Reinsurance Gets a Hearing in Colorado

April 18, 2018
Legislation and Policy

UPDATE, May 7, 2018: The reinsurance bill died last Friday (May 4) in the Senate State, Veterans and Military Affairs Committee. The House had passed the bill a few days earlier with support from Democrats and five Republicans from rural and Western Slope districts—areas that struggled the most with high costs for individual market insurance coverage. This proposal could come back next year, as momentum for this approach continues to build in other states. Wisconsin and Maryland legislatures just approved reinsurance proposals, and Alaska, Minnesota and Oregon already running reinsurance programs. The outlook in Colorado will depend on whether insurance premiums continue to skyrocket like they have for the past few years, or whether premiums will stabilize. The Colorado Division of Insurance will soon begin reviewing insurance carrier proposals for rates in 2019, so stay tuned.

Reinsurance is gaining momentum nationally as one solution to rising insurance premiums.

Now it will get its day in Colorado. The legislature is set to begin considering a bill that would establish a reinsurance program here. Representative Chris Kennedy, along with a bipartisan slate of sponsors in the House and Senate, introduced HB18-1392 last week.  

A new paper by CHI, “A Game-Changer for High Insurance Prices? Reinsurance Presents an Option to Aid a Troubled Market,” delves into the nuts and bolts of reinsurance — a state-run fund that would help to cover high-cost claims with the goal of reducing insurance company expenses and driving down premiums. The paper also explains how reinsurance is funded and how it could slow rapidly rising insurance premiums in Colorado.

HB18-1392 targets affordability in the individual market, which is used by people who don’t get coverage through their workplace or through a public program like Medicare or Medicaid. Premiums on the individual market rose 20 percent in 2017 and another 34 percent in 2018. Policymakers from both sides of the aisle agree that something needs to be done, but there is no consensus on the solution.

The new bill would establish a reinsurance fund to help carriers pay the health care costs of the customers that receive the most care and have the highest costs. Carriers would then be able to reduce premiums for the rest of their customers who purchase insurance on the individual market.

The proposed reinsurance program could begin operation in 2019. It would provide more relief to areas that have the highest insurance premiums, which are generally the more rural regions of Colorado. The reinsurance program would cover 30 percent of carriers’ claims cost there, while covering 20 percent of the claims cost in the rest of the state. 

The impacts of this reinsurance program on premiums have not been precisely calculated, but an earlier study conducted by Milliman for the Colorado Division of Insurance (DOI) gives a rough picture of the bill’s effects. In one scenario examined by the Milliman study, a reinsurance program that covers 25 percent of carriers’ claims cost would lead to an average premium reduction of about 20 percent. The Milliman study estimates that about 124,000 people who buy coverage on the individual market without the benefit of federal tax subsidies would benefit from this premium decrease.

What makes this approach novel is how it’s financed. The program might cost around $350 million a year, a price tag that would ordinarily stop it in its tracks at the Capitol. But Colorado could apply for a federal waiver that, if approved, would bring in federal dollars to pay for about half of the cost of the reinsurance program, money repurposed from lower tax credit costs.

The other half of the funding would come from insurance carriers, which would be assessed a special fee. That could translate into higher costs for those who get coverage through their workplaces.  So even if you don’t buy insurance through the individual market, you could be affected by a reinsurance program.

The earlier Milliman study estimates that the fee assessment could tack on about $96 per person per year to the price of insurance. Not all of this will directly hit customers’ pockets because it’s possible that carriers might absorb some of it and because employers usually pay for some of the insurance premium of their workers.

It’s all about sharing the pain. The reinsurance program would be a big help for about 124,000 people who have struggled the most to buy private insurance, and it would be paid for by a much larger group of people.

A Fair Tradeoff?

Legislators will have to decide whether reinsurance represents a fair tradeoff. When some of their constituents are suffering from 20 percent and 30 percent premium increases every year, is it reasonable to ask the large majority of their other constituents to pay a little more for their insurance?

The outlook for this bill is uncertain. On the one hand, the bill has both Democratic and Republican sponsors in the House and Senate. This bipartisan backing will improve its chances for passage, but various stakeholders have voiced concerns.

Many insurance carriers support the concept of reinsurance, but some believe that policymakers need to find a financing mechanism that doesn’t just target carriers. For example, some states fund their reinsurance programs using general tax revenue.

In addition, a reinsurance program won’t address the underlying causes of high insurance costs. Rising prices for medical services and greater use of health care will continue to drive up insurance premiums. Reinsurance is just a band-aid to a problem that needs fundamental changes.

The bill will generate a vigorous debate in the legislature. It has the potential to make insurance more affordable, but it comes with a big price tag. And it raises larger questions about fairness.

The first hearing for this bill is scheduled for Thursday in the House Health, Insurance and Environment Committee. CHI will continue to follow this and keep you up to date.

Find Edmond Toy on Twitter: @CHI_EdmondToy

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