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Invited Commentary
August 13, 2021

Individual Health Insurance Market Reinsurance After the Passage of the American Rescue Plan Act

Author Affiliations
  • 1Department of Health Policy and Management, Graduate School of Public Health, University of Pittsburgh, Pittsburgh, Pennsylvania
  • 2Margolis Center for Health Policy, Duke University, Durham, North Carolina
JAMA Health Forum. 2021;2(8):e211614. doi:10.1001/jamahealthforum.2021.1614

The American Rescue Plan (ARP) Act of 2021 created the largest changes to the Affordable Care Act’s health insurance marketplaces since they were originally implemented in 2014. Chief among these changes is the extension of premium tax credit subsidies to families with incomes above 400% of the federal poverty level ($106 000 for a 4-member family in 20211). Prior to the passage of the ARP by Congress and signed by President Biden in March 2021, such families could face marketplace premiums equal to a quarter of household income or higher. With the passage of the ARP, those premiums are now capped at 8.5% of household income.2

Under the previous 2 administrations, policy makers provided relief to families without premium subsidies by implementing reinsurance programs. Two forms of reinsurance exist for individual health plans sold on and off of the marketplaces. The first is a national, catastrophic reinsurance program run by the Centers for Medicare & Medicaid Services that pays 40% of claims in excess of $1 million. This program reduces insurers’ risks of covering costly enrollees at a national level, which is particularly beneficial in small states where a few costly enrollees can considerably increase the mean enrollee’s health care expenditures. The second form of reinsurance is a set of state-run programs examined by Polyakova and colleagues3 in this issue of JAMA Health Forum that are authorized through the section 1332 waiver process under the Affordable Care Act. Both programs partially offset insurers’ claims costs, which allows insurers to lower their premiums.4 Prior to the ARP, these reductions in premiums increased marketplace plan affordability for enrollees without premium subsidies. By reducing risk to insurers, reinsurance programs also could theoretically increase insurer participation in the marketplaces; however, the literature has not yet demonstrated a causal linkage between reinsurance and marketplace insurer participation.

The ARP’s enhanced premium subsidies undercut the logic of state-based reinsurance programs by capping benchmark marketplace premiums at 8.5% of household income for families with incomes above 400% of the federal poverty level. Capping premiums means that premium levels no longer determine the affordability of marketplace plans for these enrollees. While state-based reinsurance programs still reduce premium levels, the expansion of premium subsidies to households means that the ARP severs the relationship between marketplace premium levels and marketplace premium affordability for nearly all enrollees. The premium of the benchmark plan facing previously unsubsidized households now equals 8.5% of their household income; it does not vary with premiums as set by insurers.

Redesigned and more efficient state-based reinsurance programs may still be of use to policy makers under the ARP, as illustrated by Polyakova and colleagues.3 Risk adjustment is imperfect; there will always be idiosyncratically costly enrollees whose claims are unlikely to be captured by risk-adjustment algorithms (eg, enrollees with rare genetic diseases or those whose treatment costs are far above average). Even with good but imperfect risk adjustment, insurers may have a strong incentive to avoid geographic areas where such enrollees live.5 Reinsurance can reduce insurers’ risk of participating in markets with idiosyncratic, residual costs.6 Reinsurance can thus act as a complement to risk adjustment in that it helps reduce variance associated with catastrophic costs, whereas risk adjustment reduces risks associated with predictable costs.

If the enhanced subsidies of the ARP are made permanent, states will have the opportunity to reconsider how the section 1332 waiver process can be used to generate revenue to expand marketplace affordability in creative ways, such as redesigned premium subsidies, lowered cost-sharing, and automatic reenrollment and retention programs.7,8 However, if the enhanced subsidies of the ARP expire in 2023 as currently planned, a better understanding of how to improve existing state-based reinsurance programs is needed. More cost-effective reinsurance programs could further improve affordability for unsubsidized enrollees without increasing the burden on states’ budgets. Policy makers thus are faced with a great deal of uncertainty in modifying state-based reinsurance programs—the path forward is entirely dependent on the future of the ARP’s enhanced premium subsidies.

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Article Information

Published: August 13, 2021. doi:10.1001/jamahealthforum.2021.1614

Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2021 Drake C et al. JAMA Health Forum.

Corresponding Author: Coleman Drake, PhD, Department of Health Policy and Management, Graduate School of Public Health, University of Pittsburgh, 130 DeSoto St, Pittsburgh, PA 15261 (cdrake@pitt.edu).

Conflict of Interest Disclosures: Dr Drake reported grants from the National Institute for Health Care Management outside of the submitted work. Mr Anderson reported grants from the National Institute of Health Care Management for outside of the submitted work.

References
1.
Office of the Assistant Secretary for Planning and Evaluation. 2021 poverty guidelines. US Department of Health and Human Services. January 26, 2021. Accessed July 14, 2021. https://aspe.hhs.gov/2021-poverty-guidelines
2.
Norris  L. How the American Rescue Plan Act will boost marketplace premium subsidies. healthinsurance.org. March 5, 2021. Accessed July 14, 2021. https://www.healthinsurance.org/blog/how-the-american-rescue-plan-act-would-boost-marketplace-premium-subsidies/
3.
Polyakova  M, Bhatia  V, Bundorf  MK.  Analysis of publicly funded reinsurance—government spending and insurer risk exposure.   JAMA Health Forum. 2021;2(8):e211992. doi:10.1001/jamahealthforum.2021.1992Google Scholar
4.
Kaiser Family Foundation. Tracking section 1332 state innovation waivers. November 1, 2020. Accessed July 14, 2021. https://www.kff.org/health-reform/fact-sheet/tracking-section-1332-state-innovation-waivers/
5.
Fang  H, Ko  A. Partial rating area offering in the ACA marketplaces: facts, theory and evidence. National Bureau of Economic Research working paper 25154. October 2018. Accessed July 14, 2021. https://www.nber.org/system/files/working_papers/w25154/w25154.pdf
6.
McGuire  TG, Schillo  S, van Kleef  RC.  Very high and low residual spenders in private health insurance markets: Germany, the Netherlands and the U.S. marketplaces.   Eur J Health Econ. 2021;22(1):35-50. doi:10.1007/s10198-020-01227-3 PubMedGoogle ScholarCrossref
7.
McIntyre  AL, Shepard  M, Wagner  M. Can automatic retention improve health insurance market outcomes? National Bureau of Economic Research working paper 28630. April 2021. Accessed July 14, 2021. https://www.nber.org/system/files/working_papers/w28630/w28630.pdf
8.
Fiedler  M. The case for replacing “Silver Loading.” Brookings. May 20, 2021. Accessed July 14, 2021. https://www.brookings.edu/essay/the-case-for-replacing-silver-loading/
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