Reinsurance in Washington State

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Abstract

This report estimates the benefits and costs of alternative forms of state-funded medical reinsurance in Washington using the Urban Institute's Reinsurance Model. A subsidy targeted at all small firms would substantially increase primary coverage but would be very expensive, as most benefit would flow to already insured people. Targeting the conventional small group market by excluding association health plans would reduce state cost per newly uninsured person and would bolster existing regulatory requirements for that sector;s insurers to use modified community rating. Any practical program also needs to identify secure funding and maintain cost consciousness among newly reinsured health plans.

Introduction

This report responds to legislative interest in reinsurance as one component of reforms to promote health insurance in the state of Washington. It provides information about health coverage and costs as of 2007, quantitative estimates of impacts from different interventions through publicly funded reinsurance and of costs to the state, and qualitative input on associated issues. This information is meant to inform deliberations on three key questions suggested by legislation: (i) is public reinsurance feasible and worth exploring further in Washington state, (ii) what costs and benefits are reasonably foreseeable, and (iii) what additional information is needed to make effects more predictable?

Given nationwide interest in reinsurance, the Reinsurance Institute project was created in 2006 by State Coverage Initiatives, a national program of the Robert Wood Johnson Foundation program. The Reinsurance Institute provided quantitative modeling and qualitative analytical support for states considering publicly funded reinsurance programs. They reduce uninsurance by reimbursing insurers for some share of large claims costs, which allows the subsidized insurers to lower premiums to enrollees.

Building upon Reinsurance Institute work, Washington contracted with the Reinsurance Institute team for additional assistance. First, the model was modified to incorporate state survey information to better approximate Washington population characteristics. Second, revised modeling addressed two important features of Washington health insurance: Association Health Plans (AHPs) sold to small firms but outside the small group market, and the Washington State Health Insurance Plan (WSHIP), the state’s high risk pool.

The model first creates a baseline of information on Washington’s current population, informed by the Washington State Population Survey. This descriptive information provides a backdrop against which reinsurance or other interventions may promote coverage. For example, among people under 65 years old, an estimated 15 percent of those with family incomes below the poverty line were uninsured, compared with just 9 percent of others. Only 39 percent of individuals reporting fair or poor health had employer-sponsored insurance, compared with 67 percent of healthier people. The less healthy are more likely to have public coverage, however, which reduces their overall uninsured rate to 11.4 percent, almost as low as the 10.3 percent of those in better health.

The baseline statistics also suggest how different the effects of reinsurance are likely to be under reinsurance alternatives that cover different corridors of medical claims expense. Even before formal modeling, it is clear that reinsuring only very high spending corridors cannot much reduce underlying claims costs borne by primary insurers and passed on in premiums because the lion’s share of total dollars occur in the lower spending corridors. For example, over 67 percent of non-group enrollees had less than $1,000 of annual health spending (2007$). (Non-group is also called individual coverage.) In contrast, slightly fewer than half of small-firm enrollees (48 percent). Fully 62 percent of annual expenditures per person insured through a small firm occur within the low-end corridor of $0 to $10,000.

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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.

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