Reinsurance in State Health Reform

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Abstract

The Reinsurance Institute provided quantitative modeling and qualitative analysis to states as they explored reinsurance as an element of health reform. The project estimated the impacts of reinsurance, including changes in premiums, employer offer and enrollee take-up of coverage, numbers of people insured, and costs to the state. Small numbers of high spenders account for a large share of health spending, but most spending occurs in lower corridors of expense. Medical spending varies widely by age and health status, creating pressure for risk segmentation. Lastly, defining the eligible population determined whether reinsurance would cover new enrollees or solidify current coverage.

Introduction

Reinsurance provides insurance coverage for insurance carriers. Many health plans purchase private reinsurance to protect themselves from unexpectedly large volumes of high-cost claims and for other business reasons. In 2001, New York began Healthy NY, a program of state-funded reinsurance, which has grown to cover almost 150,000 people. Healthy NY sought to attract new enrollees by having health maintenance organizations (HMOs) offer a new, streamlined and subsidized product for previously uninsured, low-income workers or their workplace groups. The state subsidy consists of reinsurance reimbursement to carriers of 90 percent of medical benefits costs in the “corridor” of $5,000–$70,000 in spending per person per year. The Reinsurance Institute was a project that provided quantitative modeling and qualitative analytical support for states with strong interest in using reinsurance as an element of health coverage reform. A rationale was that better advance information could help states avoid some of the trial-and-error determination of impacts illustrated by Healthy NY’s experience. The project worked closely with state officials from Rhode Island, Washington, and Wisconsin to thoroughly understand state circumstances, to build a baseline dataset not previously available to simulate premiums, and to estimate the impacts of reinsurance. Such impacts included changes in premiums, in employer offer and enrollee take-up of coverage, in numbers of people insured, and in costs to the state of reimbursing primary carriers for claims under the state-specified terms of reinsurance. Throughout the project, the team consulted with states on related issues of program design within the prevailing market and regulatory context.

Because no existing data sources linked all state residents and their employers or contained socio-demographic information and medical spending by resident, employer characteristics, prevailing premiums in the state, and generally applicable state insurance rate-making rules, data from existing national and state sources were combined in such a way as to create a database for each state that contained these elements and reflected known state characteristics. Estimated premiums were benchmarked to prevailing state rates. Policy makers expressed considerable interest in baseline information, even before formal modeling, as it illustrated two key points. First, small numbers of very high spenders account for a large share of health spending, but most spending nonetheless occurs in lower corridors of claims expense. As one example, almost 65 percent of Wisconsin’s insured spending was estimated to occur under $10,000 per year per person. Second, medical spending varies widely across individuals and by age and health status. This systematic variation creates pressure for risk segmentation across health insurance pools.

The model then estimated how much insurance purchases were likely to change if reinsurance reduced insurers’ claims costs and insurers’ reduced premiums to a commensurate extent. The model simulated the extent to which enrollees would take up offers of insurance, from employment groups or in the non-group market, as well as the extent to which employers would add or drop offers of insurance. Modeling of individual and employer responses to premium changes was based on elasticities from economic literature.

In specifying configurations of reinsurance to be modeled, all participating states sought not only to expand health insurance coverage, but also to support existing coverage. A surprise was that none ultimately showed much interest in adapting Healthy NY’s approach of targeting only previously uninsured people. Participants also wanted to focus help on small firms or non-group buyers of coverage. Many configurations of reinsurance were modeled—that is, different specifications of eligible populations, corridors, and percentages of costs in the corridor to be reimbursed by the state rather than retained by the carrier. Washington and Wisconsin both wanted to model the impact of state general funding, as in Healthy NY. Rhode Island wanted to use insurer assessments and reinsurance payouts to shift funds across carriers based on patterns of medical spending incurred.

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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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