Accepted for Publication: June 11, 2021.
Published: August 13, 2021. doi:10.1001/jamahealthforum.2021.1992
Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2021 Polyakova M et al. JAMA Health Forum.
Corresponding Author: Maria Polyakova, PhD, School of Medicine, Stanford University, 615 Crothers Way, Stanford, CA 94305 (ude.drofnats@kaylopm).
Author Contributions: Drs Polyakova and Bundorf had full access to all the data in the study and take responsibility for the integrity of the data and the accuracy of the data analysis.
Concept and design: Polyakova, Bundorf.
Acquisition, analysis, or interpretation of data: All authors.
Drafting of the manuscript: Polyakova, Bhatia.
Critical revision of the manuscript for important intellectual content: Polyakova, Bundorf.
Statistical analysis: Polyakova, Bhatia.
Obtained funding: Polyakova.
Administrative, technical, or material support: Polyakova, Bundorf.
Supervision: Polyakova, Bundorf.
Conflict of Interest Disclosures: None reported.
Funding/Support: This work was funded by the National Institute for Health Care Management (73782).
Role of the Funder/Sponsor: The National Institute for Health Care Management had no role in the design and conduct of the study; collection, management, analysis, and interpretation of the data; preparation, review, or approval of the manuscript; and decision to submit the manuscript for publication.
Additional Contributions: We thank the National Bureau of Economic Research for providing data storage and computing support, as well as access to the MarketScan claims database. No compensation was provided for any contributions.
Received 2021 Apr 21; Accepted 2021 Jun 11. Copyright 2021 Polyakova M et al. JAMA Health Forum. This is an open access article distributed under the terms of the CC-BY License.This analysis compares the design of section 1332 reinsurance policies across states based on their potential for reducing insurer risk exposure and likely level of government spending
States have received approval from the Centers for Medicare & Medicaid Services to operate publicly financed reinsurance programs through section 1332 state innovation waivers. 1 Reinsurance—insurance for insurers—protects insurers from the risk of unusually high enrollee spending. 2 Publicly financed risk protection for insurers can both promote insurer participation in markets and reduce their incentives to avoid high-risk enrollees. 3 In this study, we compare the design of section 1332 reinsurance policies across states based on their potential for reducing insurer risk exposure and likely level of government spending.
We used an algorithm (eAppendix in the Supplement) to simulate 12 operational state-based reinsurance programs, 3 federal reinsurance policies adopted as part of the Affordable Care Act, and 2 benchmark commercial stop-loss policies for a standardized population ( Table 1 ). 4 We examined 2 metrics for each program: (1) total government spending on reinsurance claims and average insurer liability (the sum of government spending and insurer liability is a constant), and (2) insurer risk exposure, measured by the coefficient of variation—the standard deviation divided by the mean of per-enrollee insurer liability. Because this study did not meet the definition of human subjects research as defined by the Common Rule (45 CFR §46), it was not reviewed by an institutional review board.
| Reinsurance program | Reinsurance parameters | Approval date | Implementation year |
|---|---|---|---|
| Federal reinsurance policy | |||
| 2014 | 100% Of claims $45 000-$250 000 | NA | 2014 |
| 2015 | 55.1% Of claims $45 000-$250 000 | NA | 2015 |
| 2016 | 52.9% Of claims $90 000-$250 000 | NA | 2016 |
| Alaska | 100% Of paid claims of individuals with 1 of 33 conditions | 7/7/17 | 2018 |
| Colorado | Either 45%, 50%, or 85% of claims $30 000-$400 000, depending on the rating area | 7/31/19 | 2020 |
| Delaware | 75% Of claims $65 000-$215 000 | 8/20/19 | 2020 |
| Maine | 90% Of claims between $47 000-$77 000 and 100% afterward; insurers must cede policies | 7/30/18 | 2019 |
| Maryland | 80% Of claims $20 000-$250 000 | 8/22/18 | 2019 |
| Minnesota | 80% Of claims $50 000-$250 000 | 9/22/17 | 2018 |
| Montana | 60% Of claims $40 000-$101 750 | 8/16/19 | 2020 |
| New Jersey | 60% Of claims $40 000-$215 000 | 8/16/18 | 2019 |
| North Dakota | 75% Of claims $100 000-$1 000 000 | 7/31/19 | 2020 |
| Oregon | 50% Of claims $95 000-$1 000 000 | 10/19/17 | 2018 |
| Rhode Island | 50% Of claims $40 000-$97 000 | 8/26/19 | 2020 |
| Wisconsin | 50% Of claims $50 000-$250 000 | 7/29/18 | 2019 |
| Commercial individual stop-loss | 100% Of claims ≥$250 000 | NA | NA |
Abbreviation: NA, not applicable.
a The Table records reinsurance programs that were simulated in the article. Reinsurance coverage parameters, approval dates, and implementation dates are listed elsewhere. 1
Each program was associated with greater government spending, lower insurer liability, and greater insurer risk protection compared with no reinsurance ( Figure ). Large differences existed, however, across programs. State and federal reinsurance policies were far from the frontier, defined as a policy that achieves the maximum simulated risk protection for insurers for a given level of public funding. The frontier policy is full insurance above an attachment point.
The Figure plots annual government spending against coefficient of variation in insurer liability for each of the simulated reinsurance policies. The lines trace the risk protection that the government could provide for each level of annual public spending if public reinsurance contracts followed the commercial structure with either 80% (dark blue) or 100% (orange) coinsurance rates. Axes are reversed to represent the trade-offs that policy makers face. The association between the mean insurer liability and government spending is mechanical in the simulation because the sum of the 2 is fixed in each simulation. As the government spends more, insurer liability falls. Fed indicates federal reinsurance policy; the Fed and states’ positions on the graph and the Colorado (CO) percentages are detailed in the Table .
While program parameters differed across states, they resulted in remarkably similar—and relatively low—simulated insurer risk protection ( Figure ). The coefficient of variation fell below 4.0 for only 4 states. In most states, insurer risk protection could have been greater for the same level of government spending. For example, Delaware and North Dakota’s programs were associated with similar levels of government spending, yet North Dakota’s was associated with greater insurer risk protection. Conversely, Rhode Island and Maryland’s programs were associated with similar insurer risk protection, yet Maryland’s was associated with substantially higher government spending.
Results of this analysis showed that states could modify their reinsurance programs to maintain their level of spending and increase insurer risk protection, strengthening incentives for insurer entry and reducing incentives to avoid high risks. However, greater insurer risk protection has possible downsides. States may not be better positioned to bear catastrophic risk than private reinsurers and may be reluctant to crowd out private reinsurance, a market that has recently been revived by the elimination of the lifetime cap on covered expenditures. More comprehensive reinsurance could also increase spending by reducing incentives for insurers to manage care for the sickest patients.
Public spending on reinsurance can also indirectly subsidize insurance for consumers. Indeed, lowering premiums, particularly for higher-income exchange enrollees who do not receive income-based subsidies, was one of the explicit objectives of reinsurance programs. However, the American Rescue Plan has extended direct premium subsidies to more families, reducing the size of this population by more than 50%. 5 The relative costs and benefits of spending public dollars through direct premium subsidies and publicly funded reinsurance are an open question. A general concern in both cases is whether government-financed payments ultimately reach consumers. Limited insurer competition may lead to limited pass-through of any subsidies to consumers. 6
A limitation of this study is that it does not provide empirical evidence on the effects of reinsurance programs. Instead, we provide insights into the trade-offs facing policy makers when considering whether and how to provide publicly financed reinsurance.
eAppendix. Supplemental materials.
