Policy & Politics: Can Reinsurance Programs Save the ACA?

Now that the Republican efforts to repeal the Affordable Care Act (ACA) are all but dead, it is time for officials to turn attention to stabilizing the jittery insurance exchanges. Payers have been essentially operating in limbo since last year’s presidential election. They’ve been waiting for Washington to act, and were probably expecting Republicans to deliver on their 7 year promise to do away with the ACA now that there is someone in the White House who will not veto a repeal bill. 

It has been, in many ways, 9 wasted months since the election. And the uncertainty does not appear to be waning, thanks in part to the President himself, who has suggested that the best way forward is to let the ACA collapse under its own weight. Such a scenario is not inconceivable if President Trump follows through on what he has alluded to in Tweets. That is, halt subsidy payments to insurance companies that are designed to reduce deductibles for the poor. He could also stop enforcing the penalty for people who fail to buy insurance. No subsidies and fewer healthy insured individuals will hasten the so-called “death spiral” that has dogged the exchanges almost from the start. 

The administration could decide to work with both parties in Congress and at the state level to improve the ACA. One way to do that is through reinsurance, whereby the government helps pay for the sickest people that tend to drive up rates in areas where there are not enough healthy people enrolled to balance them out. Reinsurance, of course, is nothing new. Under the ACA, the federal government temporarily provided reinsurance for 3 years through 2016. Some believe such funding needs to be extended indefinitely, but no one is holding their breath as President Trump continues to fume and Washington gridlock persists.  

Some States Turn to Reinsurance

Some states have decided to take matters into their own hands, using a provision in the ACA that allows them to redesign their health insurance markets as long as health coverage is not jeopardized. Known as “state innovation waivers,” the practice is also being embraced by Washington. In July, the Trump administration approved Alaska’s waiver application, which will allow the state to use federal ACA dollars to fund its successful reinsurance program. Other states—including Idaho, New Hampshire, Maine, Minnesota, and Oklahoma—reportedly will soon follow suit. While state waivers can be sought for a variety of reasons, experts believe waivers for reinsurance programs will get the lion’s share of attention because their focus on reducing premiums simplifies the approval process. Plus, reinsurance programs have been shown to work. 

An analysis of the ACA’s just-expired reinsurance program demonstrated that for the 30% of insurers with the highest claims costs, revenues exceeded those costs by $0 to $49 per member per month in 2014 and 2015, thanks to reinsurance. Had the program not been in place claims would have exceeded premium revenues by $90 to $397 per member per month, according to data in Health Affairs.

A year ago, Alaska had little choice but to begin its own reinsurance program. Premiums on the state exchange were set to rise 42%. So officials diverted $55 million in tax revenue normally allocated to the general budget fund into a reinsurance program. This convinced Premera—the lone insurer on the Alaska exchange—to increase premiums by just 7%. The success emboldened the state to apply for a federal waiver a year later, and approval now allows it to use federal funds for reinsurance. This helped to move Alaska down from being one of the states with the highest year-over-year premium increases to one of the lowest in the country.

But why are only a half dozen or so states following Alaska’s lead? In short, not every state is cut out for reinsurance—the circumstances have to be just right, according to experts we spoke with. 

Not for All States

“It is a reasonable strategy to consider, but Alaska is unique from a population, geography, and insurability perspective,” F Randy Vogenberg, PhD, RPh, principal at the Institute for Integrated Healthcare said. He added that other states are “teetering on bankruptcy due to underfunded pensions and Medicaid fiscal pressures.” This makes it next-to-impossible to do as Alaska did: self-fund for a year before applying for a federal waiver.

“Where does the funding for reinsurance come from in the first place?” Norm Smith, president of Viewpoint Consulting, Inc, which surveys managed markets decision-makers for the pharmaceutical industry asked. He agreed that not all states are in a position to raid a general fund. The only other options appear to be pooled funds created by the exchange itself, or special federal funding.

Still, with the federal government practically dangling funds in front of the states through the waiver program, it is natural to wonder why more are not following suit. But Gary Owens, MD, president of Gary Owens Associates, a medical management and pharmaceutical consultancy firm, said he is not surprised at all. “States are in a difficult position because they don’t know where Washington is headed with insurance reform.” 

Because of the uncertainty, Mr Smith, a First Report Managed Care editorial advisory board member, said that states that attempt to establish a reinsurance program will take a route that best suits their specific needs. Alaska had the luxury of being able to redirect state funds. Other states will need to find a different way. Or pass on the opportunity. 

“In larger states, with many more members in the insurance pool, [the cost to insure high-risk individuals] could exceed the actuarial value of the reinsurance,” he said. This would render the program useless, unless the threshold where reinsurance kicks in is lowered. 

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Mixed Messages? 

Mr Smith said he also wonders about the mixed messages the federal government sends when it encourages states to establish reinsurance programs. Technically, “there is no specific part of the ACA that allows for a special risk pool for high cost members.” The ACA stipulates that “everyone must be in the pool, these reinsurance pools violate that,” by separating high-risk patients, he explained. 

The main goal of reinsurance is to keep payers from exiting the exchanges, but critics of the federal waiver program point out that payers are not obligated to participate even if reinsurance funds are available. While some think such a requirement should be a condition for payers, Dr Owens pointed out that the absence of a guarantee “works both ways. There is no guarantee that funds to subsidize the market will continue in the future.” For that reason, whether reinsurance programs are in place or not, “insurers will continue to exit losing markets,” he said.  In other words, reinsurance might slow payer withdrawal, but not prevent it completely. 

Dr Vogenberg said he believes reinsurance is “a reasonable strategy,” but it should be implemented without requiring payer participation. “Let the market work on its own,” he noted.

Mr Smith agreed. “Good communications and fair premium setting will iron this out over time,” he explained. And while “no insurer wants bad PR, they’ll take it if the losses mount up.”

Medicaid Waivers Under Trump

Reinsurance waivers appear to be getting most of the attention, mainly due to Alaska’s success and the need to prop up the health exchanges. But a Medicaid waiver program is also in place that allows states to test approaches that go beyond federal rules, as long as they further Medicaid’s objectives. In a Trump Administration, Mr Smith said that programs that result in “less federal control over governmental health care spending, and decentralized decision making” are likely to be favored. 

In other words, efforts that seek to accomplish what GOP senators have not been able to at a national level. For example, said Mr Smith, block grants that cede more control of Medicaid dollars to states, with an accompanying medical consumer price index to ensure it keeps up with the expected rise in medical costs. “The issue is how large will the grants be initially?” 

Waivers are also likely to be granted that would allow states to impose the work requirement for able-bodied enrollees. “This has been rolled out in Indiana by the current CMS head [Seema Verma, MPH],” said Mr Smith. But the impact is likely to be low because it affects a small number of enrollees. Plus, defining who is able-bodied is subjective and could be perceived as unfair to minorities.

Meanwhile, the path remains murky, providing payers with a poor view of what lies ahead. It is challenging to make business decisions under such conditions, but insurers have little choice. 

“They will continue to make business decisions to remain in the market or not based on the real or estimated risk of loss in an increasingly higher-risk pool,” Dr Owens said. 

Dr Vogenberg said he believes that if the ACA is left as is, it will mean “financial disaster for public sector programs.” He added that “there is no easy short-term solution, but the current path is clearly not sustainable over the long run. The best solution requires an economic and clinical balance with a longer-term view on implementing [workable] solutions.”

Mr Smith says he agrees that the ACA is unsustainable as is. “I’m still pushing for the establishment of ‘sick funds’ like there are in Germany. High-cost procedures that are not ‘insurable events’ are paid from these funds.” He cited multiple sclerosis treatment as an example. “There’s no question these patients need the therapy, so there is no risk involved, making it a ‘non-insurable event.’ Keep these patients out of the general insurance pool, and socialize the costs across all citizens of the state. It is much simpler than setting up new insurance pools.”

Will Washington Choose Wisely?

As for cooperation from both political parties going forward, some do not buy that the broad divide is irreparable. “It irks me when I hear that there is no way we can have a bipartisan plan,” said a chief medical officer (CMO) who requested anonymity in order to discuss the issue more freely. He pointed to the pre-ACA days when the Healthy Americans Act—which would have moved US health care away from an employer-based system to coverage that was universal and portable—was supported by members of both parties. While it eventually lost out to the ACA, it shows that bipartisan support is attainable. 

The CMO who requested anonymity added that he is struck by the lack of focus in Washington on delivering quality care. He acknowledged that the ACA gave rise to accountable care organizations, noting it was a good start. “But we still have an incredible quality problem. It’s hard to overstate it. If you’re not doing something to try to improve quality by [ensuring that] care is needed, supported by evidence, and is not duplicative of care received elsewhere, you’ll never get control of the costs.” 

If those words sound familiar, that’s because they are the stated goals of the American Board of Internal Medicine’s Choosing Wisely campaign. As anxious stakeholders wait for the government’s next move—with the midterm election just 15 months away—it remains to be seen how wise the choices in Washington will be.