As numerous carriersstruggled with high health care costs caused by insuring older andsicker individuals under the ACA, some states experimented withtheir own reinsurance programs. (Photo:Shutterstock)

An old insurance industry practice has reduced Affordable CareAct (ACA) individual market premiums by an average of nearly 20percent in seven states, a new analysis has found.

Reinsurance, a practice where insurancecarriers reduce risk by purchasing policies from other insurers tolimit their losses, has been used by a number of states to tobolster their ACA markets by creating state reinsurance programs tohelp insurance companies that have struggled with fluctuations inhealth care costs. Avalere, a health care consulting company,looked at the data to determine howeffective they've been.

Reinsurance and the ACA

Although the concept doesn't grab a lot of headlines,reinsurance has been promoted by many experts as a way to controlcosts and keep private insurers from exiting the ACA marketplace.The ACA came with a temporary reinsurance program for its first fewyears—and despite some serious glitches in the funding of thatearly effort, many agreed that the reinsurance concept was anoverall positive for the financial health of the marketplace.

“The insurers have all been clear that without continuingreinsurance, they will substantially increase premiums,” wroteKatherine Swartz, professor of health economics and policy at theHarvard School of Public Health, in a 2017analysis of the federal program. “There is widespread recognitionthat the program played a major role in stabilizing premiums overthe past three years.”

States take the reins

As numerous carriers struggled with high health care costscaused by insuring older and sicker individuals under the ACA, somestates experimented with their own reinsurance programs.

The Avalere study looked at seven states: Alaska, Maryland,Maine, Minnesota, New Jersey, Oregon, and Wisconsin, which createdtheir own reinsurance programs. With a mix of state and federalfunding, these states launched new reinsurance programs orcontinued previous programs designed to buffer insurance companiesfrom unexpected losses in their state markets.

The study found that among these states, premiums were 19.9percent lower on average during the first year of the reinsuranceprogram. There was a wide range of savings: premium reductionsranged from 6 percent to 43 percent, depending on the state.

“In response to recent individual market uncertainty and risingpremiums, many states are pursuing reinsurance programs to mitigateinsurers' risk and stabilize individual markets, as well as to helpresidents avoid unexpected premium increases while reducing thenumber of uninsured,” the study said.

Cost is still an issue

Although the analysis found that the reduced premiums savednearly $1 billion for the federal government, the state-by-stateapproach does come with more front-end costs for state governments:the study said states bear an average of 31.9 percent of totalannual costs of reinsurance programs, for an average cost of $72.7million.

“Reinsurance programs have been effective at stabilizingindividual market premiums and maintaining insurer participation,”said Elizabeth Carpenter, practice director at Avalere. “Though theappetite for state reinsurance programs is high, securing statefunding is an obstacle to additional states implementing theseprograms.”

Read more: 

• GAO reinsurance ruling could cost health insurers$2 billion
• CMS official numbers: Obamacare signups down,premiums (and subsidies) up
• Half of Americans think the ACA marketplace iscollapsing