Reinsurance: Prescription for Stabilizing the Individual Market?

By Carol Backstrom, Principal and Director, Delivery System Transformation
and Hilary Haycock, President

The Affordable Care Act (ACA) has resulted in more than 20 million Americans gaining health coverage through the creation of the health insurance marketplaces and the expansion of the Medicaid program. Since 2010, the uninsurance rate has decreased from nearly 16 percent to only 8.8 percent today. One of the remaining challenges facing states is the instability of the individual insurance marketplace, which has caused premiums to increase significantly in some parts of the country.

There are several policy tools states and the federal government have available to stabilize these markets and potentially bring down premiums, while ensuring all Americans have access to coverage. One of these tools is the Section 1332 waiver, which allows states to ask the federal Department of Health and Human Services (HHS) for approval to modify key parts of the ACA within certain rules. Recently, states have been turning to the Section 1332 waiver authority to implement reinsurance programs to help stabilize their individual markets.

Silver Premium Percent Change from Previous Year

As shown in the figure, while the average premium increase between 2015-2016 was 4%, premiums in some states spiked. Some of these states are using Section 1332 waivers to implement reinsurance programs to stabilize their individual markets and help lower premiums.

 

Reinsurance programs work just like their name implies. It’s like an insurance policy for an insurance company.  If a policy holder gets sick, the insurance company pays all their bills up to a certain dollar amount. After that point, the insurance company gets reimbursed for some portion of those costs up to the reinsurance cap. Then the insurance company is responsible for paying the bills again. It’s a way to ensure that a small number of very expensive individuals don’t drive up premiums for everyone. It spreads the cost of their care – and the risk – across a much larger pool of individuals. This is cheaper for everyone. While the ACA included a reinsurance program that was in place for the first few years, it was slowly phased out.

Some markets, such as Alaska and Minnesota, still need these types of programs to help manage their risk and lower premiums. In 2017, Alaska’s individual market premiums were projected to increase by 42 percent. In response, the state legislature created the Alaska Reinsurance Program (ARP) and appropriated $55 million to fund the program in 2017. As a result, premiums have increased a modest 7.3 percent.

In December, Alaska submitted a Section 1332 waiver to HHS making the case that the reinsurance program will lower the federal government’s obligation to provide Advanced Premium Tax Credits  for the purchase of individual market coverage.  The state is seeking federal funds to supplement the ARP.

Other states are following suit. In March, the Minnesota legislature passed a measure creating a $542 million reinsurance pool aimed at making individual insurance more affordable. The legislation instructs the state to seek approval of a Section 1332 waiver that will partially cover the state’s costs.  And Iowa just released a plan that would include a reinsurance program, in addition to changing the state’s premium subsidy structure. The plan is designed to bring insurers back into the state’s marketplace and address rising premiums.

Hawaii is the only state with an approved Section 1332 waiver in place. Instead of using the waiver for reinsurance relief, however, the state received a waiver from the Small Business Health Options Program (SHOP) requirement, based on the argument that an existing state law rendered the SHOP requirements moot and that small business tax subsidies would be better suited for a state fund that helps small businesses offer insurance.

HHS Secretary Tom Price reminded governors in a recent letter that Section 1332 waivers offer a vehicle for states seeking premium relief for consumers. If Alaska, Minnesota, and Iowa waivers are approved, the purpose of 1332 waivers will broaden in scope. And while many questions remain around the long-term future of the ACA and its various market stabilization policy tools, these types of reinsurance programs can be a good interim step in stabilizing states’ individual markets.