System-Wide Strategies to Cover the Uninsured: Reinsurance and Rate Regulation Deborah Chollet Senior Fellow, Mathematica Policy Research and The Robert Wood Johnson Foundation’s State Coverage Initiatives Program ILLINOIS HEALTH FORUM Chicago, Illinois December 7, 2005

Overview Reinsurance programs Reinsurance programs Conventional rate regulation Conventional rate regulation New concepts of rate regulation New concepts of rate regulation 2

Reinsurance programs What is reinsurance? What is reinsurance? –Insurance for insurers –Recognizes that relatively few insured lives account for most medical cost –Captures insurers’ highest costs and pools them more broadly 3

Unsubsidized vs. subsidized reinsurance Unsubsidized (e.g., CT, ID, NM) Unsubsidized (e.g., CT, ID, NM) –Stabilize premium change by making insurer liability more predictable –May encourage insurers to hold less surplus and, therefore, lower premiums –Private healthcare reinsurance is rare Subsidized (e.g., NY, AZ) Subsidized (e.g., NY, AZ) –Intended to further reduce premiums 4

Example: Healthy New York Reinsurance for Reinsurance for –Small, low-wage employers (30% < $33,000) not offering coverage in the past year –Sole proprietors and individual workers < 250% FPL Standardized, limited benefits (no MH/SA, limited Rx); HMOs must offer Healthy NY product Standardized, limited benefits (no MH/SA, limited Rx); HMOs must offer Healthy NY product Participating insurers pay initial medical costs each year for all covered lives Participating insurers pay initial medical costs each year for all covered lives Healthy NY pays 90% of claims between $5,000 and $75,000 Healthy NY pays 90% of claims between $5,000 and $75,000 5

Healthy New York, cont. Enrollment rising quickly since 2003 (now > 11,000) Enrollment rising quickly since 2003 (now > 11,000)  About half sole proprietors and individuals  Healthy population Average Healthy NY premiums for small groups were 40% less than market rates in 2004 Average Healthy NY premiums for small groups were 40% less than market rates in 2004 Average Healthy NY individual premiums were one third of market rates Average Healthy NY individual premiums were one third of market rates Program cost = $449/person in 2004, from tobacco settlement funds Program cost = $449/person in 2004, from tobacco settlement funds 6

Example: Arizona Healthcare Group Reinsurance for participating small groups with 50 or fewer employees Reinsurance for participating small groups with 50 or fewer employees Program pays carriers to offset medical losses that exceed 86% of premiums Program pays carriers to offset medical losses that exceed 86% of premiums State cost = $4m/yr for about 12,000 enrolled lives in 2004 (about $330 per enrollee) State cost = $4m/yr for about 12,000 enrolled lives in 2004 (about $330 per enrollee) 7

Reinsurance vs. a high risk pool Useful for small groups as well as individuals Useful for small groups as well as individuals Helps support guaranteed issue (versus denial and referral in a high-risk pool system) Helps support guaranteed issue (versus denial and referral in a high-risk pool system) No premium spike for health status No premium spike for health status Transparent to enrollees (and employers) Transparent to enrollees (and employers) 8

Conventional rate regulation Community rating – no rating on health status Community rating – no rating on health status Rate bands Rate bands  Age  Health status  Comprehensive rate bands Pure community rating Pure community rating Renewal rates Renewal rates 9

Pro’s and con’s of conventional rate regulation Pro’s Pro’s –Forces broader risk pooling –Makes the market more predictable and stable for employers/consumers –Encourages coverage among people likely to need care (older, sicker) by cross-subsidizing them Con’s Con’s –Difficult to develop low- cost products for low-risk classes –May encourage insurer consolidation to manage risk, reducing and/or altering competition –May discourage coverage in low-risk classes 10

Emerging concepts of rate regulation in concentrated health insurance markets Minimum small-group loss ratio (NJ, ME) Minimum small-group loss ratio (NJ, ME) Maximum insurer surplus or “unassigned funds” Maximum insurer surplus or “unassigned funds”