Funding for State Reinsurance Programs Can’t Replace Individual Mandate

The Republican tax bill repeals the Affordable Care Act’s (ACA) individual mandate, the requirement that most people have coverage or pay a penalty. Senator Susan Collins has argued that providing temporary federal funding for state reinsurance programs, as the bill she introduced with Senator Bill Nelson would do, could mitigate the harmful effects of mandate repeal. But that approach would come nowhere close to undoing the damage from repealing the mandate. (As we’ve explained, the same is true for Senator Lamar Alexander and Patty Murray’s market stabilization bill.)

Senator Collins has proposed to provide $5 billion of federal funds in each of 2019 and 2020 for state reinsurance programs and let states secure additional federal funds through waivers — providing up to roughly $10 billion in total federal funding for each of those years. Reinsurance programs reimburse insurers for some of the costs associated with the highest-cost enrollees, thereby enabling them to charge lower premiums.

If states fully tapped the federal dollars available under Collins’ proposal, that probably could temporarily reverse the individual market premium increases that repealing the mandate will generate. But the funding would end after 2020, while the estimated 10 percent premium increase from mandate repeal would be permanent.

Moreover, even if it were permanent, the proposed reinsurance funding would barely make a dent in the coverage losses from repealing the mandate and would do little to counter the uncertainty and instability that mandate repeal would create in the individual market.

• Coverage losses will remain. Repealing the individual mandate will ultimately cause 13 million people to become uninsured, according to Congressional Budget Office estimates. Evidence from Massachusetts’ pre-ACA individual mandate and from the nationwide coverage gains under the ACA among people with incomes too high to qualify for federal subsidies to help them buy insurance or for the ACA’s Medicaid expansion confirms that the individual mandate has substantially increased coverage.

  Meanwhile, analyses from Oliver Wyman and Avalere — studies that Senator Collins herself cites to support her proposal — show that her reinsurance proposal would increase coverage by fewer than 1 million people (700,000 according to Oliver Wyman, 500,000 or fewer according to Avalere). That shouldn’t be surprising, since even a permanent federal reinsurance program at $5 billion per year would restore less than one-sixth of the $314 billion ten-year reduction in federal funding for coverage programs from repealing the mandate.

  Moreover, even a far larger federal reinsurance program would have limited impact. That’s because reinsurance has a more limited reach in affecting insurance coverage than the individual mandate does. Reinsurance increases the number of people with coverage only by reducing individual market premiums, which means it affects coverage only for unsubsidized individual market consumers. (For subsidy-eligible consumers, subsidies adjust to keep pace with premiums, so neither premium increases nor premium decreases meaningfully affect net premiums.) This significantly limits a reinsurance program’s potential impact, since only a minority of those predicted to lose coverage from repealing the mandate — and only a small minority of the remaining uninsured — fall into this group.

• Individual market uncertainty will persist. Repealing the individual mandate will create uncertainty and confusion in the individual market, especially in the near term. As the American Academy of Actuaries noted in its recent letter to congressional leaders regarding individual mandate repeal, “increased uncertainty and instability regarding future enrollment, premium rates, and risk pool profiles if coverage incentives are eliminated would increase the risk of insurers incurring losses. Insurers would likely reconsider their future participation in the market. This could lead to severe market disruption and loss of coverage among individual market enrollees.”

  Reinsurance funding wouldn’t address insurers’ uncertainty about how they should set their prices in light of mandate repeal. While reinsurance relieves insurers of some of the costs associated with high-cost enrollees, to set premiums they still must be able to predict how many people — including how many healthier people — will enroll. Thus, a reinsurance program does not change the fact that insurers will be at risk of large losses if their assumptions about how many people (and how many healthy people) will leave the market in response to repealing the mandate prove wrong.

  Moreover, because of its design, Senator Collins’ proposal could, if anything, increase individual market uncertainty in 2019. The Collins-Nelson bill leaves it up to the Administration to decide how to allocate federal funding among states, and up to states whether to establish reinsurance programs at all and how to structure their programs if they do. That means that insurers would likely have to make at least preliminary (and potentially final) decisions about 2019 pricing and market participation without knowing where these programs would be established and how they would work.

Providing federal start-up funding for state reinsurance programs would be a helpful stand-alone measure to reduce individual market premiums and strengthen markets. But it’s no substitute for the individual mandate.