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Reinsurance Proposal Can’t Fix Damage From Individual Mandate Repeal

Note: An updated analysis of Collins’ latest proposal is available here.

The tax bill passed by the Senate Finance Committee repeals the Affordable Care Act’s individual mandate, the requirement that most people have health insurance coverage or pay a penalty. Senator Susan Collins has argued that the harmful effects of repealing the mandate — higher premiums, more individual market instability, and millions more uninsured — could be mitigated if the President and Congress also adopted two additional pieces of legislation: the bipartisan individual market reform package from Senators Lamar Alexander and Patty Murray and the reinsurance bill from Senators Collins and Bill Nelson. But as we’ve explained, the Alexander-Murray bill — while good policy on its own — would come nowhere close to undoing the damage from individual mandate repeal. The same is true of the Collins-Nelson proposal.

The Collins-Nelson bill would provide $2.25 billion in each of 2018 and 2019 in federal funding for state reinsurance programs. (While states could supplement this federal funding, they wouldn’t be required to do so.) Reinsurance programs reimburse insurers for some or all of the costs associated with the highest-cost claims.

While the Collins-Nelson proposal is a sensible standalone measure, it would come nowhere close to undoing the damaging effects of repealing the mandate. Repealing the mandate would reduce federal spending on coverage programs by over $300 billion over the coming decade, which the tax bill uses to pay for permanent corporate tax cuts. Reversing the coverage losses and other harmful consequences of mandate repeal would require dedicating that amount, or significantly more, to that purpose.

More specifically, the Collins-Nelson bill — or any similar federal reinsurance proposal — would not undo the mandate repeal’s effects on premiums, market stability, or coverage.

  • Premiums. Without the mandate, fewer healthy people would sign up for individual market coverage, which would increase average costs and therefore premiums in the individual market. The Congressional Budget Office (CBO) estimates that repealing the mandate would permanently raise premiums by 10 percent, and some major insurers have projected larger effects. As Senator Collins has noted, these premium increases would likely erase — or more than erase — the Senate bill’s tax cuts for millions of people who buy coverage in the individual market.

    Based on prior CBO and other estimates, reversing the premium increases that would result from repealing the mandate would require a permanent federal reinsurance program with a net cost of roughly $5 billion per year. While it would require about $10 billion per year in gross federal funding for reinsurance, reinsurance yields offsetting federal savings from reduced costs for premium tax credits. Because premium tax credits adjust in size based on premiums, lowering premiums through reinsurance lowers federal tax credit costs. The Collins-Nelson legislation would let states choose to use these additional savings to help finance their reinsurance programs. Nonetheless, the net cost of a reinsurance program that would lower premiums by 10 percent would be about twice the maximum amount the Collins-Nelson bill could provide. And, as discussed below, even that much larger reinsurance program would come nowhere close to offsetting the mandate repeal’s effects on coverage.

  • Market stability. As the American Academy of Actuaries commented in its recent letter to Senate leaders about repealing the mandate, “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” (emphasis added).

    An underfunded, temporary reinsurance program that states can decide whether and how to implement will not reverse the uncertainty and confusion about the overall status of the individual market risk pool resulting from mandate repeal. As a result, it will not meaningfully reduce the risk that insurers will leave the market. Even a much larger reinsurance program would leave insurers in doubt about how to price their insurance products for the state of the overall risk pool: what they should assume, for example, about how many people will leave the market, how much healthier this group is than average, and how quickly the full effects of mandate repeal would be felt.

  • Coverage. CBO estimates that repealing the mandate would cause 13 million people to become uninsured, consistent with earlier estimates from the Urban Institute and RAND. While CBO notes that the magnitude of the coverage effects is uncertain, it concludes that there’s no doubt that “the number of uninsured people would be millions higher.”

    For comparison, a permanent federal reinsurance program about the size of the temporary Collins-Nelson proposal would increase coverage by fewer than 1 million people, RAND estimates suggest. Even a larger reinsurance program would have far more limited reach in affecting insurance coverage than the individual mandate. The mandate affects enrollment in coverage among people eligible for subsidized and unsubsidized individual market coverage, Medicaid, and employer coverage. By contrast, reinsurance lowers premiums and expands coverage only for unsubsidized individual market consumers.

    Pairing mandate repeal with the Collins-Nelson bill, or a similar approach, thus would not change the fact that repealing the mandate would drive up uninsured rates. That would weaken access to care, health, and financial security for millions of people. It would also substantially raise uncompensated care costs, which would ultimately be borne by providers, other health care consumers, and taxpayers.