August 24, 2018
A Statewide Solution to Rising Individual Health Insurance Costs
Across the country states are turning to reinsurance pools as a way to decrease health insurance costs and stabilize the individual market. The budget adopted by the General Assembly in May 2018 authorizes the state to develop and apply for a waiver from the federal government to stand up a reinsurance pool here in Virginia. Here’s why that would be a good move for Virginians.
Reinsurance programs protect against premium increases in the individual market by offsetting the expenses of high-cost individuals. Enrollees who have unexpected high cost claims can drive up overall premium costs. Such claims can cause insurers to overestimate unexpected costs in order to protect themselves from losses or underestimate these costs in one year, and then overcorrect the next year.
State reinsurance programs reimburse insurers a portion of these high-cost claims. Eliminating the unexpected costs associated with these high cost outliers would allow health insurance companies to more accurately forecast expenses which can lead to reduced premiums and less variation in costs from year to year. This would help not only insurance companies but individual consumers as well.
Since 2016, the average premium for a 40 year old with the most popular Affordable Care Act (ACA) exchange plan has jumped 83 percent in Virginia. Early indications from a study looking at several metropolitan areas show further expected increases in Richmond for Bronze and Silver level marketplace plans for 2019. There are several factors that contribute to consumer premium rates, including insurer response to changing provisions of the ACA, health care costs, market instability and insurer participation in a given locality. Reinsurance programs have been touted as a way to alleviate the final two concerns.
The Trump administration has actively supported the creation of state reinsurance programs citing them as a way to “lower premiums for consumers, improve market stability, and increase consumer choice.” Along with stabilizing markets by allowing for better expense forecasting, reinsurance pools can also encourage insurers to offer services in areas with higher risk consumers with less concern about high cost claims. Insurers have shown reluctance to offer coverage in areas where the population may be aging or have significant health concerns compared to healthy individuals. Small communities like Charlottesville, which has been recognized as having the highest premiums in the nation, tend to be pricier to cover because there is a small patient pool to balance out risks.
Reinsurance programs have been implemented in Alaska, Minnesota, and Oregon with four additional state programs (Maine, New Jersey, Maryland, and Wisconsin) being approved in 2018. Early results have been mostly positive for health insurance consumers in states that have implemented reinsurance plans. Minnesota marketplace premium rates fell 15 percent for the lowest cost Silver plans while the same level premiums in Alaska have dropped 22.5 percent for 2018. Oregon’s plan was implemented after 2018 rates had been decided and 2019 rates show mixed results. Expected premium rates have much lower variation than in the previous two years, which suggests a possible stabilizing effect of the program.
The Virginia Marketplace Stability Work Group, commissioned by Governor Northam’s administration, is currently exploring a state reinsurance option among other ideas to bring down individual health insurance costs. The state could do this via a 1332 waiver, which allows states to develop innovative methods to address affordability issues in the individual and small group insurance marketplace.
These waivers offset state program financing with federal funding equal to the federal savings generated by reducing premiums. This means that to fund reinsurance programs, states only have to cover the net cost after the federal funding is applied.
State costs have varied in the three states that have implemented reinsurance. Alaska, Oregon, and Minnesota pay for 3 percent, 39 percent, and 52 percent of their reinsurance programs respectively. The variation in state costs is largely due to decisions on how to model their respective reinsurance programs which takes into consideration estimates on how much federal money would be saved by lowering health premiums. Alaska decided to fully or partially cover claims of high-risk individuals with certain medical conditions. Meanwhile, Minnesota will reimburse insurers 80 percent of claims above $50,000 and up to a cap of $250,000.
Consumers who will see the greatest savings from reinsurance will be the middle class and upper-middle class. Premiums have been rising across the board but those with subsidized plans purchased on the marketplace have benefited from federal subsidies that have increased accordingly. Those that qualify for federal Advanced Premium Tax Credits on the marketplace have been mostly protected from the rise in individual premiums and likely would not see significantly lower cost from the creation of a reinsurance pool. Everyone who purchases insurance on the individual marketplace would benefit, however, if a reinsurance system sufficiently attracts market participation thereby increasing consumer choice.
The flexibility provided by the 1332 waiver means that Virginia has an opportunity to design its own unique version of a reinsurance program that is tied to state specific trends and concerns. Modeling can be done to estimate how much state investment is needed for the program and the potential outcomes in regards to premium costs for consumers. Results from early adopter states indicate that reinsurance programs are a viable and cost effective way to seek control over rising individual health insurance costs.