What’s the Reason for the Fall in Health Insurance Premiums? Hint: Not the Market
First published in Morning Consult on August 28, 2019
Several interlinked headlines showed up recently related to annual premiums in state health insurance markets. The Centers for Medicare and Medicaid Services published two reports related to the individual health insurance market, including health plans offered both on and off the Affordable Care Act health insurance exchanges.
While many venues ran with the CMS press release focus on declining enrollment for people who are not eligible for ACA subsidies, the report also showed average total monthly premiums in February 2019 decreased by 1 percent for exchange enrollees.
Charles Gaba, who runs the site ACASignups.net, published a detailed analysis of proposed and approved premiums by state for the 2020 plan year, noting the lowest rate increases ever.
The Heritage Foundation also published a report about these health care premium trends but took it a step further by declaring the purported reason for the declining premiums — “How Health Care Premiums Are Declining in States That Seek Relief from Obamacare’s Mandates.”
Who should pay for risk?
Insurance, by definition, is about managing risk. A person or entity pays a small amount to hedge against the risk of having to pay a much larger amount. Insurance companies make their money by being good at predicting risk. In the case of health care, health insurers charge a premium to a pool of people and anticipate that the amount of premiums received in a given year (plus some amount of reserves) will be enough to cover the costs of the health care needs of that population in that particular year.
But what happens if the insurance company can offload some of that risk? If the health insurance company doesn’t have to pay for some of the costs for its covered population, then it can reduce the premiums it charges. Reducing the impact of high claim amounts from a small portion of the covered population — for example, the one person who is diagnosed with a rare cancer — can be accomplished by allowing another entity to pay for those claims.
In many other types of insurance, companies step in to take on that extra risk and sell “reinsurance” policies. So who is paying for the risk in state health insurance markets?
State-based reinsurance backed by the federal government
Section 1332 waivers were established by the ACA to enable states to waive provisions related to the individual and employer mandates, premium credits, cost-sharing reductions, benefits, qualified health plan requirements, etc. To date, 13 Section 1332 waiver applications have been approved by CMS, and all but one (Hawaii) concerned state implementation of reinsurance programs. One additional 1332 waiver is pending, but does not implement reinsurance (Idaho).
Although CMS issued new guidance in October 2018 on Section 1332 “State Innovation Waivers,” changing the name to “State Relief and Empowerment Waivers,” nearly all of the 1332 waivers so far have allowed insurers to stop doing what insurers do and instead have the federal government do it.
Colorado, which had its 1332 waiver approved in July, explained the concept clearly:
The … waiver would reduce premiums through the introduction of a state-based reinsurance program starting in 2020. This program, established by the state, would pay for a portion of claims for high cost members in the non-group ACA-compliant health insurance market. … The reinsurance program would pay a percentage of claims, above the attachment point and up to a cap. Covered claims would reduce the total costs paid by carriers in the non-group market. Therefore, any reductions to claims costs due to reinsurance would reduce premiums as well.
The “attachment point” is the floor. The responsibility for paying the health care claims of that amount or more will be shared by the health insurance company and the government. The “cap” is the ceiling. Health care claims up the amount of the cap will be shared.
In the case of Colorado, the range between the attachment point and the cap is $30,000 and $400,000. Reductions to claims costs for insurers most likely mean lower premiums.
Risk stabilization courtesy of the federal government
While the Heritage Foundation report claims premiums are decreasing because some states have sought “relief from Obamacare’s mandates,” the real reason is because insurers are being allowed to shift the costs of high claims to the state and federal government. The report goes on to say, “the study finds that premiums declined significantly in the … states that obtained federal waivers to operate risk-stabilization programs.”
Heritage is right that premiums are down in states that asked for 1332 waivers related to reinsurance. But risk stabilization courtesy of the federal government is hardly a market-based solution to rising health care costs. Medicare for All proponents, take note.