State Reinsurance Programs to Expand Coverage

1. State Reinsurance Programsto Expand Coverage Deborah Chollet Senior Fellow, Mathematica Policy Research The Robert Wood Johnson Foundation’s State Coverage Initiatives Program September 19,2005

2. What is Reinsurance? • Insurance for insurers • Targets the small number of insured lives that account for most health plan costs • Captures insurers’ highest costs and pools them more broadly

3. The Purpose of Reinsurance • Conventional reinsurance • Stabilize premiums by stabilizing claims experience • Reduce premiums • Reduce small insurers’ premium margin for risk aversion • Encourage competition • Magnitude of effect? • Subsidized reinsurance • Same purposes as conventional insurance • PLUS targeted subsidy to reduce consumer premiums

4. How Does a Reinsurance Program Work? • Insurer pays • A premium to cede risk to the reinsurance program • Some level of initial claims (deductible), and percent of reinsured claims (coinsurance) • Reinsurance program pays • All claims above the coinsurance threshold (minus coinsurance); reinsurance may be capped. • All health insurers and/or the State participate in paying scheduled or unscheduled net losses.

5. New Mexico Health Insurance Alliance: Small groups and self-employed workers Idaho Small Employer Health Program: Small groups and self-employed workers Idaho Individual High Risk Reinsurance Pool: uninsurable individuals Reinsurance premium covers ceded risk and the program’s administrative cost Program may assess all “participating” insurers to cover unexpected losses net of premium revenues Insurers may deduct assessment from taxable income Conventional Reinsurance Programs

6. Arizona Health Care Group: Small groups and self-employed workers Healthy New York: Low-wage small groups and individual workers No insurer premiums for reinsurance Primary insurance premiums reflect reinsurance subsidy State appropriates funds to cover reinsurance costs Subsidized Reinsurance Programs

7. Advantages • Reinsurance can : • Be tailored to different employment and regulatory environments. • Work with the market, directly with all insurers or with contracting insurers. • Make coverage accessible to micro-groups, groups of one, and individuals.

8. Challenges • A reinsurance pool that tries to do what the market does not (e.g., guaranteed issue to self-employed, compressed or community rates) can experience adverse selection. If so, it will be more expensive and/or less successful. • Subsidized reinsurance can crowd out conventional insurance. • To manage both problems: • Small-group reinsurance pools typically require high participation within groups and cover only full-time permanent workers. • Targeted subsidies help.

9. Successes • Evidence that reinsurance CAN do what the market has not: • NM HIA covers more than 4,000 lives; 65% are small groups, 35% sole proprietors. • Arizona HCG covers more than 11,000 lives, including 3900 small groups. • Healthy NY covers 77,000 lives; 58% are low-income individuals and 19% are sole proprietors. • Idaho’s Individual High-Risk Reinsurance Pool covers 1,400 individuals