Delaying Obamacare’s reinsurance fee would be a win for insurers

October 15, 2013
In this Oct. 1, 2013, file photo, a volunteer counselor with Insure Central Texas uses a chart to help explain healthinsurance options in Austin, Texas. Despite anecdotal evidence of high interest and the political stakes attached to President Barack Obama’s Affordable Care Act, a nation obsessed with keeping score of winners and losers lacks the data to pass early judgment on the success of a law that will in large part define the president’s legacy. (AP Photo/Eric Gay, File)
In this Oct. 1, 2013 file photo, a volunteer counselor with Insure Central Texas uses a chart to help explain health insurance options in Austin. (Eric Gay/AP, File)

The Transitional Reinsurance Program is undoubtedly one of the most important and most boring parts of the Affordable Care Act. It's a huge reason why health plans are even participating in the health law's marketplaces. It's also a great policy read for those with incurable insomnia.

But thank you to an evolving deal in the Senate, the federal health-care law's reinsurance program is getting its 15 minutes of fame. Which means its time for us here at Wonkblog to explain what, exactly, reinsurance is.

The health law's reinsurance program was thought up as a way to coax insurance companies into the insurance marketplaces that launched on Oct. 1. Jumping into these new markets was a big risk; insurance plans had no clue whether they'd get people who were really sick, really healthy or somewhere in the middle. If one plan unintentionally got all the sick people, perhaps because they structured their benefit package in a certain way, that could drive them out of business.

The reinsurance program is essentially protection against that, where the government collects $10 billion in 2014 to redistribute to the insurance plans that get super sick enrollees.

"Reinsurance payments will be made to eligible plans that have members whose claims cost exceed a specific attachment point, up to a reinsurance cap," Citi analyst Carl McDonald wrote in a note Tuesday morning to clients.

That "attachment point" McDonald mentions is a threshold for how expensive a sick subscriber needs to be before the health plan can start asking for reinsurance payments. In regulations issued in March, Health and Human Services decided that a subscriber would have to run up at least $60,000 in claims before the insurer could tap into reinsurance dollars. There would be a cap on reinsurance payments, too: Above $250,000, the health plan would once again be responsible for covering its subscribers' costs.

The reinsurance program is meant to be transitional, only spanning from 2014 through 2016. After that, the thinking goes, health plans will have enough experience in the marketplaces to predict how sick their subscribers will be.

Nearly all health insurance plans are required to pay into the reinsurance plan, even big employer plans that don't sell on the new marketplaces. For each subscriber, the health plans are charged $63 per enrollee annually or $5.25 per member per month. This is why the reinsurance program wasn't especially popular with health plans that focus on the group market, who wouldn't see much in the way of benefit from this program.

The Senate proposal wouldn't, as health industry people understand it, delay the reinsurance program altogether. Health insurers would absolutely hate that because they would lose an important financial protection. Instead, it would delay collection of the fee for one year.

So, you would then have a reinsurance plan that runs from 2014 through 2016 -- but fees will be collected from 2015 through 2017. For 2014, the reinsurance payments would come out of general revenues.

That's great news for health plans: They get all the benefits of the reinsurance program (protection against sick enrollees) and get to hold off on paying for it until 2015. What's more, insurers have already included these reinsurance fees in the premiums they set for 2014. If the government doesn't collect, they're essentially holding onto those as profit.

"Health plans would still get protection from large claims on the exchange, with the possibility of financial upside, since plans have already included a reinsurance fee into premiums and ASO fees that will no longer be collected by the government," Citi's McDonald writes.

Whether this change makes it into the final deal is still far from a sure thing. It did not make it into the House Republicans' proposal Tuesday morning. That likely has a fair amount to do with a perception that this change would be a win for unions, whose health insurance plans would have to pay this fee. More accurately though, this would be a win for all large employers, who were not thrilled about a new fee that would do little to nothing to their benefit.

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Neil Irwin | October 15, 2013