Policy & Politics: Can Reinsurance Programs Save the ACA?

August 11, 2017

By Dean Celia

Now that the Republican efforts to repeal the Affordable Care Act (ACA) are all but dead, it is time for officials to turn attention to stabilizing the jittery insurance exchanges. Payers have been essentially operating in limbo since last year’s presidential election. They’ve been waiting for Washington to act, and were probably expecting Republicans to deliver on their 7 year promise to do away with the ACA now that there is someone in the White House who will not veto a repeal bill. 

It has been, in many ways, 9 wasted months since the election. And the uncertainty does not appear to be waning, thanks in part to the President himself, who has suggested that the best way forward is to let the ACA collapse under its own weight. Such a scenario is not inconceivable if President Trump follows through on what he has alluded to in Tweets. That is, halt subsidy payments to insurance companies that are designed to reduce deductibles for the poor. He could also stop enforcing the penalty for people who fail to buy insurance. No subsidies and fewer healthy insured individuals will hasten the so-called “death spiral” that has dogged the exchanges almost from the start. 

The administration could decide to work with both parties in Congress and at the state level to improve the ACA. One way to do that is through reinsurance, whereby the government helps pay for the sickest people that tend to drive up rates in areas where there are not enough healthy people enrolled to balance them out. Reinsurance, of course, is nothing new. Under the ACA, the federal government temporarily provided reinsurance for 3 years through 2016. Some believe such funding needs to be extended indefinitely, but no one is holding their breath as President Trump continues to fume and Washington gridlock persists.  

Some States Turn to Reinsurance

Some states have decided to take matters into their own hands, using a provision in the ACA that allows them to redesign their health insurance markets as long as health coverage is not jeopardized. Known as “state innovation waivers,” the practice is also being embraced by Washington. In July, the Trump administration approved Alaska’s waiver application, which will allow the state to use federal ACA dollars to fund its successful reinsurance program. Other states—including Idaho, New Hampshire, Maine, Minnesota, and Oklahoma—reportedly will soon follow suit. While state waivers can be sought for a variety of reasons, experts believe waivers for reinsurance programs will get the lion’s share of attention because their focus on reducing premiums simplifies the approval process. Plus, reinsurance programs have been shown to work. 

An analysis of the ACA’s just-expired reinsurance program demonstrated that for the 30% of insurers with the highest claims costs, revenues exceeded those costs by $0 to $49 per member per month in 2014 and 2015, thanks to reinsurance. Had the program not been in place claims would have exceeded premium revenues by $90 to $397 per member per month, according to data in Health Affairs.

A year ago, Alaska had little choice but to begin its own reinsurance program. Premiums on the state exchange were set to rise 42%. So officials diverted $55 million in tax revenue normally allocated to the general budget fund into a reinsurance program. This convinced Premera—the lone insurer on the Alaska exchange—to increase premiums by just 7%. The success emboldened the state to apply for a federal waiver a year later, and approval now allows it to use federal funds for reinsurance. This helped to move Alaska down from being one of the states with the highest year-over-year premium increases to one of the lowest in the country.

But why are only a half dozen or so states following Alaska’s lead? In short, not every state is cut out for reinsurance—the circumstances have to be just right, according to experts we spoke with. 

Not for All States

“It is a reasonable strategy to consider, but Alaska is unique from a population, geography, and insurability perspective,” F Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare said. He added that other states are “teetering on bankruptcy due to underfunded pensions and Medicaid fiscal pressures.” This makes it next-to-impossible to do as Alaska did: self-fund for a year before applying for a federal waiver.

“Where does the funding for reinsurance come from in the first place?” Norm Smith, president of Viewpoint Consulting, Inc, which surveys managed markets decision-makers for the pharmaceutical industry asked. He agreed that not all states are in a position to raid a general fund. The only other options appear to be pooled funds created by the exchange itself, or special federal funding.

Still, with the federal government practically dangling funds in front of the states through the waiver program, it is natural to wonder why more are not following suit. But Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm, said he is not surprised at all. “States are in a difficult position because they don’t know where Washington is headed with insurance reform.” 

Because of the uncertainty, Mr Smith, a First Report Managed Care editorial advisory board member, said that states that attempt to establish a reinsurance program will take a route that best suits their specific needs. Alaska had the luxury of being able to redirect state funds. Other states will need to find a different way. Or pass on the opportunity. 

“In larger states, with many more members in the insurance pool, [the cost to insure high-risk individuals] could exceed the actuarial value of the reinsurance,” he said. This would render the program useless, unless the threshold where reinsurance kicks in is lowered. 

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