As Congress wrestles with a way to replace or modify the Affordable Care Act, some observers are keeping a close eye on a segment of the ACA that, when properly deployed, can mitigate much of the expense of insuring high-risk policyholders.
Reinsurance refers to insurance sold from one or more insurance companies to another via a broker as a means of managing risk and helping insurers remain solvent after major disasters.
The ACA contained a provision for reinsurance as a way to provide payment to plans that enroll higher-risk individuals. It protected against premium increases in the individual market by using subsidies to offset the expenses of covering high-risk insureds.
“When they passed the ACA, they correctly anticipated that a lot of people with pre-existing conditions would come into the individual market,” said Lynn A. Blewett, a professor of health policy and management at the University of Minnesota’s School of Public Health. “The idea was that there would be a rough few years where we didn’t know what the risk was, and insurers wouldn’t really know how to price their products.”
That experiment was scuttled when Republican lawmakers dragged their feet on fully funding the reinsurance portion of the ACA, which expired at the end of 2016.
“So the market was destabilized from the get-go. The risk adjustment was budget-neutral, so there was no money there. The risk corridor was never funded,” said Blewett, who’s also the director of the State Health Access Data Assistance Center, funded by The Robert Wood Johnson Foundation. The center helps states analyze and monitor health insurance coverage and inform health policy.
Reinsurance in the individual market
In Minnesota, the Legislature is trying to stay ahead of the curve by building a reinsurance provision into its individual health market.
A $600 million reinsurance bill passed in the Senate by a 37-29 vote on March 15 after nearly three hours of debate. It now heads to a House-Senate conference committee to work out differences between the two companion bills. The House of Representatives passed its version of the bill March 13.
If passed, state money — and some federal block-grant money, should that come through — would be spent protecting insurers against runaway losses in the individually purchased health insurance market.
The Senate bill would begin helping an insurer when an individual’s medical costs reach $45,000; the House version kicks in at $50,000. Both max out at $250,000.
Within those ranges the state would pay a coinsurance rate of either 80 percent (the Senate bill) or 50 to 70 percent (the House version) of an individual’s medical costs.
The funding mechanisms also differ. The House bill, authored by Rep. Greg Davids, R-Preston, would cost about $384 million over the next two years. The money comes from a variety of sources, including a one-time $80 million transfer from the Health Care Access Fund. Another $70 million per year over two years, derived from taxes on insurers, would come from the state’s general fund.
The Senate bill, authored by Sen. Gary Dahms, R-Redwood Falls, would transfer $360 million over two years from the Health Care Access Fund. Another $240 million in 2018 and 2019 would come out of the state’s budget reserves.
Both authors predicted that their bills would lead to lower premiums. Davids said during the March 13 House floor debate that his bill would reduce premiums by 17 to 18 percent. Dahms predicted 18 to 23 percent in premium reductions, but also acknowledged that rates could rise.
Gov. Mark Dayton, in a letter to insurers March 16, called for a firmer commitment from them to reduce premiums. He said reinsurance should be financed at the federal level. “However, if the Legislature chooses to establish a state-based program, I believe strongly that it should be financed by a tax on the industry itself,” he wrote.
Nationally, with Congress struggling to morph the ACA into the American Health Care Act (AHCA), it remains to be seen what place reinsurance will have in the new reform legislation — and how it’s paid for.
Insurers and policymakers would like to see state-based high-risk pools that would both help keep people with pre-existing conditions insured and stabilize the individual insurance market.
U.S. House Speaker Paul Ryan, R-Wisconsin, would place unhealthy consumers into a risk pool separate from the rest of the individual market, while the U.S. Department of Health and Human Services’ proposal would give states the option of using $1 billion in federal funding per year, for up to three years, to maintain their high-risk pools.
Will the replacement contain mechanisms to deal with the risk-shifting among primary carriers that was part of the ACA? Or will carriers buy less in the conventional reinsurance market?
“Insurance companies are concerned that inducing lower-risk people to purchase coverage will prove inadequate,” said Hilary N. Rowen, an insurance regulatory lawyer with the Sedgwick law firm in San Francisco. “Under the ACA, you had subsidies and the mandate. The proposed legislation only uses a tax credit, which is a different way of offering subsidies to consumers.”
Rowen, who has spoken on the health insurance marketplace at national conventions held by the American Bar Association and other organizations, has also written numerous journal articles about the shifting health care climate in the United States.
The version of the AHCA currently being debated in the House contains a nine-year, $100 billion pool of money that would be distributed to states for premium stabilization efforts — with a proviso that the states match a percentage of the funding, leading up to a 50-50 split in 2026. That pool would consist of $15 billion in 2018, $15 billion in 2019, and then $10 billion for each of the next seven years.
“If that is the plan, it would do a significant job of smoothing out the claims burden and taking out a fair amount of the high-cost payment burden, which should lead to lower premiums,” said David Anderson, a research associate in the Margolis Center for Health Policy at Duke University.
The question for any implementation of reinsurance, as always, is money — or more specifically, subsidies. Much of the burden of providing coverage under the ACA was leavened by cost-saving government subsidies.
“If there’s significant money coming in from the outside — which the current draft of the bill says will happen — it could work,” said Anderson. “The biggest issue is that $15 billion in year one and $10 billion in year three would be grossly insufficient to have effective high-cost risk pools. You’d need three to five times as much money.”
President Donald Trump has said that people with pre-existing conditions will still be able to get coverage under whatever version of the AHCA becomes law. But it might not contain an individual mandate, and without it, insurers fear, their coverage pool will consist mostly of expensive-to-cover sick people.
“States like Minnesota have their own high-risk pools, so fewer people are denied coverage in the individual market, or else they’re subsidized,” said Blewett. “The concern now is where the subsidies will come from. By definition, these people cost a lot. If I had a condition like that, I’d be paying attention to what’s going on.”
Staff writer Kevin Featherly contributed to this article.