Colorado: Reinsurance waiver would reduce premiums 23%...using Medicare-based reimbursement??

A couple of weeks ago, I noted that Colorado is joining over a half-dozen other states in moving forward with their own ACA reinsurance program 1332 waiver request. At the time, I was a bit vague as to just how much the program, if approved, would actually lower unsubsidized premiums, especially since the wording of the bill differentiates between different rating areas:

The Commissioner shall set the payment parameters at amounts to achieve:

  • (i) A reduction in claims costs of between thirty and thirty-five percent in geographic rating area numbers five and nine;
  • (ii) A reduction in claims costs of between twenty and twenty-five percent in geographic rating area numbers four, six, seven, and eight; and
  • (iii) A reduction in claims costs of between fifteen and twenty percent in geographic rating area numbers one, two, and three.

Over the weekend, however, the CO Division of Insurance released a study about House Bill 19-1168 projecting that statewide, the average premium reduction would amount to around 23%:

Study shows Colorado's Reinsurance Program funding model will cut insurance premiums
Program will reduce individual premiums by 23%.

DENVER (March 21, 2019) – Today, the Division of Insurance (DOI), part of the Department of Regulatory Agencies (DORA), released an actuarial study regarding a proposed reinsurance program for health insurance in the individual market (for those who do not get their health insurance through their employer or through a government program).

The Colorado Reinsurance Program Analysis is related to House Bill 19-1168 (HB19-1168), “The State Innovation Waiver Reinsurance Program.” The Division commissioned this actuarial study to evaluate what premium decrease would result from the Colorado model for funding reinsurance, and to demonstrate the effectiveness of this model.

What does the study show?

In the study, completed by the actuarial firm Lewis & Ellis, multiple scenarios are reviewed to show the expected reductions to the costs of medical claims through Medicare-reference-based pricing. These reduced costs lead to a statewide decrease in individual health insurance premiums of nearly 23 percent, or approximately $250,000,000.

In a joint quote from the sponsors of HB19-1168, Senator Kerry Donovan (D-Vail), Senator Bob Rankin (R-Carbondale), Representative Julie McCluskie (D-Dillon) and Representative Janice Rich (R-Grand Junction), offered this view.

"The initial review of this report makes us very hopeful that our approach to funding reinsurance will work. Reinsurance is a proven program that will lower the cost of health insurance premiums. This is going to create much needed relief for the high country, who currently pay some of the highest premiums in the nation."

“This study shows that our innovative Colorado Reinsurance funding model works,” said Colorado Insurance Commissioner Michael Conway. “It also disproves the argument that people with commercial health insurance have to pay more to make up for what Medicare and Medicaid pay. Consumers in the individual market are paying more than double what Medicare pays for inpatient services, and almost four times as much as Medicare for outpatient services. That far surpasses any rational amount that would be necessary to cover shortfalls from Medicare and Medicaid.

“This study proves once again that the price we pay for health care is one of the biggest challenges to the affordability of insurance,” added Commissioner Conway.

So far, so good...this sounds similar to other state reinsurance programs...except that apparently there's an eyebrow-raising twist in Colorado's case:

How will the reinsurance program bring down health care costs?

While similar programs have gone into effect in a number of states, Colorado’s funding mechanism for reinsurance would be an innovative approach. This mechanism utilizes Medicare reference-based pricing to bring down health care costs (what is paid to hospitals and doctors). Medicare-reference-based pricing means that the hospitals, doctors and other healthcare providers would be paid a percentage of what Medicare would pay. For example, the program may pay 150 percent (or 1.5 times) of what Medicare would pay for services, which would be less than what is currently paid to healthcare providers. That savings is then passed on to consumers in the form of lower premiums.

The Colorado model for funding reinsurance keeps costs to the reinsurance program down and as a result reduces health insurance premiums.

Whoa. That sounds...significant (it's also further support for my post last week regarding the gap between Medicare and private insurance reimbursement rates).

Remember, these are private insurance policies...yet apparently under the proposed reinsurance program, the state would be reimbursing the carriers at Medicare-based rates? Or would the carriers be the ones paying doctors/hospitals based on state-mandated rates (which I assume would also mean superceding their privately negotiated rates?) VERY interesting if it goes through...

What is a reinsurance program?

Reinsurance is a program designed to help Coloradans in the individual health insurance market. It would pay a share of expensive claims once an individual reaches a certain level (known as the “attachment point”) up to a cap.

For example, the program might set the attachment point at $50,000, with a cap of $500,000. If a person’s medical costs (i.e., what was being charged by doctors and hospitals) reached $50,000 in a year, the insurance company would pay up to $50,000, and the reinsurance program would pay the costs after that and up to $500,000.

This type of funding model reduces the impact of the high-cost claims on the insurance pool. That, in turn, will reduce Coloradans’ health insurance premiums in the individual market.

In addition, the program may also provide an incentive for insurance companies to remain in the Colorado individual market, and possibly expand into areas of the state that currently have fewer companies offering individual plans.

The attachment point and caps are not set by the legislation, but directs the Colorado Insurance Commissioner to establish these parameters.

What is the 1332 waiver?

Another key element in funding the reinsurance program is what is known as pass-through funding from the federal government. Under the Affordable Care Act (ACA), for people with household incomes under 400 percent (4 times) of the Federal Poverty Level, tax credits from the federal government are available to help make health insurance in the individual market more affordable. These tax credits are tied to health insurance premiums, so that when premiums go up, tax credits go up, and when premiums go down, the tax credits also go down.

As the reinsurance program brings health insurance premiums down, the amount of money the federal government has to spend on tax credits will also go down. But rather than letting it pocket the money, Colorado will ask the federal government to pass that money through to the state to fund the reinsurance program and maintain the lower premiums and stability it will bring to the individual health insurance market.

Section 1332 of the ACA gives states the flexibility to waive certain provisions and receive federal funding to implement state-based health care policies. It is through a request for a 1332 waiver that Colorado will request these pass-through funds.

Follow HB19-1168

The bill, HB19-1168, is still working its way through the Colorado legislature. People can follow its progress, including committee hearings and amendments, on the website for the Colorado General Assembly - HB19-1168: State Innovation Waiver Reinsurance Program.