Georgia, Virginia, and Idaho (in Virginia and Idaho, the reinsurance programs take effect in 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. 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.

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 the initial years after the program takes effect. In some states, this has been in sharp contrast with very significant rate increases in prior years.

Reinsurance and the American Rescue Plan

Prior to 2021, people whose household income was above 400% of the poverty level were ineligible for premium subsidies in the exchange. This created a "subsidy cliff" and made coverage unaffordable for some households with income a little above that threshold.

But the American Rescue Plan (ARP), enacted in early 2021, temporarily eliminated the subsidy cliff and also made subsidies larger for people who were already eligible for subsidies. The rules were changed for 2021 and 2022 by the ARP, but the enhanced subsidy provisions have been extended through 2025 under the Inflation Reduction Act.

Because there's no longer a subsidy cliff (at least until 2026), and because subsidies are larger in general as a result of the ARP and Inflation Reduction Act, there is less of a need for reinsurance programs. This is because reinsurance primarily benefits people who don't get premium subsidies, and there just aren't as many people now who don't get premium subsidies.

Reinsurance can also—somewhat counterintuitively—leave people who do get premium subsidies worse off. This is because subsidy amounts are based on the cost of the benchmark silver plan; if the price of that plan goes down (as it does when reinsurance is introduced), subsidies also go down. Depending on which plan a person selects, this can end up resulting in a higher after-subsidy premium.

As long as the ARP's subsidy enhancements remain in effect, these are issues that state policymakers need to keep in mind when they're considering reinsurance programs. But it should be noted that three states (Georgia, Virginia, and Idaho) have implemented reinsurance programs after the ARP was enacted, so the idea does still have traction.

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 its 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.

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) required or allowed insurers to cede policies to MGARA when the insured has a high-risk medical condition, although this changed in 2022.

As of 2022, Maine abandoned the condition-specific reinsurance model and switched to a claims cost model instead. This is referred to as a retrospective approach, since reinsurance coverage only kicks 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.

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 covers far more claims than most 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%.

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.

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.

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.

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. 

Colorado

Colorado implemented a reinsurance program as of 2020. The state's program is fairly 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 has a similar model that took 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.

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.

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.

North Dakota

North Dakota's reinsurance program took effect in 2020. According to the state'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.

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 was 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.

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.

Georgia

Georgia's reinsurance program took effect in 2022. It was approved as part of a two-part 1332 waiver. The reinsurance portion was similar to what other states have done. But the second part of the waiver, which was supposed to take effect in 2023, would have eliminated Georgia's health insurance exchange/marketplace altogether. In 2022, HHS revoked approval for that portion of the waiver, although the reinsurance program approval was unaffected.

Virginia

Virginia enacted legislation in 2021 to begin the process of establishing a reinsurance program that will take effect in 2023. Federal approval was granted in May 2022. The program will reimburse 70% of the cost of claims that are between $40,000 and $155,000.

Idaho

Idaho's reinsurance waiver was approved by HHS in August 2022, and the program takes effect in 2023.

Idaho and Virginia are the only states with new reinsurance programs in 2023, and they're also the only two states where insurers in the individual market proposed an overall average rate decrease for 2023.

Although there are 15 other states that already have effective reinsurance programs, the lower rates created by the programs were already incorporated into those states' premiums in the first year or two of operation. Premiums are lower now in those states than they would otherwise be, but they do not continue to decline year over year once the reinsurance program is in effect.

Will Additional States Create Reinsurance Programs?

Other states may seek 1332 waivers to implement their own reinsurance programs in future years. Reinsurance generally has bipartisan support.

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.

For example, 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.

And as discussed above, reinsurance isn't as useful with the American Rescue Plan's subsidy enhancements in place. If the ARP subsidy enhancements are allowed to expire at the end of 2025, reinsurance will again be as important as it was before the ARP was enacted.

Summary

Reinsurance programs reimburse health insurers for certain high-cost claims, which means the insurers can charge lower premiums and still cover their costs.

The ACA included a temporary reinsurance program, but it ended after 2016. Since then, 17 states have implemented their own state-run reinsurance programs to stabilize their individual/family health insurance markets.

The states use 1332 waivers to recoup the money that the federal government saves in premium subsidies (subsidies are lower when premiums are lower). The states use that money, together with some state funds, to pay for the reinsurance program.

A Word From Verywell

If you buy your own health insurance, either through the exchange or off-exchange, you're likely well aware of how expensive health insurance can be. Most exchange enrollees get premium subsidies, which make coverage much more affordable than it would otherwise be. But in 17 states, reinsurance programs are helping to keep full-price premiums lower than they would otherwise be, for people who don't receive any subsidy assistance.