Section 1332 Reinsurance Waivers and Silverloading

We talked earlier this week that the Republican reconciliation bill may contain a direct payment appropriation for Cost-Sharing Reduction (CSR) subsidies in the ACA.  This would end the practice of “Silverloading” which has dramatically made subsidized coverage more affordable for non-silver buyers (mostly 200% Federal Poverty Level  (FPL) and higher households) since 2018.  This action, combined with the expiration of the ARPA/IRA subsidies on December 31, 2025 would bring the ACA markets’ fundamental affordability levels back to 2017 with more administrative burdens and less information and navigator support as we saw in 2018.  It is a recipe for a dramatic reduction in ACA enrollment within 2 years.

This administration was very enthusiastic about Section 1332 reinsurance waivers in the firs term and the early hints are that the current version of CMS will be even more enthusiastic in pushing waiver concepts.  Section 1332 waivers allows for states to modify their insurance markets to fit local goals. These programs must meet four guardrails consisting of coverage at least as good, at least as affordable for at least as many people and no increase in federal spending.  Any federal cost-savings are passed through to the state to help fund the waiver activity.

The most common (15 out of 17 approved waivers) is a state funded reinsurance program.  In these programs states inject some level of state general funds into the ACA markets to pay some portion of high cost claims.  This means that premiums no longer have to cover all claims costs which then means premiums can decrease.  Lower premiums means that the federal government does not need to spend as much money on premium subsidies.  Those premium subsidy savings are passed back to the state.  In 2025, the federal government projects at least a $3.5 billion dollar passthrough to state reinsurance programs.

Pass through is a combination of the richness of a state program and the benchmark premium level.  A state program that funds reinsurance at $1 million dollars will have much less pass through than the same state spending $10 million dollars on reinsurance.  ARPA subsidy expiration, which every state should have anticipated by the 2nd week of November, will bump the minimum applicable percentage for low income enrollees from 0% of family income to 2% of family income which will decrease the federal pass through.  We should anticipate less passthrough in 2026 due to current law because subsidies go down but the benchmark premium will not change much.

However, if CSRs are appropriated, we would expect the benchmark premium to be dramatically lower.  In 2018, Silver premiums increased by about 32% while Bronze and Gold premiums increased by about 18%.  The benchmark premium spiked which made the average subsidy amount increase dramatically as well.  All current reinsurance waivers are based on an actuarial assumption that premium levels, and thus subsidy levels, are driven by the current policy of Silverloading with high Silver premium levels relative to 2017.

In the scenario where CSRs are directly appropriated, federal spending goes down dramatically as both enrollment decreases as the least expensive plans become more expensive, driving out likely low cost/low risk enrollees, and the benchmark drops substantially.  The pass-through of funds to states from federal savings will decrease.  This means that state reinsurance programs will either require more state general funds to maintain the same payment structure OR a substantial reduction in program generosity leading to more expensive non-subsidized insurance.

I’ve been a skeptic of reinsurance for at least the past four years with the acknowledgment that they do a good job of lowering gross premiums for non-subsidized buyers.    I have thought that states should be very clear about their policy goals with reinsurance.  I would hope that in the eventuality of CSRs being directly appropriated that states examine the likely revenue/passthrough shock quickly and examine the trade-offs that are being made in these programs.