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State-Run Reinsurance Programs Reduce ACA Premiums by 16.9% on Average

Summary

Continuing analysis from Avalere finds that state reinsurance programs reduce individual market premiums by 16.9% on average in their first year, relative to estimated premiums without reinsurance.

These results build on previous Avalere analysis released on March 13, 2019.

Reinsurance programs provide a combination of state and federal funds to health insurers to help offset potential losses from covering individuals who are sicker than predicted. Many states are pursuing reinsurance programs to mitigate insurers’ risk and stabilize individual markets, as well as help patients avoid unforeseen premium increases, while reducing the number of uninsured.

“States continue to look to reinsurance programs as a cost-effective way to stabilize their individual markets,” says Chris Sloan, associate principal at Avalere. “If they are able to secure a source of funding, state-based reinsurance programs can reduce premiums significantly in their first year, particularly in states with higher individual market enrollment.”

To date, 12 states (AK, CO, DE, MD, ME, MN, MT, ND, NJ, OR, RI, and WI) have created their own reinsurance programs using Section 1332 waiver authority. These states receive federal funding for their reinsurance programs based on the amount the federal government would have spent on advanced premium tax credits (APTCs) to eligible individuals if the programs were not in place—otherwise known as pass-through funding.

To further understand the impact of these programs, Avalere analyzed existing and actuarially estimated data from the 12 states with approved reinsurance programs to estimate changes in individual market premiums, federal pass-through funding levels, and costs to the state.

Avalere’s analysis finds that among the 12 states with state reinsurance programs, premiums were 16.9% lower, on average, in the first year of enactment compared to what they would have been without the reinsurance program (Table 1). The premium reductions ranged from -6% to -43.4%.

In addition, Avalere’s analysis estimates that, during the first year of enactment, reinsurance programs led to lower federal spending on APTCs of nearly $1 billion (Table 1) compared to what the federal government would have been spent without a reinsurance program. The federal government must “pass through” a portion of these savings to the states to help fund their reinsurance programs. In total, the federal government has contributed nearly twice as much ($1.2 billion) to state reinsurance programs as states ($643.4 million) in the first year of enactment.

Table 1: Estimated Individual Market Impact of State Reinsurance Programs in First Year of Enactment
State
(Date of Enactment)
Percent Change in Average Individual Market Premiums Federal Pass-Through Funding (millions) State Reinsurance Funding (millions) Percent of Program Cost Born by State
AK (2017) -34.7% $58.5M $1.5M 2.5%
CO (2020) -16% $162.8M $87M 34.8%
DE (2020) -13.7% $20M $6.9M 25.7%
MD (2019) -43.4% $373.4M $88.6M 19.2%
ME (2019) -9.4% $65.3M $27.7M 29.8%
MN (2018)* -20% $131M $140M 51.7%
MT (2020) -8% $22.1M $12.4M 35.9%
ND (2020) -19.8% $26.1M $21.2M 44.8%
NJ (2019) -15.1% $180.2M $143.5M 44.3%
OR (2018) -6% $54.5M $35.5M 39.4%
RI (2020) -5.9% $6.4M $8.3M 56.4%
WI (2019) -10.6% $127.7M $72.3M 36.1%
State Average -16.9% $102.3M $53.7M 35.1%
Total $1.2B $644.9M

*In 2018, MN estimated to have spent less than $10M (down from the projected $140M) on state reinsurance after accounting for federal pass-through funding

Avalere’s analysis also finds that states propose to bear an average of 35.1% (ranging from 2.5% to 56.4%) of the total annual costs to run their reinsurance programs for an average of $53.7M. These additional costs may hinder adoption of reinsurance programs by states with limited budget flexibility. However, states could bear a lower proportion of the costs than projected, as MN reported for 2018.

Methodology

To conduct the analysis, Avalere analyzed individual market rate filings in states from 2017 to 2019 and state ACA Section 1332 waiver application reports to estimate changes in individual market premiums, spending by the federal government on APTCs and subsequent pass-through funding associated with savings from reinsurance programs, and costs to the state as a percentage of total program spending.

For states with existing reinsurance program data (AK, MN, OR), Avalere compared baseline premium projected growth to actual premium rate filings in the year of enactment to determine the percent reduction in premium growth due to reinsurance. For states with approved ACA Section 1332 waiver applications to establish reinsurance programs (CO, MD, ME, MT, ND, NJ, OR, RI, WI), Avalere compared state 2019 or 2020 projected premium growth to projected 2019 or 2020 premium growth under the waiver using approved 1332 waiver application reports.

Avalere used total federal pass-through funding through savings associated with reduction in APTCs from the Center for Consumer Information & Insurance Oversight Section 1332: State Innovation Waivers Resource Center. Avalere then estimated the percent of program costs born by the state as the portion of remaining funds after pass-through funding, divided by total estimated reinsurance program costs.

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