By Colleen Becker
As health insurance premiums continue to rise and more insurers exit health insurance exchanges, states are looking at ways to stabilize their individual and small group markets.
Some states have begun to expand use of the complex mechanism of reinsurance, also known as stop-loss coverage, to help fortify their exchanges and health insurance markets.
But what exactly does reinsurance mean?
Health insurance companies pool clients to spread the risk. When a customer is diagnosed with cancer or another condition that is expensive to treat, the company is on the hook for hefty payouts. Too many customers with high risks/costs can push a company toward insolvency or even bankruptcy.
Before the Affordable Care Act (ACA), insurers could charge premiums based on several factors, including pre-existing health conditions. The ACA now forbids that, which means all individual market enrollees are placed into a single risk pool.
When too many people with high medical needs seek coverage, but not enough healthy people enter the risk pool, insurers charge higher premiums to cover the costs of the high-need individuals. Higher premiums, in turn, drive more healthy people out of the insurance market.
That’s where reinsurance comes in. To mitigate the spiral of increasing premiums, some states are looking to institute a reinsurance program to support those payors who are struggling in the state exchanges.
The way it works is similar to stop-loss coverage for self-insured employer plans where the primary insurer purchases a policy to cover claims that exceed a certain amount, called an attachment point. Much like a consumer’s deductible, the reinsurance company takes over when the threshold amount is reached.
For the individual market, reinsurance helps pick up where the health plan left off. After the attachment point is reached reinsurance typically covers a percentage of the claim up to a cap. This helps insulate the primary insurer from additional claims for high-cost members.
Originally implemented during the inception of the ACA, this concept was one of the temporary programs employed to help stabilize the state marketplaces. In place for just the first three years, the reinsurance program provided payments to insurers to help pay claims for high-cost enrollees.
To initiate a reinsurance program that uses federal funds under the ACA, a state must first apply for a Section 1332 Innovation Waiver, which offers states an opportunity to fashion various new coverage systems customized for local context and preferences, while still fulfilling the core aims of the ACA. The federal statute requires interested states to pass authorizing legislation before applying for and ultimately implementing waiver-based reforms.
In 2016, Alaska took the first leap to adopt a reinsurance plan through a 1332 waiver, and Governor Bill Walker (I) signed HB 374, authorizing the waiver application. The Alaska Reinsurance Program was originally funded through the state’s own appropriations and by assessing all types of health insurers in the state.
According to the Georgetown University Center on Health Insurance Reforms, individual market premium rates in Alaska for 2017 without the program were originally projected to increase by 42 percent. After the reinsurance program was enacted, they increased by only 7.3 percent.
Since premiums in Alaska are now lower than they would be without the program, the federal government does not need to pay as much to Alaska’s qualifying low- and middle-income residents through advance premium tax credits (APTC). As such, Alaska’s reinsurance program generated approximately $58.5 million in savings to the federal government, and these funds will be passed through to continue stabilizing Alaska’s exchange for 2018 and beyond.
Only two other states—Minnesota and Oregon—have had reinsurance waivers approved. Several other states have started the waiver process with an emphasis on reinsurance. Currently, Louisiana, Missouri and New Jersey have simply proposed legislation while others like Maryland, Oklahoma and Wisconsin have enacted legislation to authorize a waiver request.
The upside for states to apply for a waiver is that the primary insurer’s risk of insolvency decreases, which incentivizes companies to accept more policyholders and re-enter the state marketplaces. The downside is that reinsurance is usually expensive and most states cannot afford the initial up-front cost.
All this said, reinsurance cannot be viewed as a silver bullet or a one-size-fits-all approach to fixing the struggling state marketplaces. Without further intervention from the federal government, reinsurance is just one way states can affect the individual market.
Legislators have a delicate balancing act deciding what is financially and politically feasible in their states with what their constituents are asking for—affordable and accessible coverage for health care. Using innovative strategies such as reinsurance programs is one step toward paving the way.
Colleen Becker is a policy specialst in NCSL's Health program.