1. Garrett-Bovbjerg, 19 July 2007; slide 1 SCI Reinsur Inst, Metro Center Marriott The Reinsurance Institute II: Evolving State-Specific Outputs and Implementation Issues A. Bowen Garrett, PhD Randall R. Bovbjerg, JD Presenters for Urban Institute Team Presentation to Reinsurance Institute’s Final Meeting with States, Marriott-Metro Center, Washington, DC; Thursday, July 19, 2007 The Reinsurance Institute is funded through the State Coverage Initiatives (SCI) program, which is a national program of the Robert Wood Johnson Foundation, administered by AcademyHealth, Washington, DC. Content of slides is responsibility of the authors.

2. Garrett-Bovbjerg, 19 July 2007; slide 2 SCI Reinsur Inst, Metro Center Marriott Roadmap I. Interactions with states II. Emerging state results III. Advice on implementation IV. Some lessons learned

3. Garrett-Bovbjerg, 19 July 2007; slide 3 SCI Reinsur Inst, Metro Center Marriott Interaction with States Established baseline population distributions in each state Continuing iterations on –The reinsurance policy options we model –Interpretation and qualification of results –Ways of reporting the model’s output Ongoing model refinements in response to states’ analytic needs Ongoing discussion and consultation with states

4. Garrett-Bovbjerg, 19 July 2007; slide 4 SCI Reinsur Inst, Metro Center Marriott Emerging State Results – Washington State Example Reinsurance policy for entire small group (<50) and nongroup markets –Attachment point: $10,000 –Upper limit: $90,000 –Coinsurance: 10%

5. Garrett-Bovbjerg, 19 July 2007; slide 5 SCI Reinsur Inst, Metro Center Marriott Emerging State Results – Washington State Example, Overall Effects Small group premiums decline by about 31% Nongroup premiums decline by 38% Offer rate of small firm workers increases from 71% to 81% Number of uninsured falls from 624K to 563K (-61K)

6. Garrett-Bovbjerg, 19 July 2007; slide 6 SCI Reinsur Inst, Metro Center Marriott Emerging State Results – Washington State Example, State Program Costs Small group costs:$376 Million Nongroup costs:$224 Million Total state cost:$600 Million Cost per newly insured:$9,800 Reduced premiums for existing insured –Small group single policy:-$1,115 –Nongroup single policy:-$1,461 (estimates are preliminary)

7. Garrett-Bovbjerg, 19 July 2007; slide 7 SCI Reinsur Inst, Metro Center Marriott Emerging State Results – Wash. St. Example, Changes in Nongroup Single Premiums Rating groupBeforeAfterChange Pct. change Age under 25, healthy$1,859$1,215-$643-35% Age 25-45, healthy$2,597$1,691-$906-35% Age 45-65, healthy$5,215$3,418-$1,797-35% Age 45-65, fair or poor health $14,764$7,870-$6,894-47%

8. Garrett-Bovbjerg, 19 July 2007; slide 8 SCI Reinsur Inst, Metro Center Marriott Emerging State Results – Wisconsin Example Interested in reinsurance policies targeting the smallest employer groups (1-9 employees) that cost roughly $100 million Policy (LL-UL / Coins) Premium change (single/family) Change in uninsured Program cost $35K-$75K / 10%-28% / -40%-26,400 $106 Million $15K-$75K / 20%-33% / -42%-27,600 $116 Million $20K-$75K / 20%-26% / -35%-25,500$93 Million (estimates are preliminary)

9. Garrett-Bovbjerg, 19 July 2007; slide 9 SCI Reinsur Inst, Metro Center Marriott State Costs beyond Claims Administrative Costs, Start-Up… Can be high, although experience varies Set-up activities include: –administrative-services contract & systems –governance structure & mechanisms (e.g., board) –plan of operations –claims & accounting software –professional contracts (law, accounting) –actuarial systems for budgeting, reserves –banking services (e.g., negotiated line of credit)

10. Garrett-Bovbjerg, 19 July 2007; slide 10 SCI Reinsur Inst, Metro Center Marriott Costs beyond Claims, cont’d Administrative Costs, Ongoing… Biggest is general administration, also outside fees Substantial fixed costs create economies of scale (higher claims volume lowers cost as %age load) Other influences include: –complexity of activities (e.g., whether to compute premium) –number of insurers in the program –audit frequency & scope –extent of year-to-year changes in program –Requirements of admin. proced. act, budgeting rules in state Experience shows that costs range from 0.6% to about 3% of reinsured claims expense

11. Garrett-Bovbjerg, 19 July 2007; slide 11 SCI Reinsur Inst, Metro Center Marriott Impacts beyond Subsidy Potential benefits –reduced year-to-year claims volatility, risk premium –reduced need for capital under risk-based rules –reduced year-to-year turnover across plans, transaction costs –lower need for/costs of private reinsurance –less underwriting, lower costs Potential costs –New transaction costs –Moral hazard for primary insurers

12. Garrett-Bovbjerg, 19 July 2007; slide 12 SCI Reinsur Inst, Metro Center Marriott Implementation Three Phases from Policy Idea to Program Execution Develop general reinsurance concepts of interest in state Operationalize selected concept(s) with specific program provisions, legislation Roll out program administratively, monitor, correct

13. Garrett-Bovbjerg, 19 July 2007; slide 13 SCI Reinsur Inst, Metro Center Marriott A. Develop General Concepts Start with goals of reinsurance –intended beneficiaries, specific problem, logic of how interventions help, role within overall vision Understand context –existing market, regulation, insurer behavior –concommitant interventions, e.g., “Connector” Model expected impacts vs. intended –formally, as here, or other approach –compare with other alternatives “Sell” concept/vision to constituencies –build shared understanding even if not political consensus

14. Garrett-Bovbjerg, 19 July 2007; slide 14 SCI Reinsur Inst, Metro Center Marriott B. Operationalize Concept(s) Tailor intervention to intended beneficaries –uninsured or already insured; nongroup, small group Tailor to perceived problem(s) –high-end reinsurance plausibly helps new, small insurers, very small groups (e.g., $30-100K) –lower-corridor reinsur. helps more insurers, does more to reduce risk selection (e.g., $5-75K) Worry about key issues –make subsidy credible, durable –track/regulate premium savings & their distribution –address moral hazard & transaction costs –HIPAA, other legal compliance issues Write enabling legislation

15. Garrett-Bovbjerg, 19 July 2007; slide 15 SCI Reinsur Inst, Metro Center Marriott C. Administrative Roll-Out Again, allow some time Budget realistically for start-up costs Expect slow ramp-up of claims experience Phase in functional capabilities –implementation planning, organized roll-out, ongoing monitoring, mid-course corrections –administrators need tools, flexibility to respond to unintended consequences Nuts and bolts –report will have checklist of administrative tasks

16. Garrett-Bovbjerg, 19 July 2007; slide 16 SCI Reinsur Inst, Metro Center Marriott Nuts & Bolts Working Checklist

17. Garrett-Bovbjerg, 19 July 2007; slide 17 SCI Reinsur Inst, Metro Center Marriott Karl’s Cross-Cutting Comments Create strong & flexible administrative authority, but balance with accountability & oversight Keep communication clear throughout -- among administrators, policy overseers, carriers Assure that program can do timely & accurate accounting and budgeting Conduct independent audits of carrier compliance (build trust, but verify) Re-assign, hire, or contract for experienced staff

18. Garrett-Bovbjerg, 19 July 2007; slide 18 SCI Reinsur Inst, Metro Center Marriott Some Lessons Learned Policy makers appreciate quick-turnaround estimates “Knowing the territory” helps build credibility, institu- tional knowledge even without direct input into modeling Useful to understand practical administrative issues Early specifications often need reformulation –specificity issues (e.g., what is “high risk”) –affordability issues –refocusing on highest priorities Frequent give and take with participating state staff is very helpful

19. Garrett-Bovbjerg, 19 July 2007; slide 19 SCI Reinsur Inst, Metro Center Marriott End