The Urban Institute's Microsimulation Model for Reinsurance

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Abstract

The Reinsurance Institute simulated the effects of reinsurance on individual and employer behavior, observing state-specific characteristics. We constructed a baseline database for each state by reweighting and combining multiple data sources to create a profile of individual-level demographics and health expenditures, allowing for the computation of individual-level premiums. We grouped health insurance units together into risk pools consistent with state market rules to calculate the change a reinsurance subsidy would have on the premium levels faced by individuals and employers. These price changes drove simulated changes in premium and coverage levels, offer and take-up rates, and state costs.

Introduction

This report describes the Urban Institute’s microsimulation model of reinsurance, which was built to simulate the impacts of various state-specific ways of using state-funded reinsurance to subsidize primary insurance premiums. The type of reinsurance modeled reimburses primary carriers at the end of a year for the insured health care spending that falls within a specified “corridor” of aggregate annual individual medical claims expense—e.g., reinsurance of 90 percent of expenses between $30,000 and $90,000 per person per year.

This work was done as part of the Reinsurance Institute, a project of the Robert Wood Johnson Foundation’s State Coverage Initiatives program, administered by AcademyHealth, and the Urban Institute, that provided technical assistance to competitively selected states interested in using reinsurance as an aspect of health financing reform. A companion report describes the overall project, including the qualitative elements of our work that complemented the quantitative modeling described here.1 Results of the modeling are reported in deliverables to the participating states.2

Four Steps in Modeling the Effects of Reinsurance

Predicting the effects of reinsurance reform options within our three states of Rhode Island, Washington, and Wisconsin involved four main tasks:

Creating a baseline database that reflects each state’s distribution of health insurance coverage, demographic characteristics, individual health expenditures, employer characteristics, and health insurance premiums paid by employer group and non-group purchasers of coverage;

Modeling the reinsurance policy and estimating the changes in premiums that would result from each particular reinsurance reform option considered;

Estimating the effects of those premium changes on employers’ health insurance offer behavior and on individuals’ take-up of group and non-group coverage; and

Computing expected changes in health care expenditures and costs to the state for each reinsurance option simulated, as well as summarizing the changes in health insurance coverage expected to result for different populations of interest.

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Disclaimer: The nonpartisan Urban Institute publishes studies, reports, and books on timely topics worthy of public consideration. The views expressed are those of the authors and should not be attributed to the Urban Institute, its trustees, or its funders.