Reinsurance in Health Insurance

Reinsurance in Health Insurance

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August 18, 2017
Reinsurance in Health Insurance
Overview
coverage limits higher than they
Reinsurance, also known as insurance for insurers, is a
otherwise might. This is particularly
mechanism aimed at reducing an insurer’s financial liability
useful for smaller insurers (where risk is
associated with unexpectedly high health care costs. The
spread among fewer enrollees), allowing
availability of reinsurance may be one of many factors an
them to compete with larger insurers.
insurer considers in assessing potential exposure to loss in a
2. To stabilize loss experience. A unique
certain market. This may affect whether or not to enter a
feature of insurance is that actual costs
market, what types of products to offer, and how premiums
associated with enrollees is not known
are set. Reinsurance may be structured and funded in a
until sometime in the future. Reinsurance
variety of ways. The potential impact of reinsurance on
stabilizes fluctuations in an insurer’s loss
health insurance premiums is highly dependent on the
experience, particularly those associated
amount of funds available for reinsurance as well as
with high-cost enrollees.
whether the program is funded internally or externally.
3. To protect against catastrophes. An
Insurance Risk
insurer may experience a catastrophic loss
due to a one-time event (e.g.,
The concept underlying insurance is risk (i.e., the likelihood
expenditures associated with a natural
and magnitude of financial loss). In any type of insurance
disaster). Through reinsurance, insurers
arrangement, all parties seek to manage their risk, subject to
can reduce any fluctuations in their loss
certain objectives (e.g., coverage and/or profit goals). In
experience.
health insurance, consumers (patients as insurance
beneficiaries) and insurers (as providers or sellers of
4. To increase capacity. That is, reinsurance
insurance) approach the management of insurance risk
allows an insurer to assume a larger
differently. From the consumer’s point of view, a person (or
overall capacity of risk than it may
family) buys health insurance to protect against financial
otherwise be able to.
losses resulting from the unpredictable use of potentially
high-cost medical care. The insurer employs a variety of
Reinsurance Arrangements and Payment
methods to manage the risk it takes on when providing
Structures
health coverage to consumers, to assure that the insurer
Reinsurance may be structured in a variety of ways
operates a viable business (e.g., balancing premiums against
depending on the insurer’s need and can range from simple
the collective risk of the covered population). The insurer
to complex. Generally, however, a reinsurance contract
uses these methods when pooling risk so that premiums
either may be a broad agreement covering some portion of
collected from all enrollees generally are sufficient to fund
the business or may cover a specific risk.
claims (plus administrative expenses and profits).
Reinsurance may also be funded using a variety of methods.
Sometimes, however, even with the variety of methods an
Reinsurance can be funded by internal resources; this may
insurer may employ to manage risk, the risk taken on by the
include insurers assessing a surcharge on premiums or
insurer may not be sufficient to protect against the chosen
insurers voluntarily purchasing reinsurance from a
risk management strategies. For example, a single health
reinsurance company. Reinsurance can also be externally
insurance company may be unable to cover a catastrophic
funded; this may include the government appropriating
loss. To limit their risk exposure, insurers often transfer
funds for reinsurance. Reinsurance can also be funded
some of their liability or risk to another insurer, a
through a combination of internal and external funding. An
reinsurance company. That is, just as an insurer pools the
example of this combination mechanism may include all
risk of its covered consumers, a portion of that risk gets
insurers being assessed a reinsurance charge, but only
further spread to other insurance companies, known as
certain insurers being eligible for reinsurance payments.
reinsurers.
The reinsurance arrangement typically involves various
Reinsurance
payment parameters. Generally, in order for a health insurer
Reinsurance, thus, is an extension of insurance and further
to receive a reinsurance payment, an enrollee’s total claims
acts as a risk transfer and risk spreading mechanism.
costs must exceed a specified level (referred to as the
Reinsurance works by spreading the costs associated with
attachment point; see Figure 1). The insurer is then paid a
high-cost incidents across insurers. Insurers often purchase
portion of the claims costs (referred to as the coinsurance
reinsurance for four reasons:
rate) beyond the attachment point until total claims costs
reach a cap (referred to as the reinsurance cap; see Figure
1. To limit liability on specific risks. That is,
1).
reinsurance allows insurers to offer
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Reinsurance in Health Insurance
Figure 1. Illustrative Example of Reinsurance Payment
amounts to be used for reinsurance payments; those
Structure
amounts were $10 billion, $6 billion, and $4 billion for plan
years 2014, 2015, and 2016, respectively.
Potential Impact of Reinsurance on Health
Insurance Premium Rates
The potential impact of reinsurance funds on
premiums is highly dependent on the amount of funds
available and whether the reinsurance program is
funded internally or externally.
The goal of reinsurance in health care is to offset an
insurer’s risk associated with unexpectedly high-cost
enrollees. The availability of reinsurance allows insurers to
reduce their risk exposure and may affect whether or not to
enter a market, what types of products to offer, and how
premiums are set. Thus, in determining premiums, an
insurer would take into account the availability of
reinsurance funds.
Source: CRS.
The potential impact of reinsurance funds on premiums is
Government as the Reinsurer
highly dependent on the amount of funds available for
Occasionally, the government may act as the reinsurer or
reinsurance payments and whether the reinsurance program
facilitate reinsurance in certain health insurance markets to
is funded internally or externally. In general, as the
provide a stabilizing influence. This section provides three
availability of funds for reinsurance payments increases,
examples for which the government is the reinsurer.
health insurance premiums may decrease. The source of the
funds (internal versus external) also may influence any
The Medicare Part D Reinsurance Program is a permanent
changes in premiums. That is, in determining premium
program, with respect to covered prescription drug costs.
rates, an insurer takes into account a number of
Under this program, the attachment point is the enrollee
components, including any surcharges or payments the
annual out-of-pocket threshold. For drug costs above the
insurer may have to pay. These considerations are packaged
threshold, the government pays an amount equal to 80%
into the premium, which is paid by the enrollee. Thus, the
(coinsurance rate) of allowable reinsurance costs. The
availability of reinsurance through internal funds (e.g., an
enrollee and insurer are responsible for 5% and 10% of
insurer voluntarily purchasing reinsurance from a
allowable reinsurance costs, respectively. There is no
reinsurance company) would not have as large of an impact
reinsurance cap under the Medicare Part D Reinsurance
on lowering premium rates compared to the impact from
Program.
the availability of external reinsurance funds.
The Early Retiree Reinsurance Program (ERRP), created by
For example, according to analysis from the American
the Patient Protection and Affordable Care Act (ACA; P.L.
Academy of Actuaries, the availability of reinsurance funds
111-148, as amended), was a temporary program (ended
“[reduced] the risk to insurers, allowing them to offer
January 1, 2014) that provided reimbursement to
premiums lower than they otherwise would be.” Recall that
participating employment-based plans for a portion of the
the ACA’s Transitional Reinsurance Program was funded
costs of providing health insurance coverage to early
by both internal and external funds (certain insurers in the
retirees (ages 55-64). Under the program, the attachment
individual and large-group markets paid into the program,
point was set at $15,000, and the reinsurance cap was set at
but only insurers in the individual market were eligible for
$90,000. The government reimbursed 80% (coinsurance
reinsurance payments). Correspondingly, the American
rate) of the costs; $5 billion from the Treasury was
Academy of Actuaries estimated that availability of
appropriated for the program.
reinsurance funds and their associated payment parameters
reduced health insurance premium rates by 10%-14% in
The ACA’s Transitional Reinsurance Program was a
plan year 2014, 6%-11% in plan year 2015, and 4%-6% in
temporary program (2014-2016) that provided
plan year 2016. Thus, as the reinsurance funds decreased,
reimbursement to most individual market health plans that
there was corresponding upward pressure on premium rates.
enrolled high-cost enrollees. The payment parameters in the
program changed from year to year. For example, in plan
For additional information, see CRS Report R44690, The
year 2014, the attachment point was $45,000, the
Patient Protection and Affordable Care Act’s (ACA’s)
coinsurance rate was 100%, and the reinsurance cap was
Transitional Reinsurance Program, by Namrata K. Uberoi
$250,000. The program was funded through collections
and Edward C. Liu.
from certain health insurers in the individual and group
markets; the government then used those contributions to
Bernadette Fernandez, Specialist in Health Care
make reinsurance payments to plans offered in the
Financing
individual market only. Statute specified the collection
IF10707
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Reinsurance in Health Insurance

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