As numerous carriers struggled with high health care costs caused by insuring older and sicker individuals under the ACA, some states experimented with their own reinsurance programs. (Photo: Shutterstock)
An old insurance industry practice has reduced Affordable Care Act (ACA) individual market premiums by an average of nearly 20 percent in seven states, a new analysis has found.
Reinsurance, a practice where insurance carriers reduce risk by purchasing policies from other insurers to limit their losses, has been used by a number of states to to bolster their ACA markets by creating state reinsurance programs to help insurance companies that have struggled with fluctuations in health care costs. Avalere, a health care consulting company, looked at the data to determine how effective they've been.
Reinsurance and the ACA
Although the concept doesn't grab a lot of headlines, reinsurance has been promoted by many experts as a way to control costs and keep private insurers from exiting the ACA marketplace. The ACA came with a temporary reinsurance program for its first few years—and despite some serious glitches in the funding of that early effort, many agreed that the reinsurance concept was an overall positive for the financial health of the marketplace.
“The insurers have all been clear that without continuing reinsurance, they will substantially increase premiums,” wrote Katherine Swartz, professor of health economics and policy at the Harvard School of Public Health, in a 2017 analysis of the federal program. “There is widespread recognition that the program played a major role in stabilizing premiums over the past three years.”
States take the reins
As numerous carriers struggled with high health care costs caused by insuring older and sicker individuals under the ACA, some states experimented with their own reinsurance programs.
The Avalere study looked at seven states: Alaska, Maryland, Maine, Minnesota, New Jersey, Oregon, and Wisconsin, which created their own reinsurance programs. With a mix of state and federal funding, these states launched new reinsurance programs or continued previous programs designed to buffer insurance companies from unexpected losses in their state markets.
The study found that among these states, premiums were 19.9 percent lower on average during the first year of the reinsurance program. There was a wide range of savings: premium reductions ranged from 6 percent to 43 percent, depending on the state.
“In response to recent individual market uncertainty and rising premiums, many states are pursuing reinsurance programs to mitigate insurers' risk and stabilize individual markets, as well as to help residents avoid unexpected premium increases while reducing the number of uninsured,” the study said.
Cost is still an issue
Although the analysis found that the reduced premiums saved nearly $1 billion for the federal government, the state-by-state approach does come with more front-end costs for state governments: the study said states bear an average of 31.9 percent of total annual costs of reinsurance programs, for an average cost of $72.7 million.
“Reinsurance programs have been effective at stabilizing individual market premiums and maintaining insurer participation,” said Elizabeth Carpenter, practice director at Avalere. “Though the appetite for state reinsurance programs is high, securing state funding is an obstacle to additional states implementing these programs.”
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