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.
How does reinsurance help lower costs for health insurance plan buyers?
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 health insurance coverage. Lower premiums and increases enrollment translate to a more stable insurance market.
The American Rescue Plan (ARP) and the Inflation Reduction Act (IRA) have diminished the need for reinsurance programs, at least through the end of 2025. That’s because the ARP/IRA have eliminated the ACA’s “subsidy cliff” from 2021 through 2025, ensuring that people with income above 400% of the poverty level can qualify for premium subsidies if the second-lowest-cost Silver plan would otherwise be more than 8.5% of their household income.
If that provision is extended again by Congress, reinsurance programs would not be as important going forward. But if it isn’t, reinsurance will regain its importance in 2026 as a means of keeping coverage more affordable for households that earn more than 400% of the poverty level.
Although reinsurance can be used in any insurance market, the programs we’re discussing here are focused on the individual/family health insurance market; some states are considering expanded reinsurance that would also incorporate the small group 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.
Why did states create their own reinsurance programs?
The ACA included a temporary reinsurance program for the individual insurance market; it existed nationwide from 2014 through 2016. Seventeen states have since received federal approval to create their own reinsurance programs. Fifteen are already in effect as of 2022. Idaho and Virginia will join them in 2023. Other states may follow suit 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 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.
The result is fairly minimal state spending and unchanged federal spending, but lower full-price premiums that result in more people being able to afford coverage.
How might different states approach 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% 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.)
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. Maine also used this model in prior years, but switched to the retrospective model (ie, based on claims costs rather than specific medical conditions) as of 2022.
Which states have created reinsurance programs for their individual markets?
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 took effect in 2018. Rates decreased in 2018, 2019, and 2020, but increased for 2021. The program had only been slated to run through 2021, but has been extended (albeit with less robust coverage) for 2022. Rates increased in 2022, due in part to the less generous coverage provided by the reinsurance program.
- Oregon‘s reinsurance program took effect in 2018. Rates have increased each year since then, although the 2020, 2021, and 2022 increases were minimal.
- Wisconsin‘s reinsurance program took effect in 2019. Rates decreased in 2019, 2020, 2021, and 2022.
- Maine‘s reinsurance program took effect in 2019. Rates decreased slightly in 2019 and 2020, sharply in 2021, and slightly in 2022. Assuming federal approval is granted, Maine plans to expand its reinsurance program to include the individual and small group market as of 2023.
- Maryland‘s reinsurance program took effect in 2019. Rates decreased in 2019, 2020, and again in 2021, although they increased slightly for 2022.
- New Jersey‘s reinsurance program took effect in 2019. Rates decreased in 2019, but increased in 2020, 2021, and 2022.
- North Dakota‘s reinsurance program took effect in 2020. Rates decreased in 2020, and stayed relatively flat for 2021 and 2022 (the state enacted legislation in 2021 that directs the insurance department to conduct a study on the impact of combining the individual and small group markets for reinsurance).
- Montana‘s reinsurance program took effect in 2020. Rates decreased in 2020, increased slightly in 2021, and stayed mostly flat for 2022.
- Delaware‘s reinsurance program took effect in 2020. Rates decreased sharply in 2020, decreased again in 2021, and increased modestly for 2022.
- Colorado‘s reinsurance program took effect in 2020. Rates decreased sharply in 2020 and increased slightly in 2021 and 2022.
- Rhode Island‘s reinsurance program took effect in 2020. Rates decreased slightly in 2020 but increased in 2021 and 2022.
- Pennsylvania‘s reinsurance program took effect in 2021. Rates decreased for 2021 and stayed mostly flat for 2022.
- New Hampshire‘s reinsurance program took effect in 2021. Rates decreased for 2021, but increased slightly for 2022.
- Georgia‘s reinsurance program took effect in 2022. Rates decreased modestly for 2022.
- Virginia‘s reinsurance program will take effect in 2023, after the state’s proposal received federal approval in May 2022.
- Idaho‘s reinsurance program will take effect in 2023, after the state’s proposal received federal approval in August 2022.
It’s noteworthy that Idaho and Virginia, both of which are implementing reinsurance programs as of 2023, are the only states where insurers proposed an overall average rate decrease for 2023. Reinsurance is the driving factor for that in both states.
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.
