The Obama administration announced earlier today that it would increase the rate of subsidy provided insurers under the transitional reinsurance program established by the Affordable Care Act. This program, in effect for the policies sold in 2014, 2015, and 2016 on one of the individual insurance exchanges fostered by the ACA, provides free specific stop loss reinsurance to insurers, something insurers would otherwise have to pay a lot of money to obtain. The Center for Medicare and Medicaid Services (CMS) announced today that instead of taxpayers giving insurers 80% of the losses on any individual for their claims between $45,000 and $250,000, it would now pay a full 100% of these losses.
The higher rate of reinsurance should not be interpreted as a sign that claims were lower than insurers expected — something that would run contrary to many of the recent insurer rate hike filings or the losses reported by many insurers. It is not a sign of the success of Obamacare; rather it is an artifact of its problems. If, for example, there were 14% fewer people enrolled in Obamacare than at the time the reinsurance rates were initially determined (7 million vs. 6 million), reinsurance payments could be, as here, yet more generous to insurers even if claims were 10% higher than originally projected.
There are several implications of today’s announcement. First, it means that, on a percentage basis, the ACA is subsidizing exchange insurers for 2014 even more than regulations enacted under it had heretofore prescribed. Since this same money paid to insurers could instead have been used to provide greater subsidies to poorer and middle class individuals trying to purchase health insurance, the candy distributed today to insurers is a bit troubling. Second, because CMS says it will actually have money left over from 2014 even after the increase in reinsurance rates, and because enrollment in Obamacare remains considerably lower than was estimated at the time of its enactment, there is an increased likelihood of reinsurance payments to insurers being higher than originally authorized in 2015.
We can get some sense of the magnitude of the changes announced today. To do so, I use data embedded in the Actuarial Value Calculator, a document produced by CMS for the purposes of figuring out whether various insurance plans met the standards for bronze, silver, gold and platinum policies. For an average silver policy, for example, the reinsurance that would have been provided prior to today would have been expected to save insurers about 11% in expenses, and, quite likely, premiums. With the new reinsurance parameters, the transitional reinsurance program will save insurers selling the same silver policies about 14%.
We can do the same exercise for platinum, gold and bronze policies. The results are not much different. The table below shows the results.
|Metal Level||Original subsidy||New subsidy|
1. This is actually the second time CMS has made the transitional reinsurance program for 2014 more generous. Originally, the reinsurance would “attach” at $60,000. If an individual’s claims were below that amount, no reinsurance would kick in. Leter, CMS changed the attachment point to $45,000.
2. How could I do this computation so swiftly? I’ve been preparing for testimony before the House Ways and Means Committee on, among other things, the effect of the transitional reinsurance program on insurer rate changes and I’ve been working on a talk on a similar topic for the R in Insurance Conference later this month. So, all I had to do was plug the new parameters into my model, and out came the results. Be prepared.