Reinsurance waivers in the ARPA/IRA subsidy environment

Last August, Coleman Drake and I wrote a short commentary in JAMA Health Forums where we wondered about the role of reinsurance after the American Rescue Plan (ARP) subsidies were passed. Prior to ARP, individuals and families earning over 400% Federal Poverty Level (FPL) were paying full gross premium. After ARP passed, households earning over 400% FPL would pay no more than 8.5% of their modified adjusted gross income for the benchmark silver plan. We noted that this mostly addressed the upper middle class affordability challenge that most reinsurance waivers had been focusing on:

Under the previous 2 administrations, policy makers provided relief to families without premium subsidies by implementing reinsurance programs… \ a set of state-run programs examined by Polyakova and colleagues3 in this issue of JAMA Health Forum that are authorized through the section 1332 waiver process under the Affordable Care Act. Both programs partially offset insurers’ claims costs, which allows insurers to lower their premiums.4 Prior to the ARP, these reductions in premiums increased marketplace plan affordability for enrollees without premium subsidies.

We noted that this program justification disappeared in 2022 due to ARPA:

ARP’s enhanced premium subsidies undercut the logic of state-based reinsurance programs by capping benchmark marketplace premiums at 8.5% of household income for families with incomes above 400% of the federal poverty level. Capping premiums means that premium levels no longer determine the affordability of marketplace plans for these enrollees. While state-based reinsurance programs still reduce premium levels, the expansion of premium subsidies to households means that the ARP severs the relationship between marketplace premium levels and marketplace premium affordability for nearly all enrollees. The premium of the benchmark plan facing previously unsubsidized households now equals 8.5% of their household income; it does not vary with premiums as set by insurers.

Reinsurance has a role to play as there are idiosyncratic cases that do not risk adjust well because either the disease is too rare or the variance of spending within a disease category is humongous. Proper catastrophic risk adjustment that trims individual level tail risk can allow for better functioning markets where insurers compete more on their offerings while being mostly risk agnostic instead of competing on identifying and avoiding idiosyncratic high cost and undercompensated risk.

This was true in 2021 and 2022 with the ARP subsidies. It remains true today through the end of 2025 with the passage of the IRA. Reinsurance no longer has a direct role in premium affordability for almost everyone. States that administer reinsurance programs that mix state revenues with federal dollars to provide a covert subsidy for upper income residents should reconsider their program intent and design in 2024 and 2025. I had conversations with state policy crafters after this commentary came out and they noted that the passage of ARP was too late in the 2022 rate and policy cycle for them to easily change rating assumptions and the temporary nature of the bill made thinking about 2023 unfeasible. I acknowledge that limitation for 2023 but I think that there is plenty of policy time and space for creative state programs to use funds that were previously committed to a state reinsurance program to be used for other priorities in the healthcare space.