Supplemental health industry for small companies: Challenges and opportunities
Small companies in the supplemental health products market need to understand the unique challenges these products present in order to compete effectively.
While affordability is a challenge across all health insurance markets, the individual market’s challenges have historically been more acute. There are a number of reasons for this:
Unsurprisingly, policy mechanisms that could subsidize or otherwise reduce premiums in the individual market have been important considerations when policymakers seek solutions to create market stability and access. By subsidizing costs, premiums become more affordable for more individuals, thereby increasing access to coverage and broadening participation, which in turn helps to stabilize prices. This is demonstrated by the high number of low-income households purchasing insurance coverage through the insurance marketplaces with premium subsidies. However, as we note above, premium assistance is not currently available in the insurance marketplaces to households with income above 400% FPL, creating situations where individual market coverage may be considered unaffordable for higher-income households.
While not diminishing the importance of other market stabilization mechanisms such as the individual mandate and government-funded premium subsidies,1 both high-risk pools (HRPs) and reinsurance2 are policy mechanisms that have been and likely will continue to be used to address the market-wide cost challenges in the individual market. Both mechanisms can play important roles in controlling claims cost volatility as well. In this paper, we examine:
Prior to the ACA, many states that had underwritten individual markets also employed some form of HRP.3 In some cases, the HRP pool was completely separate from the standard risk pool and entirely visible to the enrollee: higher rates, distinct benefit plans, unique networks, etc. In other cases, the HRP was invisible to enrollees. Enrollees were a part of the standard pool in that they had the same product and carrier selection and the same rates. (Please see the Appendix for a summary of different program features). Regardless of the specific structure of an HRP, these programs served several purposes:
A predictable consequence of carving out high-risk individuals to a separate pool, however, is that HRP costs were often very volatile, which presented a significant budgeting challenge for states that used general revenues to fund HRPs. Additionally, affordability of premium rates in HRPs for low-income individuals was a concern, with state-run HRPs often having premium rates that were as much as 50% higher than standard rates offered in the broader individual market.6
With the advent of the ACA, the rationale for high-risk pools was largely removed (although some pools remain open with limited enrollment7), as all risk in the individual market was intended to be in the “single risk pool” and insurers could not vary premiums by health status or preexisting conditions. However, recognizing the negative price impact that moving high-risk individuals out of high-risk pools and into the single risk pool would have, ACA architects included the transitional reinsurance program (TRP), one of the three risk mitigation components of the ACA’s “3R’s” programs. The TRP subsidized ACA-compliant individual market coverage for coverage years 2014 through 2016, reducing insurer-paid claims expenses by approximately $8 billion in both 2014 and 2015 and $4 billion in 2016.8 This represented approximately 22% of ACA-compliant premium in 2014, decreasing to ~5% in 2016.9 The TRP was funded through an assessment on commercial health insurance coverage, decreasing from $5.25 per member per month (PMPM) in 2014 to $2.25 PMPM in 2016.
Note, the TRP was not intended by the Department of Health and Human Services (HHS) to replace traditional commercial reinsurance, which limits an insurer’s exposure to catastrophic losses. Rather, it covered a portion of costs from an attachment point up to a cap, effectively subsidizing the market by removing a defined corridor of claims. Moreover, the TRP did not require carriers to cede risk at issue to a defined reinsurance pool as was often done with pre-ACA high-risk pools. Rather, the reinsurance applied to anyone who hit the attachment point regardless of condition or date of onset. This financial construct illustrates how the primary impact of the “reinsurance” as implemented by HHS was not to control volatility (as is the case with typical commercial reinsurance) or even anti-selection (as is the case with traditional high risk pools), but rather was simply an organized way to move money into the individual market in order to reduce prices.
Beginning in 2018, the ACA’s risk adjustment program will have a reinsurance component. For claims in excess of $1 million, the risk adjustment mechanism will reimburse insurers 60% of the cost above the $1 million attachment point.10 The impact of this change can be substantial, particularly in smaller states where severe catastrophic claims could have highly negative impacts on the market as a whole. In Iowa, it has been reported an enrollee in the marketplace incurs $12 million in annual claims expense.11 This new provision will spread a substantial portion of costs for this individual across a broader national reinsurance pool for the individual and merged markets.12
The TRP under the ACA was successful at lowering costs, but it was only temporary and ended with the 2016 benefit year. And while 2014 and 2015 premium rates in the reformed individual market were lower than anticipated,13 the market has shown signs of pressure on affordability in recent years. In 2017, subsidy-benchmark rate increases have averaged approximately 25% nationwide.14 Moreover, the earliest indications for 2018 hint that the 2017 increases may not be a “one-time correction”15 (although regulatory and political instability may be a key contributing factor to a portion of the increases ).16
With double-digit premium increases and signs of declining enrollment in 2017, some states have taken steps in establishing a state-run reinsurance program for the primary purpose of lowering individual market costs. Further, in a March 13, 2017, letter to governors, HHS Secretary Thomas Price encouraged states to apply for Section 1332 waivers, particularly for proposals related to the introduction of high-risk pool or reinsurance programs.17 Secretary Price cited the Alaska Reinsurance Program (ARP) as an example of a state using a Section 1332 waiver to stabilize its individual health insurance market. The ARP was established in 2017 through a state appropriation. For 2018 and beyond, the state is seeking pass-through payments from the federal government as a result of the reinsurance program reducing federal expenditures on advanced premium tax credit subsidies.18 In its waiver application, the state cites the ARP as reducing individual market premium increases in 2017 from 42% to 7%.
While not submitting a 1332 waiver, Minnesota has also introduced a reinsurance program for the individual health insurance market (limited to 2018 and 2019) and provided premium rebates to households not qualifying for federal premium assistance.19 The state of Maine is also interested in reactivating the Maine Guaranteed Access Reinsurance Association under a 1332 waiver,20 while Oklahoma is also considering the submission of a 1332 waiver to implement a state-run reinsurance program.21
How should a state establishing a reinsurance program or HRP evaluate potential federal pass-through funding under a 1332 waiver? If a state introduced either one of these mechanisms under the 1332 waiver that would reduce the premium cost of individual market coverage, it would also reduce federal premium assistance costs for qualifying individuals. Section 1332 indicates that, rather than the federal government spending less as a result of the proposed program, the savings would be provided to the state to help fund the provisions. The amount of savings passed back to the state varies proportionally based on the total amount of advanced premium tax credit (APTC) dollars relative to total ACA premium, but represents a significant matching of funds by the federal government. In 2016, we estimate that over 50% of the individual market was receiving federal premium assistance on a national basis, including nearly 60% of those purchasing ACA-compliant coverage.25
The financial impacts to consumers from a reinsurance or HRP program will vary significantly by income as a result of the ACA’s premium subsidy structure. The example in Figure 1 shows net premium changes for three households receiving varying premium subsidy amounts. Each household purchases the same coverage, with the full premium amount (prior to subsidy application) decreasing from $500 to $450 per month as a result of the introduction of a reinsurance program.
Figure 1: Illustrative example
|Pre-reinsurance program implementation||Post-reinsurance program implementation|
|Sample household||Full premium||Premium subsidy||Net premium||Full premium||Premium subsidy||Net premium||Consumer premium savings||Federal pass- through amount|
Household A. Consumers qualifying for federal premium assistance with greater value than the premium reduction resulting from reinsurance program are unlikely to see a reduction in net premium cost (federal government retains 100% of premium savings).
Household B. For consumers qualifying for limited premium assistance, such as Household B, premium savings will be shared by the consumers and the federal government. Household B does not qualify for premium assistance under the reinsurance program, but experiences a $25 reduction in monthly net premiums (federal government retains 50% of premium savings in this example).
Household C. Higher-income consumers who did not qualify for premium assistance prior to the implementation of the reinsurance program will realize the full premium savings from the reinsurance program (consumer retains 100% of premium savings).
While the percentage of individual market participants purchasing coverage without federal premium assistance varies significantly by state, it is likely that a well-funded reinsurance or high-risk program would reduce premiums materially for nonsubsidized households and could provide a financial incentive to households that would otherwise be uninsured (for perceived unaffordability) to purchase insurance coverage. At the same time, those receiving premium subsidies would not be financially affected.
On May 4, 2017, the U.S. House of Representatives passed a second version of the AHCA26 that included several uses of both high-risk pools and reinsurance:
The details of how these programs will interact is not entirely clear yet. For example, if PSSF funds are used to establish a high-risk pool, how will it interact with the FIRSP? If a state used the default reinsurance program under the PSSF, would that program pay before FIRSP costs are paid, or would the FIRSP pay first? Will participation in the FIRSP be mandatory or will states be allowed to opt out of participation in the FIRSP entirely?
The outcome of the AHCA is yet to be determined and the Senate, as of this writing, has stated its intention to “start from scratch,” though it has indicated it may take good ideas from the AHCA. Moreover, Senate Democrats have signaled their desire to work with Republicans on a “repair” approach to the ACA as opposed to the current “repeal and replace.” Thus, the final structure and amounts of any federal dollars available for purposes of price relief in the individual markets are unknown. However, considerations for the use of reinsurance and high-risk pools, regardless of outcome, would include:
While there is significant uncertainty with federal healthcare reform legislation, reinsurance and HRP programs are likely to play a role in attempting to stabilize individual market enrollment and premiums. As each state market is unique in terms of size and cost characteristics, state policymakers should consider these features in evaluating the potential impact of these programs.
The table below compares three different “families” of programs that could be used to reduce costs in the individual market. Note that this is intended to be a high level summary and does not capture all of different program facets of the past or all of the possibilities for future implementations.
Figure 2: High level comparison of high-risk pool & reinsurance programs
|Traditional HRP||Invisible HRP||Reinsurance|
|Visibility||Visible to enrollee||Invisible to enrollee||Invisible to enrollee|
|Eligibility||Defined based on clinical condition or other medical underwriting criteria||Defined based on clinical condition or other medical underwriting criteria||Any member of the eligible risk pool that hits the attachment point|
|Insurance options||Distinct from standard risk pool enrollees||Same as other standard risk pool enrollees||Same as other standard risk pool enrollees|
|Premiums||May differ from standard risk pool||Same as other standard risk pool enrollees||Same as other standard risk pool enrollees|
|Ceding||Generally required and done at issue||Generally required and done at issue||No ceding per se. See Eligibility above.|
Reinsurance and high-risk pools: Past, present, and future role in the individual health insurance market
This paper examines the historical uses of high-risk pools (HRPs) prior to the implementation of the Patient Protection and Affordable Care Act (ACA), the role of reinsurance under the ACA, the proposed usage of reinsurance and HRPs under the American Health Care Act, and considerations for states examining the creation and deployment of these types of mechanisms.