Flavors of public ACA reinsurance

Delaware just had their ACA Section 1332 reinsurance waiver approved by the Center for Medicare and Medicaid Services (CMS).

This plan is one of two flavors of public re-insurance for the ACA market. This flavor is the external money flavor. In it, an external source of state based money is added to the pool of money collected by premiums.  This new pot of money is then used to pay claims and since, on a static analysis, the claim expense does not change, the average premium can decrease because it is displaced by some external funding.  The theory of change can range from a political need to do something and this is something for high, non-subsidized premiums to a more technocratic justification that the ACA individual market is acting as a quasi-de facto high cost risk pool and it should be compensated as such by other entities.

Within a state that has externally funded reinsurance, insurers now have less variability in their claims costs as their exposure to expensive to really expensive claims have gone down.  Insurers are still, usually, on the hook for ungodly expensive claims under these schemes.

There is another flavor of reinsurance.  CMS runs a small catastrophic reinsurance scheme that is funded directly by premiums through the risk adjustment program.

The high-cost risk pool reimburses issuers for 60 percent of an enrollee’s aggregated paid claims costs exceeding $1 million. To fund these payments, the high-cost risk pool collects a charge from issuers of risk adjustment covered plans that is a small percent of an issuer’s total premiums.  A total of 217 issuers nationwide received a high-cost risk pool payment. The high-cost risk pool charge was 0.20 percent of premium for the individual market (including catastrophic and non-catastrophic, and merged market plans), and 0.32 percent of premium for the small group market, nationally.

This self-funded public re-insurance shifts premium revenue from insurers that aren’t getting hit with incredibly cost individuals to insurers with very high cost covered individuals. It is a thin veneer of nationalizing the risk pool instead of having fifty one, independent risk pools. State based risk pools vary in their ability to eat recurring catastrophic risk; California, Texas, Florida are all big enough and deep enough that a single recurring, predictable ten million dollar claim would not distort the market, while risk pools in the Dakotas or Delaware are too shallow to handle that type of claim without quickly descending to a stable monopolist setting.

Premium funded reinsurance does not lower net, consumer facing premiums. It will change those premiums slightly higher for the insurers that don’t receive money from the fund and noticably lower for the insurers that are covering individuals with multi-million dollar claims. This type of reinsurance has a different objective; it is to make the markets more stable and less variable by spreading some of the costs of huge claims across a multi-million member risk pool instead of a risk pool of tens of thousands. If an insurer knows that there is an individual with a multi-million dollar claim year living in the service area, this reduces the distortion to an entire state’s market:

Rates have to be high enough to cover this individual’s costs. In a competitive market where the subsidies are tied to the second least expensive Silver and there is one super-outlier who can not be re-insured against, every carrier lives in fear of being chosen by the one outlier. If they set their rates low enough to be attractive to healthy people, they lose money on the catastrophic expected claims. If they set the rates high enough to cover a $12,000,000 claim, no one buys their product….
There are two other possible solutions. The first is a cynical solution. All of the insurers in Iowa could agree to kick in $300,000 a piece and buy this single individual a very nice house ten feet over the state line and make this person someone else’s problem.

The other solution is that this is the textbook case of where a high cost risk pool or invisible reinsurance or a prospective re-assignment system would make sense.

These two types of public reinsurance perform different functions. The external funded reinsurance lowers in-state premiums by injecting non-premium revenue into the claims payment pool. The premium funded reinsurance spreads catastrophic risk across the nation and makes the markets more functional.