Maryland: CMS approves 5-year renewal of reinsurance program...which will only makes sense if IRA subsidies are allowed to expire

via the Maryland Health Benefit Exchange:

MARYLAND WINS FEDERAL APPROVAL FOR “REINSURANCE” FOR ANOTHER FIVE YEARS

• Program has helped drive down rates for Marylanders who buy their own health coverage to among the most affordable in the nation

BALTIMORE (July 5, 2023) – The Reinsurance Program that helped drive down costs for consumers who purchase their own health insurance in Maryland to among the lowest rates in the nation has been renewed for the next five years.

The U.S. Department of Health and Human Services and the Department of the Treasury informed Maryland health and insurance officials that they have approved the state’s application for the period from Dec. 31, 2023, when the current authorization expires, until Dec. 31, 2028.

“Extension of the Reinsurance Program is great news for Marylanders,” said Michele Eberle, executive director of Maryland Health Benefit Exchange, the agency that administers Maryland Health Connection, the state’s health insurance marketplace. “It has enabled Maryland to keep premiums at bay so that more people have access to affordable health coverage.”

"Maryland's Reinsurance Program has been very successful at keeping rates affordable for everyone who buys individual insurance in Maryland, on or off the exchange," said Maryland Insurance Commissioner Kathleen A. Birrane. "It has played a particularly important role in stabilizing premiums for Marylanders who do not qualify for subsidies."

During the past five years, the program cut more than 30 percent from health insurance premiums for Marylanders who buy their own health insurance because they don’t get it through their employer or another government program such as Medicaid or Medicare.

Maryland this year offered the third cheapest average monthly health insurance premiums in the nation ($472) after Utah ($431) and New Hampshire ($469) for households that purchase their own coverage through a state marketplace, according to data from the Centers for Medicare & Medicaid Services.

The program helped strengthen the state’s now 12-year-old marketplace, Maryland Health Connection, that was created under the Affordable Care Act. Enrollment reached a record 182,166 this year, the fifth consecutive year of enrollment growth. Most enrollees receive additional financial help through the ACA.

Gains have also been made in communities that historically have lacked health insurance. Black enrollment was up nearly 3 percent this year. Hispanic enrollment was up 9 percent – and up 13 percent for Hispanic young adults ages 18-34. In fact, Hispanic enrollment through Maryland Health Connection has grown more than 20 percent since 2019.

Rates also came down for people who buy health coverage directly from an insurance company outside Maryland Health Connection.

The federal approval was required technically as an “innovation waiver” under Section 1332 of the Patient Protection and Affordable Care Act of 2010. The program covers a portion of the costs of health insurers that serve Maryland Health Connection. The majority of funding comes from the federal government. State costs are funded through a 1 percent assessment on health insurance policies.

(sigh) I have very mixed feelings about using reinsurance to reduce premiums. The problem, as I've explained before (as have several of my colleagues like David Anderson and Andrew Sprung), is that the way reinsurance reduces unsubsidized premiums is effectively by increasing subsidized premiums.

To explain: A typical state-based reinsurance program might work as follows:

• Around 1% of those in a given risk pool rack up 23% of total healthcare expenses
• Around 5% of those in a given risk pool rack up a whopping 50% of total healthcare expenses

Let's say you have exactly 1,000 enrollees in a risk pool, with 950 of them only racking up average medical expenses of $5,200/year; 40 of them have expensive problems which cost $69,000/year apiece; 9 of them cost $200,000 apiece and one enrollee has really expensive problems costing $500,000/year, for a grand total of right around $10,000,000 even. Since all 1,000 are part of the same risk pool, the total healthcare cost per enrollee averages around $10,000 apiece.

Under a reinsurance program, the government agrees to pay for a percentage of the cost of the really expensive, high-risk enrollees...basically, that last 5% or so...in order to lower the premiums for everyone else. In serves a similar function to the pre-ACA "High Risk Pools", except that it's done behind the scenes, there's no individual medical underwriting needed, there's no stigma attached to the enrollees (since they aren't shunted off into a separate program), and there's no funding discrimination.

In Maryland's case, for the first four years of the program, the government agreed to pay 80% of claims for enrollees whose medical costs exceed $20,000 in the year, up to a cap of $250,000 per enrollee.

Let's suppose we applied these parameters to my example above.

• 950 of the enrollees have total expenses well below $20,000, so the reinsurance program doesn't apply to them.

• 40 of the enrollees have total expenses of $69K apiece. Subtracting the first $20K leaves $49K. 80% of that is $39,200. Multiply by 40 enrollees and that's $1,568,000.

• 9 of the enrollees have total expenses of $200K apiece. Subtracting the first $20K leaves $180K. 80% of that is $144,000. Multiply by 9 and that's $1,296,000.

• The final enrollee has total expenses of $500K. The upper bound on the reinsurance program is $250K, so subtracting $40K leaves $210K. 80% of that is $168,000.
• Add it up and the reinsurance program would cover $3,032,000 out of the $10,000,000 grand total...or around 30.3% of all medical expenses for the entire pool.

Sure enough, the press release says that Maryland's reinsurance program has reduced unsubsidized premiums by around 30% over the past 5 years (the parameters changed a bit this year but the principle is the same).

So far, so good: Maryland residents who pay full price for ACA policies (whether on or off the exchange) get a 30% rate cut, yay!

Of course, that $3 million has to come from somewhere (and in fact Maryland's ACA individual market is more like 230,000 people, so we're actually talking about several hundred million dollars...in fact, the projected total cost for 2023 is estimated to be $582 million.

A chunk of it comes from the state charging a special health insurer tax (around $135 million). the other $439 million comes from federal "pass-through" dollars authorized by the waiver itself.

So, where does the federal pass-through money come from? Well, that's where we run into the problem with state-based reinsurance waivers: The $439 million comes from the money saved by the federal government due to paying less in Advance Premium Tax Credits (APTC) subsidies to the subsidized ACA population.

When you reduce the unsubsidized premiums of the benchmark Silver plan (which is also generally the most popular plan chosen by exchange enrollees) by 30%...that also means that subsidies are reduced by roughly 30% as well.

If you enroll in the benchmark Silver plan this doesn't really change anything for you--your net premium is the same either way. However, if you're subsidized but choose any other plan (especially Bronze, Gold or Platinum), your net premium actually increases significantly as a result, since the subsidy is based on the full price of the benchmark plan only.

Put more simply, reinsurance programs help reduce net costs for unsubsidized enrollees while raising them for subsidized enrollees...which, in Maryland, makes up 76% of the on-exchange population and around 60% of the total individual market. In other states those percentages can be considerably higher.

Now, reinsurance did make sense (sometimes) prior to the American Rescue Plan passing, since those enrollees caught by the "Subsidy Cliff" at 400% FPL were often screwed by the high unsubsidized premiums and needed something to cut them down to size...but in the ARP/IRA era, where ACA premiums are capped at no more than 8.5% of income no matter how high your income, reinsurance programs like this make no sense at all; enrollees over 400% FPL won't have to pay more than 8.5% of their income whether the reinsurance program existed or not, but those earning ~200 - 400% FPL are hurt by it with no real justification.

On the other hand, the current ARP/IRA enhanced subsidies are currently scheduled to sunset at the end of 2025. If that happens, this 5-year extension of the reinsurance program will (mostly) make sense again...but it would be much better for all involved if the enhanced subsidies are instead made permanent (at which point I'd recommend scrapping the reinsurance programs altogether).