AcademyHealth's Reinsurance Institute Works with Three States - Rhode Island, Washington and Wisconsin - To Assess Reinsurance Plans
In 2006, AcademyHealth, working with the Urban Institute under contract, established the Reinsurance Institute to provide technical assistance to states interested in using reinsurance to make health insurance more affordable and expand coverage. Reinsurance is the practice by which an insurer pays the reinsurer a premium in return for the reinsurer paying all or part of the liability under the insurance policy or policies of the original insurer. Publicly funded reinsurance often targets small businesses and individuals who often find it difficult to secure insurance because they are not part of a large pool of enrollees.
The institute developed a microsimulation model to predict the effects of reinsurance on health insurance enrollment, coverage and state costs. It worked with three statesRhode Island, Washington and Wisconsinto assess various reinsurance plans they were considering.
- Reinsurance that covers only very high health care expenses cannot significantly reduce premiums charged to enrollees.
- Reinsurance subsidies paid with state funds would expand coverage among people who were previously uninsured and reduce premiums by about one-third.
- Most of the impact occurred because more employers offered coverage, not because more employees enrolled in health insurance that had previously been offered at a higher cost.
- Reinsurance often disproportionately helped higher-income people, who found the lower rates more attractive. Lower-income families still had trouble paying for insurance.
- Reinsurance did more to solidify existing coverageby keeping small employers from dropping coverage, for examplethan to expand the number of people covered.
- Reinsurance can help reduce risk segmentationthe tendency to cluster less healthy people in very expensive insurance plansbut by itself cannot ensure that those people have access to insurance.
The Robert Wood Johnson Foundation (RWJF) provided a grant of $696,550 from August 2006 through December 2007 for the project.
In 2004, 45.8 million Americans lacked health insurance, according to a report from the Office of the Assistant Secretary for Planning and Evaluation at the U.S. Department of Health and Human Services. While uninsured people were more likely to have low incomes, some 27 percent had annual incomes at or greater than 300 percent of the federal poverty level.
Uninsured people are more likely to work in small firms than in large firms. Only 52 percent of firms with fewer than 10 workers offered insurance, while 99 percent of firms with more than 200 employees did so. Insurers typically charge higher premiums to small firms, because they cannot spread the risk among a large number of employees.
The Reinsurance Model
One potential strategy for reducing health insurance premiums and encouraging more employers and their employees to sign up for coverage is reinsurance.
Reinsurance is insurance for insurers. Under reinsurance, the primary insurer transfers some of the risk of paid benefits to another entity, called the reinsurer. The insurer pays a premium to the reinsurer, which in turn pays all or part of the liability under the insurance policy or policies of the original insurer. Reinsurance is invisible to insured people because it is an arrangement between two insurers.
There is usually a band, called a corridor, within which reinsurance applies. For example, in one model, the primary insurer pays the first $25,000 of health care costs per person per year and also pays costs over $100,000 per year. The reinsurer covers all or a percentage (such as 90 percent) of costs incurred in the corridor between $25,000 and $100,000. The primary insurer pays the uncovered percentage of costs and costs outside the corridor.
While reinsurance does not lower the cost of health care, it reduces the risk of unexpectedly high costs, and thus induces primary insurers to reduce the prices they charge. In effect, reinsurers are reducing overall risk by spreading that risk over the pools of multiple primary insurers.
Reinsurance is common practice among private insurers, and there are several reasons for public agencies to consider using public funds for reinsurance, including:
- Encouraging increased enrollment by reducing premiums so that insurance is more affordable.
- Reducing adverse selection, in which only people with high health care costs are willing to buy insurance. Lower premiums will induce healthier people to buy insurance, which will lower the average cost of care per insured, and thus reduce premiums.
- Reducing insurers' incentive to "cream"try to cover only people unlikely to need costly health care services. Because the risk of high costs is shared, reinsurance encourages primary insurers to cover less healthy individuals and groups.
- Encouraging the expansion of insurance by using public funds to assume high and unfamiliar risks until private insurers have some experience with these new markets.
Healthy New York
One of the oldest public reinsurance programs is Healthy NY, which covered more than 150,000 previously uninsured state residentsboth individuals and employees of small firmsat the end of 2008. The insurance, offered through private health maintenance organizations, reduces premiums by:
- Requiring fewer benefits than are mandated for private insurance plans in the state.
- Pooling individual and small-employer coverage.
- Using public funds to purchase reinsurance that covers up to 90 percent of the corridor between $5,000 and $75,000 (per person, per year).
In July 2006, the average Healthy NY premium was roughly half of what small employers were paying in the private market and about 70 percent less than what privately insured individuals were charged. (Not all of the reduction in premiums can be attributed to the reinsurance.)
Americans' lack of meaningful access to affordable and stable health care coverage has been a central concern of the Foundation since its inception 35 years ago. We are working in several areas to accomplish our goal of ensuring that everyone in America has affordable and stable health care coverage.
Increased coverage can be achieved by promoting expansions of coverage in the public and private sectors. This includes encouraging state and federal expansion efforts and encouraging employers and health plans to expand opportunities for private insurance.
We are particularly interested in commissioning, conducting and disseminating innovative research and policy analysis that will reveal the fundamental barriers to achieving affordable and stable health care coverage for all, including the rapidly rising cost of care and the structural features of private health insurance markets. We are now focusing more specifically on states, and are supporting research and evaluation initiatives that will identify the effective coverage strategies that will inform state and federal action.
RWJF has a history of supporting state-level initiatives to increase the availability of affordable health care, including the following examples:
- In 1991, RWJF established the State Initiatives in Health Care Reform program. This program helps states test strategies that expand coverage and foster cost control. The RWJF Board of Trustees reauthorized the program in 1993 and again in 1996.
- As an outgrowth of State Initiatives in Health Care Reform, in 1999 RWJF established the State Coverage Initiatives national program. This program provides states with technical assistance and financial support to help them examine coverage expansion strategies and implement expansion programs. The Board of Trustees expanded this program in 2000, 2002, 2006 and 2007.
AcademyHealth launched the Reinsurance Institute in August 2006 to:
- Create a reinsurance simulation model that could be adapted to individual states.
- Help states design public reinsurance programs as a way to expand coverage.
- Build a network of states able to share their knowledge about reinsurance strategies.
AcademyHealth is the national program office for RWJF's State Coverage Initiatives program. Inquiries about reinsurance from state officials working with the State Coverage Initiatives program prompted AcademyHealth to propose the institute.
To launch the institute, AcademyHealth invited health and insurance officials from all states to submit a two-page concept paper describing their vision for reinsurance and ways the Reinsurance Institute might contribute to that vision. Officials from 16 states and the District of Columbia replied. AcademyHealth invited officials from those states to participate in a kickoff meeting in Albany, N.Y., on September 12, 2006.
The initial meeting featured presentations from New York state policy-makers and project staff about reinsurance in general and Healthy NY in particular. AcademyHealth staff also described the kinds of assistance that would be available through the Reinsurance Institute. More details of this meeting, including presentation slides, are available online.
Following the kickoff meeting, AcademyHealth asked interested states to submit more detailed proposals describing:
- The political momentum for reinsurance in their state.
- The feasibility of implementing a reinsurance program modeled after Healthy NY.
- The level of new resources that might be allocated for a reinsurance program.
- The timetable for securing new resources and implementing a program.
- How they would use a $25,000 grant from the Reinsurance Institute to support state activities.
Some 10 states submitted applications for continued technical assistance. AcademyHealth chose three to receive grants and work with the institute:
- Rhode Island
The selected states had different health policy environments and different priorities for state-funded reinsurance programs. See the Appendix for details about the project's work in the participating states.
A key activity of the institute was the development of a microsimulation model that could predict the effects of a reinsurance program on premiums and enrollment. AcademyHealth contracted with the Urban Institute, a Washington policy institute with experience in health care coverage and modeling techniques, to design the reinsurance simulation model and apply it to real-life situations. The Urban Institute subcontracted with:
- Actuarial Research Corporation, a company with offices in Annandale, Va., and Columbia, Md., to provide actuarial and statistical support.
- Pool Administrators, Inc., a Wethersfield, Conn., company to provide guidance on insurance markets, regulation and risk-sharing pools.
- Katherine Swartz, Ph.D., a Harvard professor and an expert on the startup and subsequent operations of Healthy NY and author of a book on reinsurance-based reform.
Researchers at the Urban Institute assembled detailed datasets on the insurance market in the three participating states. The model allowed state officials to specify the population that would be eligible for coverage under a reinsurance program and which expenditures reinsurance would cover. The model then estimated:
- How much premiums would be lowered under a given reinsurance scheme.
- How many additional employers would offer coverage at the new prices.
- How many people would enroll at the new prices.
- How new enrollees would change the composition and behavior of the insured poolincluding initially increasing costs as more people become insured.
- The number of people who would ultimately enroll and the accompanying costs in state subsidies.
See the Appendix for details on the analyses conducted for each state.
AcademyHealth invited officials from the 16 states and the District of Columbia who attended the kickoff meeting to a final meeting, held in Washington on July 19, 2007. Members of the project team described their work, and officials from the three states that were modeled discussed how the project evolved in their states. Slides of these presentations are available online.
In May 2008, AcademyHealth released two reports written by project researchers at the Urban Institute:
- Reinsurance in State Health Reform, available online, discusses the work of the Reinsurance Institute.
- The Urban Institute's Microsimulation Model for Reinsurance: Model Construction and State-Specific Application, available online, discusses the development and use of the microsimulation model.
See the Bibliography for more information.
The project reported the following findings in Reinsurance in State Health Reform:
- Reinsurance that covers only very high health care expenses cannot significantly reduce premiums charged to enrollees. Reinsurance that only covers catastrophic claims will not reduce costs significantly for primary insurers. To achieve a large reduction in premiums, states must structure their program so that reinsurance begins at a much lower threshold.
- Reinsurance subsidies paid with state funds would expand coverage among people who were previously uninsured and reduce premiums by about one-third. The amount of state funding contributed was much more important than whether corridors were set low or high. To have a large impact, states must provide a generous subsidy.
- Most of the impact occurred because more employers offered coverage, not because more employees enrolled in health insurance that had previously been offered at a higher cost.
- Reinsurance often disproportionately helped higher-income people, who found the lower rates more attractive. Lower-income people often could not afford even the reduced premiums that reinsurance made possible.
- Reinsurance did more to solidify existing coverage than to expand the number of people covered. In particular:
- Reinsurance made it less likely that small employers would drop coverage.
- It allowed some people to switch from expensive individual coverage to group coverage newly offered by their employers.
- Reinsurance can help reduce risk segmentationthe tendency to cluster less healthy people in very expensive insurance plans. However, reinsurance by itself will not make coverage available to high-risk people unless state regulation requires that they be offered coverage and pools losses to make premiums affordable.
For information on the findings of analyses for participating states, see the Appendix.
Reinsurance in State Health Reform cautioned that results of the simulations should be read with the following limitations in mind:
- The simulations do not yield specific budget estimates, as actual program spending would depend on factors not specified at the time of the simulation.
- The model does not simulate insurance company behavior. It estimates effects as though competing insurers act the same and assumes that all coverage follows state rules.
The report, Reinsurance in State Health Reform, offered the following conclusions:
- Reinsurance is not a cost-effective way to increase coverage, unless it is targeted only to previously uninsured people. To assess the overall costs and benefits of reinsurance, one must take into account other possible goals, such as solidifying existing coverage and reducing risk segmentation.
- In addition to reinsurance, state officials should also consider other approaches to improving heath insurance markets. These include subsidies to increase coverage and regulations to reduce risk segmentation. During the project, state officials frequently wanted to consider broader reform efforts. (See After the Grant for more on this.)
The project generated the following lessons:
- Expect to spend substantial time understanding what data policy-makers need and want, the status of insurance markets in each state, and the state's objectives and constraints. The project team was surprised by how much effort was required to understand state circumstances and objectives and how many iterations it took to build a state-specific dataset that accurately modeled the local insurance market. (Project Director)
- Bring officials from different states together to share perspectives and experiences. Even though it costs more to bring people together, state officials benefit from the opportunity to meet personally with colleagues. They learn more from discussing findings and results in person than from reading about them in reports. (RWJF Program Officer)
AFTER THE GRANT
As noted above, state officials participating in the Reinsurance Institute expressed interest in health care reform approaches other than reinsurance. To meet this need, in August 2007 RWJF provided a grant (ID# 062825) to AcademyHealth to establish a new Coverage Institute. The institute provides states with information, direct consultation with experts, and the opportunity to network with other states on issues including but not limited to reinsurance. As of August 2008, nine states had received grants from the institute to develop new program options, and two had received microsimulation grants.
GRANT DETAILS & CONTACT INFORMATION
Creating a reinsurance institute to bring together state officials who are working to expand coverage to the uninsured
AcademyHealth (Washington, DC)
Dates: August 2006 to December 2007
Enrique Martinez-Vidal, M.P.P.
Reinsurance Institute Participating States
Legislation enacted in 2006 created:
- Health Pact Rhode Island, a health insurance program for small businesses and individuals.
- A reinsurance program for low-income workers in firms with fewer than 50 employees.
- A reinsurance program for individuals at high risk of using costly health care services.
This legislation did not include a commitment of new funds for reinsurance, and state officials were not interested in replicating Healthy NY. Instead, they wanted to simulate the impacts of combining the state's individual and small-group markets. Reinsurance would be funded with an assessment on these markets, with initial revenues of $24.4 million annually.
The Reinsurance Institute team simulated two reinsurance models that kept within the $24.4-million target, assuming that reinsurance covered 90 percent of costs within the designated corridor:
- A corridor from $5,000 to $6,427. This model would result in premium increases for enrollees (both individual and small group) in good health and premium decreases for purchasers of non-group coverage who were in poor health.
- A corridor from $20,000 to $28,076. This model would raise premiums for those in the individual market and lower them for small groups.
The limited funding for reinsurance meant that the expected premium reductions were also small. In the lower corridor, for example, the cost savings for individuals in poor health were only 2.5 percent.
Washington State had a long-standing interest in reinsurance. The Office of the Insurance Commissioner developed a reinsurance proposal in 2005, but it was never enacted. A commission subsequently recommended replacing the state's high-risk pool with a form of reinsurance. And reinsurance was part of an insurance reform plan adopted in 2007.
Washington state officials wanted the Reinsurance Institute to help them create a program aimed at making insurance affordable to small employers and individuals, generally using Healthy NY as a model. The institute team simulated 12 configurations of reinsurance covering both the small-group and individual markets.
The broadest of these simulationscovering the entire small-group and individual marketwould have paid 90 percent of medical costs between $10,000 and $90,000 annually. Its impacts:
- The number of uninsured state residents would decline by 15 percent.
- Premiums would drop 30 percent or more in these markets.
- The estimated cost to the state would be $880 million.
Other simulations, however, showed that by excluding association health plans and the state's high-risk pool, the state could achieve almost the same reduction in uninsurance at much lower cost. The primary reason for the savings was that the state would no longer be subsidizing the relatively healthy members of the association plans.
In January 2006, Governor Jim Doyle proposed a Healthy Wisconsin program initially modeled after Healthy NY. A new state health council later recommended focusing on keeping people insured by making premiums more affordable. In January 2007 the council recommended targeting reinsurance to firms with 2 to 10 employees.
Wisconsin officials asked for simulations targeted at very small employers, assuming a reinsurance pool of $100 million. The institute ran three simulations:
- Narrow, covering 90 percent of costs between $5,000 and $17,500.
- Broad, covering 90 percent of costs between $15,000 and $75,000. Catastrophic, covering 80 percent of costs over $14,000.
All three approaches would have increased coverage by about 6,000. This was a sizeable portion of the 49,000 uninsured workers and their dependents at very small firms, but only about 1 percent of the total number of uninsured people in the state.
Wisconsin officials were also interested in the exploring a broader effort to protect all state residents against catastrophic health care costs. (Governor Doyle had sought to ensure that "no family should have to go bankrupt if they get sick.") The project team could not formally model such a program, but it did estimate that insured medical expenditures above $100,000 per individual would amount to some $492 million in 2007.
(Current as of date of this report; as provided by grantee organization; not verified by RWJF; items not available from RWJF.)
Bovbjerg RR, Bowen Garrett A, Clemans-Cope L and Masi P. Reinsurance in State Health Reform. Washington: AcademyHealth, 2008. Available online.
Bowen Garrett A, Clemans-Cope L, Masi P and Bovbjerg RR. The Urban Institute's Microsimulation for Reinsurance: Model Construction and State-Specific Application. Washington: AcademyHealth, 2008. Available online.
World Wide Web Sites
www.statecoverage.org/node/971. The Reinsurance Institute section of the State Coverage Initiatives Web site includes an overview of the Reinsurance Institute and links to reports and presentations prepared by project staff and participating states. Washington: State Coverage Initiatives, 2007.
Report prepared by: Mary Nakashian
Reviewed by: Robert Narus
Reviewed by: Marian Bass
Program Officer: Pamela Dickson