August 14, 2017 – With Republican efforts to repeal and replace the Affordable Care Act (ACA) stalled, one of the ideas being floated to help shore up health insurance marketplaces is to bring back a federal reinsurance program, similar to a temporary one that ended in 2016. Katherine Swartz, professor of health economics and policy, describes how such a program works and how it could help.
What is reinsurance?
Reinsurance is insurance for insurers or large companies that want to protect themselves against very large losses. For companies that provide insurance to individuals through the ACA marketplaces, reinsurance can help protect them against very high-cost enrollees whose medical claims can reach into the hundreds of thousands or even millions, thus reducing the pressure to increase premiums on everyone else.
Reinsurance works in much the same way as regular insurance. There is a threshold level, or deductible, of expenses that must be incurred before the reinsurance takes effect. There is also the equivalent of a coinsurance rate that the purchaser of the reinsurance pays for expenses above the deductible. But unlike health insurance policies, which can no longer have an annual or lifetime limit on covered expenses, reinsurance is sold for a limited amount of coverage—it is not open-ended. Policies are bought for a specified “corridor” of an individual’s expenses, such as between $50,000 and $100,000.
Here’s an example: Suppose a person has medical expenses during one year that amount to $135,000, and the person’s health plan has a $5,000 annual limit on what the person has to pay out-of-pocket for a deductible and any other cost-sharing. The insurance company is then responsible for covering $45,000 of the first $50,000 of expenses. Let’s say the insurer’s reinsurance policy requires it to pay 10% of costs between $50,000 and $100,000 for an individual. In this case, the insurer pays $5,000 and the reinsurer pays $45,000. All of the expenses above the $100,000 limit of the reinsurance policy are the responsibility of the original insurer.
The federal government provides reinsurance in a variety of other situations where a private insurance market would not exist without such reinsurance. The Medicare prescription drug benefit (Medicare Part D), for example, has a reinsurance program that helps keep premiums affordable.
There was a temporary reinsurance program under the ACA, but insurers reportedly didn’t get all of the money they were owed. Can you explain what happened with that program? And what would be the incentive for Republicans to consider continuing this sort of program now?
This requires a long answer because the history of the reinsurance program is complicated. The ACA established what was known as a “transitional” reinsurance program, which was intended to help stabilize premiums in the individual health insurance market from 2014-16. By all accounts, the program did in fact stabilize premiums.
The reinsurance program was funded by contributions that were required from all health insurers. These contributions went into a federal “reinsurance fund,” administered by the Centers for Medicare and Medicaid Services (CMS), from which payments were doled out to insurers covering high-cost individuals. In 2014 and 2015, eligible insurance plans were to receive reinsurance payments for a high-cost enrollee when the plan’s cost for that enrollee exceeded $45,000. That threshold was bumped up to $90,000 in 2016 because expectations were that the markets would be almost stable by the third year of the ACA as insurers had better knowledge about the health of people enrolling in their plans and could more accurately set premiums to meet expected costs. For each of the three years of the program, the upper limit for the reinsurance program’s coverage was $250,000 per person.
The ACA set the level of this reinsurance fund at $10 billion in 2014, $6 billion in 2015, and $4 billion in 2016. In addition to the reinsurance funds, however, the reinsurance program was supposed to also collect $5 billion over the three-year period, to be deposited in the U.S. Treasury. These additional funds were intended to reimburse the Treasury for $5 billion spent on a different reinsurance program for early retirees that was in effect from 2010-13. The U.S. Department of Health and Human Services (HHS) had set the contribution rates for the three years at levels that it expected would collect the amounts needed to fund the reinsurance program and reimburse the Treasury. However, the levels fell short by about $2.5 billion in 2014 and about $1.5 billion in 2015.
CMS had to decide how to allocate the funds. Its interpretation of the statute setting up the reinsurance program was that funds collected should go first to reimburse insurers for high-cost enrollees. And this is where things get sticky. In 2014, insurers submitted reimbursable claims for $7.9 billion, so CMS was able to completely reimburse them from the reinsurance fund, which had taken in $9.7 billion toward its target of $12.2 billion, which included the money for Treasury. But instead of giving Treasury the $1.8 billion that was left—the difference between the $9.7 billion collected and the $7.9 billion paid out—CMS decided to roll those funds into the 2015 year of the reinsurance program because there were concerns that the $6 billion set for that year wouldn’t be enough, given that more people were expected to enroll in ACA plans.
Indeed, at the end of June 2016, CMS announced that the estimated reinsurance contributions ($6.5 billion) for 2015 were substantially less than insurers’ requests for $14.3 billion in reinsurance payments. CMS was able to make $7.8 billion in reinsurance payments to 497 of the 575 participating issuers nationwide—reimbursing them for 55% of the costs of the high-cost enrollees.
Meanwhile, congressional Republicans challenged CMS’s interpretation of the statute and appealed to the Government Accountability Office (GAO) to determine if HHS could avoid reimbursing the Treasury. Last September, GAO issued its opinion—agreeing with the Republicans that the Treasury was to be reimbursed and that despite the expectation of a shortfall in funds for the reinsurance program in 2015, the unspent funds from 2014 should have been sent to Treasury. The GAO report also said that the collected funds in 2015 should be been divided proportionately between the reinsurance program and what Treasury was to receive.
Legislation was introduced in Congress to require that HHS repay the Treasury, but so far the Trump administration has continued to pay out the funds collected in 2016 for the reinsurance program. However, the funds collected in 2016 were sufficient to pay only a little more than half of insurers’ claims for expenses. According to Tim Jost’s Health Affairs Blog, as of July 1, 2017, 496 insurers were eligible for reinsurance payments in 2016 and 445 of them will receive reinsurance payments. CMS estimates that it will be able to pay 53% of claims between $90,000 and $250,000 for the year.
Congress’s incentive for continuing a reinsurance program comes from the insurance companies participating in the ACA markets. The insurers have all been clear that without continuing reinsurance, they will substantially increase premiums. There is widespread recognition that the program played a major role in stabilizing premiums over the past three years. It is telling that the Republican efforts to repeal and replace the ACA generally included federal funds for a reinsurance program.
Besides a federal reinsurance program, what other reforms would be key to stabilizing health insurance markets?
It will be important to retain the cost-sharing subsidies for low-income people with incomes below 250% of the poverty level and the premium subsidies for people with incomes up to 400% of the poverty level.
Interestingly, on July 31, the 43-member House Problem Solvers Caucus, a bipartisan group of Republican and Democratic representatives, released a proposal to stabilize the individual insurance markets, and the first two items in the proposal are to mandate full funding of the cost-sharing subsidies and to create a federal reinsurance program—called a “stability fund”—that states could tap to give extra funding to insurers to help them cover costs for their most expensive enrollees.