Current Considerations for State Reinsurance Programs
Jason Levitis, Urban Institute, Sabrina Corlette, Georgetown University’s Center on Health Insurance Reforms, and Claire O’Brien, Urban Institute
Reinsurance is a long-standing tool for stabilizing health insurance markets and reducing premiums. It has played an important role in the success of the Affordable Care Act’s (ACA) individual market as part of section 1332 state innovation waivers. By reducing premiums, reinsurance increases affordability for consumers ineligible for the premium tax credit (PTC). However, the effects on PTC recipients are smaller, mixed, and have received little attention.
A recent research article in Health Affairs argues that reinsurance programs reduce affordability and enrollment among low- to moderate-income people. The article explains a mechanism by which reinsurance can increase the net premiums of subsidized enrollees and offers empirical evidence of reduced coverage based on Georgia’s adoption of a reinsurance program in 2022.
The article raises important questions for state and federal policymakers considering whether to establish or extend reinsurance programs. Its logic about increasing premiums for some consumers seems sound, and it contributes to the empirical evidence. But the research also has important limitations in terms of its scope and methodology. It provides evidence from only less than one-third of counties in one of the 17 states with reinsurance programs; previous empirical research has found little or no impact among the group in question. And the article focuses on a scenario with PTC enhancements, which are scheduled to expire after 2025. If they do, it will fundamentally change the calculus around reinsurance. Given these limitations, as well as potential costs associated with dismantling—or establishing—a reinsurance program, states may want to wait for additional clarity and evidence before changing any plans for reinsurance programs.
This expert perspective summarizes the Health Affairs article and related considerations around reinsurance.
Background on Reinsurance
Reinsurance is a common tool throughout insurance markets to help insurers bear the risk of the largest claims.[1] The ACA included a temporary reinsurance program to help smooth the 2014 transition to its core individual market reforms, including new insurance regulations and the introduction of Marketplaces and the PTC. When the transitional reinsurance program (and the temporary risk corridor program) expired in 2017, several states experienced lower issuer participation and substantial premium increases. Premiums were especially high for older consumers and those in high-cost areas. For example, in 2017, a 60-year-old in Portland, Oregon with an income of $48,240 would not qualify for PTCs and thus bear the full premium cost: $7,951 for a benchmark silver plan, or 16% of their income.
Fortunately, the ACA includes a mechanism that can help states establish their own reinsurance programs. Under section 1332, a state can waive the ACA’s normal rating rules, establish a reinsurance program to reduce premiums, and receive federal “pass-through funding” to help support the reinsurance program based on the federal savings from reducing premiums. Alaska, Minnesota, and Oregon received approval for such waivers in 2018, and over a dozen other states soon followed.
These reinsurance programs are expected to have two key policy effects. First, they provide a stabilizing effect for issuers in the market, encouraging continued market participation because of risk mitigation for high-cost cases. Second, the cost-shift from issuers to reinsurance pools for high-cost cases results in lower premiums across the market. In 2023, the 17 reinsurance programs reduced premiums by an average of 16%.
Reinsurance has typically been thought to have little impact on PTC recipients because the PTC generally adjusts dollar for dollar with the benchmark premium. While reducing premiums reduces PTC, the amount a subsidized enrollee is expected to contribute to their premium remains constant. (To improve affordability for PTC-eligible individuals, state subsidy wraps are a key tool.) Consistent with this dynamic, states seeking reinsurance waivers have projected little or no impact on subsidized coverage. Specifically, virtually every actuarial analysis that breaks out coverage impacts by income shows no substantial change or a small enrollment increase at these income ranges.[2] Evaluations after-the-fact have generally borne this out, as discussed in greater detail below. In short, section 1332 reinsurance waivers have typically been thought to have a substantial upside without a significant downside. Perhaps for this reason, reinsurance programs have also been successful at attracting bipartisan support in states where action on healthcare policy is often difficult.[3]
The PTC enhancements enacted in the American Rescue Plan Act (ARP) of 2021 (and extended in the Inflation Reduction Act in 2022) changed the calculus for reinsurance in important ways. The ARP both expanded PTC eligibility beyond 400% of the federal poverty level (FPL) and increased PTC amounts. On the one hand, this blunted the benefit of reinsurance, since it left a smaller and higher-income group paying the full premium. On the other hand, the PTC enhancements increased pass-through funding for reinsurance waivers, and substantial numbers of consumers still benefit. Given these factors—and uncertainty about the duration of the enhancements—none of the states with reinsurance programs ended them, and a few states have established new ones.[4]
The Health Affairs Article
While reinsurance programs primarily affect unsubsidized enrollees, there has long been awareness that it could have an impact on net premiums for subsidized enrollees.[5] This is because advance PTCs (APTCs) adjust dollar-for-dollar with the benchmark silver plan, but APTC recipients can “buy up” to a more expensive plan (by paying more out-of-pocket) or “buy down” to a less expensive plan (and pay less—sometimes nothing—out-of-pocket). Reducing all premiums by a fixed percentage—as reinsurance typically does—reduces the “spread” between differently priced plans by that same percentage. This generally increases the cost of “buying down” to a cheaper plan, while reducing the cost of “buying up” to a more expensive plan.
For example, consider a consumer with household income of $35,721 (245% FPL for an individual) in 2024. If the benchmark silver plan premium is $5,723 (the national average for a 40-year-old), the consumer qualifies for APTC of $4,366, which is enough to cover the full $4,365 premium for an average bronze plan.[6] If reinsurance reduces all premiums by 20%, the benchmark premium falls to $4,578, the consumer’s APTC falls to $3,221, and the bronze premium falls to $3,492. The consumer must now pay $271 for the bronze plan. On the other hand, a consumer buying up to a more expensive plan would generally see their net premium fall. In short, reinsurance may either increase or decrease net premiums depending on individual circumstances and the plan they select.
The premium effects on consumers not purchasing the benchmark plan have historically been thought to be small,[7] to offset each other to a substantial extent, and to have little impact on coverage. As noted above, actuarial analyses accompanying reinsurance waiver applications have generally shown little or no impact on the subsidized population.[8]
But the Health Affairs article questions that logic. It notes that the net premium for buying down to a cheaper plan—which reinsurance may increase—often determines whether a consumer has a zero-premium option. Other recent research suggests that the difference between no premium and even a small premium has a disproportionate impact on enrollment decisions. This may be due both to consumer preferences and to administrative burdens from paying even a small premium, especially for individuals who are unbanked. The Health Affairs article posits that this dynamic could mean that the small premium increases for inexpensive plans under reinsurance could have an outsized effect on enrollment.
To test this theory, the authors studied the premium and enrollment changes resulting from the 2022 implementation of Georgia’s reinsurance program, which reduced premiums by about 20%. They compared changes from 2021 to 2022 in full (pre-subsidy) premiums and enrollment in Georgia’s border counties to changes in adjacent counties in surrounding states (none of which have reinsurance programs) during the same period. Using this approach and attempting to control for other differences between paired counties, they estimated that reinsurance reduced enrollment in the Georgia counties by about one-third among just the income group they would expect based on their premium spread argument: individuals with incomes 200% to 400% FPL. This seems to support the hypothesis that reinsurance negatively affects coverage among subsidized individuals.
What This Means for States
The article offers some important considerations for state and federal policymakers weighing whether to establish or extend reinsurance programs. The central calculus seems sound—that reducing premium spreads through reinsurance may increase net premiums for subsidized individuals buying down to a cheaper plan, and that doing so may eliminate zero-cost options for some consumers. However, states should be cautious about changing course based on this article alone. The analysis has important limitations, as recognized by the authors, and establishing or discontinuing a reinsurance program has other implications states should consider.
The analysis has important limitations in its scope, methodology, and assumptions. First, the evidence comes exclusively from a time when the PTC enhancements were in effect. Expiration is currently scheduled to occur after 2025. While supporters hope Congress will extend the enhancements, that is not a certainty. As noted above, expiration of the PTC enhancements would fundamentally change the reinsurance calculus: everyone over 400% FPL and more individuals under 400% FPL would be ineligible for PTC and thus benefit from reducing full premiums. The enhancements may also change the calculus around zero-premium plans. Without the enhancements, it may be that fewer consumers would be able to buy down to a zero-premium plan without reinsurance,[9] so the coverage loss due to reinsurance would be smaller.
Second, the study examines only one of the 17 states with reinsurance programs and only a subset of counties in that one state. This limits the ability to generalize the findings to the entire state of Georgia or to all reinsurance states.
Third, the methodology requires the assumption that, absent Georgia’s reinsurance program, enrollment trends would have been similar between the selected Georgia counties and the adjacent counties in neighboring states. However, enrollment trends in Georgia could have been affected by multiple other factors, including an ongoing transition to a State-Based Marketplace, a broader Marketplace waiver that was approved but is currently suspended, and substantial changes to its Medicaid program. In addition, the Medicaid continuous coverage requirement affected coverage differently across states. Thus, it is difficult to assess whether any differences in enrollment trends resulted from the reinsurance program or from other factors.
Finally, other analyses of reinsurance programs conducted after-the-fact don’t generally support the authors’ conclusion. Evaluations of reinsurance waivers commissioned by the Department of Health and Human Services have found little or no evidence of impact on enrollment in the subsidy-eligible population. For example, reports on Alaska’s and Minnesota’s waiver found no statistically significant changes in enrollment overall or by income group. Oregon’s waiver was associated with a statistically significant enrollment reduction of 3,000 among enrollees with incomes 351% to 400% FPL (a 20% reduction), but the impact was not statistically significant among subsidized enrollees overall.
In short, it is not clear that the authors’ findings about reinsurance are broadly applicable—whether to the entire state of Georgia, to other 1332 reinsurance states, or to the scenario where PTC enhancements expire. More generally, the analysis does not seem to jeopardize the approvability of reinsurance waivers that meet the guardrails under the federal approval methodology.
States should also consider other factors in determining whether to extend or establish a reinsurance program. States should be aware that ending a reinsurance program would result in an immediate spike in the unsubsidized premiums filed by issuers. These increases could be poorly received by the public, even if most enrollees would be protected from their effects due to PTCs. Moreover, such increases could come on top of increases in both unsubsidized and subsidized premiums that would accompany an end to the PTC enhancements.
States should also consider the specific conditions in the state insurance market. For example, if a state worries about insufficient issuer participation and unstable premiums, reinsurance could still be an important stabilizing tool. In recent years, issuer participation has grown but, if the PTC enhancements expire, some issuers could exit the market or shrink their footprint. This would renew concerns about reduced consumer choices in some, particularly rural, areas. For states concerned about this, a tiered approach to reinsurance, where the premium effects are focused on geographic areas with higher premiums and lower issuer participation, could be especially effective. Furthermore, depending on state politics, a reinsurance program may be the only affordability option that could attract sufficient support. Reinsurance may also be attractive to states with tighter budgets since it produces federal pass-through funding.
Finally, states should consider the time and effort involved in establishing or amending a 1332 waiver, which is not inconsiderable.
Given these offsetting considerations and uncertainties, states may wish to wait for additional developments and evidence before changing course on their reinsurance plans. The fate of the PTC enhancements is likely to be much clearer in the next year or two. Additional research may clarify the impact of reinsurance in both scenarios. As always, states should consider their specific market and political conditions in evaluating what is helpful and feasible.
States with a State-Based Marketplace could also consider establishing a state subsidy wrap along with the reinsurance program to offset potential premium increases for subsidized enrollees. This would be similar in principle to a feature included in New York’s recently approved 1332 waiver, which extends eligibility for their Essential Plan—a comprehensive coverage program previously run as a Basic Health Program under ACA section 1331—up to 250% FPL, among other changes. Since shifting these Marketplace enrollees to the Essential Plan would normally increase Marketplace premiums, the waiver also includes the Insurer Reimbursement Implementation Plan to prevent those increases. Similarly, a reinsurance waiver could include a small premium subsidy for APTC-eligible enrollees to offset any loss in purchasing power due to reinsurance.
Conclusion
Reinsurance programs have long played an important and bipartisan role in the success of the ACA’s individual market. They are a straightforward means of supporting market stability and affordability for PTC-ineligible people. That said, concerns about the impact on low- and moderate-income people warrant careful attention. Upcoming policy developments will help to clarify the landscape, and additional research is needed to understand the pros and cons.
[1] Reinsurance in health insurance most often follows a “claims cost-based” model, where the program pays a certain fraction (the coinsurance rate) of claims above a threshold (the attachment point) and up to a cap. There is also conditions-based reinsurance, where the program helps with claims for certain costly diagnoses.
[2] The one exception is Minnesota’s original application from 2017, which shows enrollment gains in the 200% to 250% FPL group and similarly sized reductions in the 250% to 400% group. It’s not clear why that would be; it may have been due to Minnesota being one of the first states seeking such a waiver and the analytical methods not being well established.
[3] For example, Alaska’s 2016 reinsurance bill passed with bipartisan support.
[4] Three states—Pennsylvania, New Hampshire, and Georgia—implemented a program in 2021 or later but their waivers were approved before the passage of the ARP. Two states—Idaho and Virginia—had reinsurance waivers approved after the passage of the ARP. Nevada has applied for a waiver that would create a reinsurance program which would make it the 18th state.
[5] See, for example, comment on the Pennsylvania 1332 waiver from David Anderson MSPPM, Dr. Coleman Drake, Ph.D. https://www.insurance.pa.gov/Coverage/Pages/PA1332Waiver.aspx.
[6] All premium and APTC figures cited are annual. These figures are taken from KFF’s APTC calculator for 2024. The national averages include premiums from states with reinsurance programs. Backing out the impact of reinsurance would yield higher premiums in reinsurance states, which would increase the nationwide averages and lead to a higher estimate of the effect on affordability. https://www.kff.org/interactive/subsidy-calculator/.
[7] See Pennsylvania’s response to the Anderson and Drake comment letter, https://www.insurance.pa.gov/Coverage/Documents/Pennsylvania%201332%20reinsurance%20waiver%20final%20application.pdf#page=125.
[8] For example, the actuarial analyses in Montana’s 2019 reinsurance waiver application and Virginia’s 2021 reinsurance waiver application predict no change in enrollment for those with incomes between 100% and 400% FPL.
[9] See, for example, D. Keith Branham et al., “Access to Marketplace Plans with Low Premiums on the Federal Platform,” ASPE Issue Brief, April 1, 2021. https://aspe.hhs.gov/sites/default/files/migrated_legacy_files//199741/ASPE%20ACA%20Low%20Premium%20Plans%20Issue%20Brief%20II.pdf.