The Benefits and Limitations of State-Run Individual Market Reinsurance

ABSTRACT

• Issue: Cost is a major barrier for many individuals seeking to enroll in or use comprehensive health insurance, despite historic gains in coverage since the Affordable Care Act (ACA). Though state policymakers have numerous options for improving the affordability of individual market coverage, they have most often chosen to implement state-run reinsurance programs. Reinsurance has been popular with states because the ACA’s temporary federal reinsurance program was successful and because state reinsurance can be funded in significant part with federal dollars available through an ACA Section 1332 waiver.
• Goal: Examine the benefits and limitations of waiver-funded state reinsurance programs.
• Methods: Analysis of state reinsurance programs; applicable federal and state laws, regulations, and guidance; and other state and federal proposals to address coverage affordability.
• Key Findings and Conclusions: States have customized waiver-funded reinsurance to meet their specific needs. States with reinsurance have experienced significantly lower individual market premiums and stable insurer participation. However, these premium reductions generally only benefit unsubsidized enrollees and the impact on coverage take-up is unclear. States prioritizing broader improvements should consider other policies in tandem with or in lieu of reinsurance, but need federal leadership and support to succeed.

Introduction

The Affordable Care Act (ACA) produced historic expansions in coverage and has provided millions of Americans — including many who have experienced hardship during the COVID-19 pandemic — with vital access to comprehensive health insurance. Even so, cost continues to present a major barrier to coverage for many. Though federal subsidies for ACA marketplace coverage can substantially reduce costs for eligible individuals, the uninsured rate remains relatively high among people with moderate and lower incomes. Meanwhile, many individuals — including those with incomes above the eligibility threshold, those who fall into the “family glitch,” and undocumented residents — do not qualify for federal financial assistance. Following large premium increases in 2017 and 2018, individual market enrollment among those who do not receive a federal subsidy dropped precipitously and has not rebounded.

Though states have considered a range of policies to make individual market coverage more affordable, they have pursued one approach more than others: reinsurance. By 2021, 14 states will operate individual market reinsurance programs, each designed to moderate premium increases and provide market stability by offsetting some costs borne by insurers of covering enrollees with high medical expenses. For the first three years of ACA marketplace coverage (2014–2016), a federal reinsurance program lowered premiums and stabilized markets nationwide. Efforts to make that program permanent foundered, but its success — and, crucially, states’ ability to finance reinsurance with federal dollars available through the ACA’s Section 1332 waiver program — paved the way for states to establish their own programs (Exhibit 1).

At the federal level, the rationale for deploying reinsurance as part of the emergency response to COVID-19 has weakened considerably. The pandemic has reduced overall demand for health care services, boosting insurer profits, and has had only a modest — and often negligible — effect on 2021 individual market premiums, making an additional influx of funds unnecessary. Yet for states weighing whether to maintain or pursue waiver-funded reinsurance over a longer time horizon, considerations differ.

This brief examines states’ efforts to implement reinsurance programs, and considers flexibilities in funding and program design, the effect of reinsurance on individual market premiums, and trends in enrollment and insurer participation. Finally, it identifies the limitations of state-run reinsurance and key considerations for states.

Program Funding and Design: A Straightforward Framework with Options to Innovate

Funding

States’ reinsurance programs receive substantial funding from the federal government, with “pass-through” dollars available through an ACA Section 1332 waiver. In 10 of the 12 states where programs have commenced operations, waiver funding covers the majority of program costs and in all states, it is this federal support that has made reinsurance viable. Still, states must cover a share of costs and have developed several funding mechanisms to do so.

What Are Section 1332 Waivers?

• Section 1332 of the ACA allows states to apply to the federal government to waive certain provisions of the health law to implement their own programs to improve health insurance coverage.
• States can waive rules governing the ACA’s marketplaces, premium and cost-sharing subsidies, and essential health benefits, among others.
• States may not waive ACA protections for people with preexisting conditions, prohibitions on health status and gender rating, and nondiscrimination rules.
• States can access federal funding through the waiver. If a state’s waiver plan is forecast to reduce federal spending on marketplace subsidies, the federal government will pass through those savings to the state for the purpose of implementing its waiver.
• The program does not give states carte blanche to waive federal law. A waiver cannot be approved unless it complies with statutory “guardrails” that disallow any proposal likely to undermine comprehensive and affordable coverage, cover fewer people, or impose additional costs on the federal government.
• States must have statutory authority to submit the waiver application to the federal government and implement the waiver program.

Eight of the 12 states rely at least in part on insurer assessments to finance their obligations, while five have used general appropriations to cover some or all state costs (Appendix Exhibit 1). But states have increasingly pursued other funding sources. Two states with individual mandates — New Jersey and Rhode Island — use the penalty dollars they collect to fund reinsurance. Pennsylvania, which recently assumed responsibility for its ACA marketplace from the federal government, will finance its new reinsurance program with savings generated by running its coverage portal more efficiently.

Other states have acted quickly and creatively to repurpose revenue from an expiring federal tax on health insurers. When Congress temporarily suspended the federal health insurance provider tax for 2019, Maryland required insurers — which benefit from and lobbied for reinsurance — to pay a fee equivalent to their forgone tax obligation to fund the program. Later, after Congress permanently repealed the tax, Colorado and New Jersey followed a course similar to Maryland and established state replacements to help fund both reinsurance and forthcoming coverage subsidy programs.

Program Parameters

Nearly all state reinsurance programs follow a “claims-based” model similar to the ACA’s temporary federal program: they reimburse insurers a percentage (i.e., the coinsurance rate) of all high-cost claims that exceed a specified threshold (i.e., the attachment point), up to a cap. In contrast, Alaska has a “conditions-based” program, under which insurers are reimbursed for the costs of enrollees with specified high-cost health conditions. Maine uses a hybrid of the two models (Appendix Exhibit 2).

States have used design and program parameters to attain specific policy outcomes. For example, Colorado policymakers structured their program to have the greatest impact in areas that have historically faced the highest health care and premium costs. The state adjusts the coinsurance rate by region: in the most expensive areas, the state picks up a larger share of eligible claims, thereby providing greater premium relief. Georgia plans to establish a program with similar parameters in 2022.

In Alaska, insurance regulators modified the list of conditions covered by the reinsurance program to include symptoms of COVID-19.

Waiver-Funded Reinsurance: Lower Unsubsidized Premiums and Stable Insurer Participation, but Enrollment Effects Unclear

Premiums

Every state that has implemented a waiver-funded individual market reinsurance program has experienced lower unsubsidized premiums as a result (Exhibit 2). The magnitude of these savings, largely a function of program funding levels and market size, has varied substantially. Rhode Island’s program, operating with a budget of $15 million, reduced rates in its inaugural year (2020) by an average of about 4 percentage points. In Maryland, the state’s $462 million program lowered average premiums by nearly 40 percentage points in its first year (2019). In most states, reinsurance has produced an annual reduction in premiums of more than 10 percentage points.

These programs have continued to generate premium reductions in the years following initial implementation. The reinsurance programs in Alaska and Minnesota have produced successively greater impact in each year of operation, with Alaska’s premium reductions topping 30 percentage points every year. Maryland’s program, meanwhile, caused a roughly 36 percentage point drop in premiums in its second year.

Marketplace Enrollment

Though reinsurance has demonstrably reduced unsubsidized individual market premiums, its effect on marketplace enrollment is less clear. During program development, nearly all states projected that reinsurance would generate only a small (less than 3%) boost in take-up. Raw enrollment trends suggest the positive effects may indeed have been limited (Exhibit 3). Seven of the 12 states with reinsurance programs have seen marketplace plan selections decline by at least 2 percent following program implementation, while two states have experienced corresponding increases. In three states, plan selections were flat.

These data do not rule out the possibility that reinsurance has affected enrollment. When these programs were being implemented, plan selections across the country trended downward. Evidence suggests that broader policy developments in the individual market, including massive cuts to consumer enrollment assistance programs, support by the Trump administration for skimpier coverage products sold outside of the marketplaces, and ongoing legal challenges to the ACA, may have played a role in depressing marketplace enrollment. This negative effect may have swamped any increase in take-up due to reinsurance. Conversely, because reinsurance may reduce the buying power of subsidized enrollees (by decreasing the size of the premium tax credit), it is possible these programs have marginally reduced sign-ups. Additional analysis, controlling for critical factors, is needed to determine the extent to which the programs have influenced enrollment.

Insurer Participation

Along with moderating premiums, a core objective of reinsurance is to offer certainty and stability to the market, to encourage ongoing and increased participation by insurers. In this regard, the programs appear to have been effective. Since implementation, all states have enjoyed stable insurer participation (Exhibit 4). Four states have gained one insurer, while seven have recorded no net change. Only one state has seen a reduction in their total number of carriers. In Oregon, an insurer with a small share of marketplace enrollment withdrew prior to the 2018 plan year.

The Limits of Reinsurance

The success of reinsurance in reducing unsubsidized premiums has made coverage more affordable for the many consumers who, because they are ineligible for federal subsidies, bear the full burden of rate increases. The broader impact of these programs on the cost of coverage, however, has been more modest.

Partly, this is because of the interaction between reinsurance and the ACA’s subsidy structure. The size of an eligible enrollee’s premium subsidy depends on her household income and the cost of a benchmark plan sold in the marketplace. As unsubsidized premiums have risen, so too has the value of the premium tax credit, and this increased buying power has generally insulated subsidized enrollees from rate hikes. But this effect works both ways. In states where reinsurance has reduced unsubsidized premiums, it also has decreased the size of the premium tax credit. Subsidized enrollees can generally compensate for this reduction in their buying power by shopping around during open enrollment. But for these consumers, reinsurance does little to improve affordability (though greater market stability and insurer participation may produce benefits over time). Indeed, there is some reason to believe that even modest decreases in buying power may push some to disenroll.

Reinsurance also has not addressed the underlying drivers of health care costs. While current programs offset expensive claims, they are not designed to encourage more efficient care management or lower provider prices. A reinsurance program could be developed with such objectives: Colorado initially sought to fund its program by requiring hospitals to bring their reimbursement rates into line with a pricing benchmark linked to Medicare rates. However, the Trump administration signaled it would not approve a waiver program that regulates provider payments, forcing the state to abandon this approach.

Finally, though most reinsurance programs are set to last for at least five years (i.e., the initial term of a Section 1332 waiver), states may find it difficult to sustain their share of funding. In particular, economic damage wrought by the pandemic could complicate near-term financing plans and act as a barrier to program adoption. If and when a state program is scheduled to expire, policymakers will face the task of winding it down without spiking rates, a challenge for which there is no clear solution.

Discussion

Whether via tax deduction, tax credit, or direct funding, the federal government subsidizes the health insurance costs of the vast majority of Americans. Individual market consumers ineligible for ACA subsidies are the major exception.

By lowering individual market premiums, state-operated reinsurance effectively subsidizes coverage for this population, providing help unavailable elsewhere. Premium reductions, market stability, and access to federal financing to establish the programs have engendered rare bipartisan support for reinsurance. Consequently, reinsurance has frequently gained traction among state policymakers, even as other affordability reforms have not.

Yet, these substantive and practical advantages do not make reinsurance, on its own, a sufficient solution to the problem of affordability. Nor do they suggest reinsurance is a necessary approach for all states; alternatives may prove superior. Policymakers must carefully consider their objectives as they weigh potential reforms.

For example, if a state aims to make comprehensive coverage more affordable for a broad swath of residents, the effect of reinsurance will be limited. In contrast, state-run coverage subsidy programs, which can be tailored to help both consumers ineligible for ACA subsidies and those for whom such assistance may be insufficient, are likely to have a more substantial impact.

States that run their own marketplaces, and therefore have administrative and operational control over enrollment, may find that subsidies offer a better return than reinsurance or that these initiatives should proceed in tandem. States that lack such flexibility and find it harder to develop a coordinated subsidy program have other options. Large benefits can be expected from expanding Medicaid, if the state has not already done so. On a smaller scale, states could set standard cost-sharing parameters for marketplace health plans that promote high-value care — for example, requiring that such services be covered before a deductible is met.

For states seeking to address underlying health care costs, waiver-funded reinsurance has little to offer at the moment. Yet, if states were freed to pursue waivers that include provider price regulations (the Trump administration’s prohibition on such waivers is simply a policy preference and not grounded in federal law), they could employ cost containment measures within their programs.

Many state reforms, including both reinsurance and subsidies, require a sustained financial commitment. Yet in many states, funding such initiatives is a continuing challenge made even harder by the pandemic. To make comprehensive coverage affordable, consumers need federal leadership and support.

Acknowledgments

The authors are grateful for the expertise provided by Julie Andrews, Danielle Bivins, Michael Cohen, and Julie Peper during the development of this brief, and for their thoughtful review and comments on the draft. We also thank Kevin Lucia for his support and assistance.