Association for Public Policy Analysis & Management

Reinsurance is a policy option considered by states to stabilize their individual health insurance markets. Three states (Alaska, Minnesota, and Oregon) have financed state-based reinsurance programs through a Section 1332 Waiver of the Affordable Care Act and several more states have developed or are considering 1332 reinsurance proposals. To assist with better understanding of the potential costs associated with a federally funded reinsurance program administered by the states, we the costs of reinsurance for the U.S. and for four states: California, Florida, Texas, and Illinois.

Study Design: We imputed total medical expenditures for the nonelderly (age 0-64) with private non-group health insurance for the 2015–2017 Current Population Survey—Annual Social and Economic Supplement (CPS) using health care spending data from the 2012–2015 Medical Expenditure Panel Survey - Household Component (MEPS). We set a reinsurance corridor of $20,000–$250,000 and a coinsurance rate of 80/20. We applied this reinsurance design to four large-sample states to highlight the variation in the number and costs of state residents purchasing coverage in the individual market and the expenses that fell within the reinsurance corridor.

Population Studied: Nonelderly in the individual market across all states for the national estimates and four large sample states for the state estimates (California, Florida, Illinois and Texas).

Principle Findings: We project that in 2018 there will be a total of 20 million individuals in the individual market with total medical expenditures of $77.2 billion. Per-capita expenditures varied from $3,333 in Texas to $3,930 in Illinois. Nationally, less than 4 percent of individuals in the non-group market had claims that fell within risk corridor set at $20,000-$250,000, but their total expenditures of $36.7 billion accounted for 48 percent of total expenditures in the non-group market. Total reinsurance costs in the individual market based on an 80/20 coinsurance rate were $16.5 billion with per-capita costs at an estimated $23,229. For the four large-sample states, estimated reinsurance payments varied with California total reinsurance payments estimated at over $2.0 billion, Florida at $1.4 billion, Texas at $1.1 billion, and Illinois at around $680 million. Per-capita reinsurance payments for individuals in the individual market varied from $22,134 in Illinois to a $23,935 in Florida.

Conclusions: Our estimate of $16.5 billion for a fully funded federal reinsurance program represents a reasonable estimate of a cost of a current policy proposal. While our estimates do not include state contributions to the costs of reinsurance, nor an estimate of how many states would opt in to a reinsurance program, our estimate is still three times the $5 billion per year included in the Alexander-Murray proposal to finance state-based reinsurance.