Reinsurance is essentially insurance for insurance companies. Just like individuals count on their insurance company to cover a portion of their medical bills if and when they have a claim, reinsurance programs pay a portion of the insurer’s bills when enrollees have high-cost claims.
Reinsurance reduces insurers’ expenses, which results in lower premiums
Because reinsurance covers part of the cost of expensive claims, insurers don’t have to pay as much. That results in lower premiums and increased enrollment – mostly among people who pay full price. Those who get premium subsidies are already insulated from the full cost of their coverage. Lower premiums and increases enrollment translate to a more stable insurance market. (Although reinsurance can be used in any insurance market, the programs we’re discussing here are focused on the individual/family health insurance market.)
Reinsurance programs are sometimes referred to as “invisible high-risk pools” because the reinsurance program is covering a portion of the claims for people with expensive medical needs, but the enrollees are still covered under their regular health insurance plan, and are not interacting with the reinsurance program at all. (There are other types of coverage that are also referred to as invisible high-risk pools, but some are not using a reinsurance approach. In other words, not all “invisible high-risk pools” are reinsurance programs.)
ACA’s reinsurance program was temporary, so some states have created their own
The ACA included a temporary reinsurance program for the individual insurance market; it existed nationwide from 2014 through 2016. Fifteen states have since received federal approval to create their own reinsurance programs. Twelve of them are already in effect; Pennsylvania’s and New Hampshire’s take effect in 2021, and Georgia’s takes effect in 2022. Other states will likely do so in the future, using 1332 waivers to fund reinsurance with the federal money that would have otherwise been spent on premium subsidies.
(Reinsurance reduces premiums, and subsidies are based on the cost of the benchmark plan‘s premium. So the amount the federal government spends on premium subsidies is reduced when a state implements a reinsurance program. By using a 1332 waiver, the state gets to recapture and use that money, instead of letting the federal government keep it.)
States utilizing reinsurance programs for their individual markets
States have some flexibility in terms of how their reinsurance programs are designed and how much of an impact they have on premiums and enrollment. The most common approach is to cover a certain percentage of claims costs that are between two pre-determined amounts. For example, a state might say that the reinsurance program will cover 75 percent of claims that fall between $50,000 and $500,000.
In that case, insurers start to receive funding from the reinsurance program if and when a member’s claims exceed $50,000, and the program continues to reimburse the insurer 75 percent of that member’s approved claims expenses until if and when they hit $500,000. (After that point, the insurer would be responsible for the full amount for the rest of the year.)
States using this approach have implemented varying dollar ranges for the reinsurance program, and cover varying percentages of the costs while claims are in the applicable range. And states can also design their reinsurance programs so that they cover a larger percentage of claims in high-cost areas. (Colorado’s is an example of this, and so is Georgia’s program that will take effect in 2022.)
Reinsurance programs can also be based on specific diagnoses (Alaska’s is an example of this), with claims for members with certain high-cost medical conditions covered by the reinsurance program.
The following states have created reinsurance programs, relying in large part on federal pass-through funding secured via 1332 waivers:
- Alaska‘s reinsurance program took effect in 2017. Rates decreased in 2018, 2019, 2020, and 2021.
- Minnesota‘s reinsurance program that took effect in 2018. Rates decreased in 2018, 2019, and 2020; increased for 2021.
- Oregon‘s reinsurance program that took effect in 2018. Rates have increased each year since then.
- Wisconsin‘s reinsurance program took effect in 2019. Rates decreased in 2019 and 2020.
- Maine‘s reinsurance program took effect in 2019. Rates decreased slightly in 2019, and 2020, and sharply in 2021.
- Maryland‘s reinsurance program took effect in 2019. Rates decreased in 2019, 2020, and again in 2021.
- New Jersey‘s reinsurance program took effect in 2019. Rates decreased in 2019, but increased in 2020 and 2021.
- North Dakota‘s reinsurance program took effect in 2020. Rates decreased in 2020, but are expected to increase in 2021.
- Montana‘s reinsurance program took effect in 2020. Rates decreased in 2020, but are increasing slightly in 2021.
- Delaware‘s reinsurance program took effect in 2020. Rates decreased sharply in 2020 and are decreasing again in 2021.
- Colorado‘s reinsurance program took effect in 2020. Rates decreased sharply in 2020 and are increasing slightly in 2021.
- Rhode Island‘s reinsurance program took effect in 2020. Rates decreased slightly in 2020 but are increasing in 2021.
- Pennsylvania‘s reinsurance program will take effect in 2021. Rates are decreasing for 2021.
- New Hampshire‘s reinsurance program will take effect in 2021. Rates are decreasing for 2021.
- Georgia‘s reinsurance program will take effect in 2021.
Lawmakers in Connecticut have repeatedly considered reinsurance legislation, but it has not passed. Kansas lawmakers have also considered reinsurance, but have not approved legislation to implement it.