Across the nation, in response to rising health insurance premiums and unsettled markets, a growing number of states are using reinsurance programs to reduce premiums and stabilize jittery markets.
Two states – Oregon and Maryland – have implemented reinsurance programs that provide funding to insurers who cover consumers with high medical costs to prevent them from raising insurance premiums on all enrollees. This approach, state officials explained during a recent National Academy for State Health Policy-sponsored webinar, has reduced premium prices and helped stabilize their insurance markets.
Reinsurance is not a new concept — the federal government uses a reinsurance program to support insurers who participate in Medicare Part D and the Affordable Care Act (ACA) temporarily implemented a reinsurance program during its first three years to keep insurers stable as they adjusted to new market dynamics triggered by the ACA’s legislative changes. Some estimates indicate that premiums rose about 4 to 7 percent in 2017 when the ACA’s reinsurance program ended, and some experts suggest that continuation of the federal reinsurance program would have helped keep premium rates lower.
Section 1332 of the ACA allows states to experiment with different approaches to coverage, and while there has been considerable discussion about new federal guidance about these Section 1332 waivers, seven states have used them to implement their own reinsurance programs. By reinsuring against high, unanticipated costs, these state initiatives lower premiums which, in turn, reduces the federal government’s costs to cover advanced premium tax credits, which are based on average premium rates. These federal “savings” are then reinvested to finance the reinsurance program, also known as pass-through dollars. In its recent webinar, officials from Oregon and Maryland shared their experiences with 1332 waivers and reinsurance.
A Tale of Two Models
Oregon established its reinsurance program under a legislative mandate (HB 2391) in July 2017, with federal approval of its waiver coming three months later. Oregon’s reinsurance program follows a “traditional” model — the state sets a fixed range at which insurers will be paid back for “high cost” expenditures and also a rate at which insurers will be reimbursed for costs that fall within that range, known as coinsurance. The range is fixed each year, though Oregon may adjust the coinsurance rate based on the amount of funds available to the program. Proposed regulations set the 2018 range to start at $95,000, with a coinsurance rate of 50 percent. The range is capped at $1 million. Modeled after Oregon, Maryland’s reinsurance program was established by statute in April 2018 and its waiver was approved in August 2018. While also a traditional reinsurance program, Maryland has set its expenditure cap at $250,000 and a coinsurance rate of 80 percent.
Financing State Reinsurance Programs
States have broad latitude to design their reinsurance programs — they can balance the trade-offs between making a robust reinsurance investment and achieving market stability and affordability. Based on their choices (e.g., generosity of coinsurance rates), states may be accountable for considerable program costs not covered by federal pass-through dollars. In states with reinsurance programs, it is estimated that federal funds will cover between 36 to 98 percent of total program costs.
Oregon officials estimated that their reinsurance program will cost approximately $90 million in 2018 (the webinar occurred in late December 2018), with a slight increase to $95 million in 2019. The state has estimated it will receive $54 million and $42 million, respectively, in federal pass-through dollars during those two years, meaning the state will need to cover $89 million in costs over those two years to cover the program’s anticipated expenditures. State funding for the program comes from:
- A portion of a 1.5 percent premium assessment on individual market and small group plans; and
- Funding from Oregon’s former high-risk pool and reserves from the state’s health insurance marketplace.
Maryland officials estimate its program will cost $462 million in 2019, and decrease to $287 million by 2021. The state will need to cover approximately $264 million in costs over those three years. Maryland aimed to be strategic in financing its program. First, it delayed a two–year anticipated federal tax on insurers and instead instituted its own assessment on health plans in 2019 in order to finance the reinsurance program from 2019 to 2021. The 2.75 percent premium assessment applies to all health plans regulated by the state. The assessment also applies to Medicaid managed care organization (MCO) plans, which are financed by federal matching funds at a rate of 62 percent.
Maryland estimates that it will draw down an additional $168 million from its assessment on MCOs — approximately $104 million of which will be financed by the federal match. Second, to reduce administrative costs, Maryland is working with the Centers for Medicare & Medicaid Services (CMS) to leverage existing federal servers and databases established to support claims data collection and processing for the federal reinsurance and risk adjustment programs. By using its existing systems, the state anticipates saving money that would have otherwise been used to maintain its own claims collection and processing infrastructure. Third, to ensure that it was maximizing its reinsurance dollars, Maryland included an adjustment to its reinsurance formula to mitigate against duplicative payments insurers might receive under the federal risk adjustment program.
Officials expressed caution about the estimates of federal pass-through dollars to finance reinsurance programs, indicating that states should prepare for some variability between estimates calculated in their waiver applications and actual program costs. The insurance markets remain dynamic and calculations will be adjusted as CMS gains a better understanding of state enrollment trends, risk mix, and/or the effect of policy changes on insurance markets. Because of these adjustments, Minnesota received nearly $100 million less than expected in federal payments in 2018, while New Jersey and Wisconsin will each receive approximately $40 million less than expected. In contrast, Oregon received nearly a $4 million boost in funding from what it had expected. New guidance issued in early December 2018 addresses some concerns by providing greater transparency about the CMS process for completing pass-through calculations.
Impact of Reinsurance Programs to Date
Officials from both states described their reinsurance programs as a “quick” and effective way to reduce premium costs and add stability to markets. In Oregon, the program led to an 8 percent reduction in 2018 premium rates and a 9 percent drop in 2019. Maryland’s program led to a 13.2 percent decline in premiums for 2019. Maryland and Oregon officials anticipate longer-term benefits from reinsurance.
- In Oregon, reinsurance has helped secure statewide participation of insurers in its markets, insurers who may not have participated if not for the stabilizing effect of reinsurance.
- Maryland anticipates that lower premiums enabled under the program will help entice younger and healthier enrollees to participate, which, will help sustain lower rates and continued participation of low-risk populations in the future.
While effective, the state reinsurance programs are designed as temporary solutions, designed to help insurers calibrate risk as insurance markets and policies continue to evolve post-ACA. As Oregon officials noted during the webinar, while reinsurance can help states bring down premium costs, it does not, in itself, address any of the underlying drivers of premium costs, such as rising costs of health care. They are looking toward more sustainable solutions to maintain lower costs in the future.
Maryland officials are wondering how to leverage the reinsurance program to drive health care management and quality improvement initiatives. The state has proposed a series of regulatory standards that require participating insurers to display information about how they are utilizing reinsurance funds, and how the insurer is working to offset costs. Longer term, the state hopes to leverage this work to address total costs of care by working with carriers on social determinants of health and health literacy.
As other states explore options to improve health insurance affordability, reinsurance remains an attractive opportunity. Tools, like a Reinsurance Pass-Through Funding Savings Calculator may help states get an initial sense of the impact a reinsurance program could have on premiums and the level of state investment needed to properly finance a program. However, this is a standard baseline estimate, and any state considering a program will need to conduct in-depth actuarial analysis to fully consider all conditions that could uniquely affect a state’s markets. States may also seek to leverage flexibility under new 1332 guidance in order to couple reinsurance with other reforms to bolster their markets.
The National Academy for State Health Policy is working to develop new state policy solutions to address rising costs, including those waivers, and will continue to report on these efforts.