The Effects of Political Versus Actuarial Uncertainty on Insurance Market Stability

Insurer Participation

This extraordinary degree of political uncertainty has undoubtedly contributed to insurers’ reluctance to enter or remain in the ACA’s individual market. Moreover, local market conditions have made insurer participation far more challenging in some states than in others, as shown in table 2.

Nationally, looking at the Marketplace exchanges, insurer participation dropped by almost 40 percent between 2016 and 2018 (HHS 2017; Haislmaier 2018; Semanskee et al. 2017; see also Abraham 2020). Eight states had only a single insurer in 2018 (Alaska, Delaware, Iowa, Mississippi, Nebraska, Oklahoma, South Carolina, and Wyoming), up from five in 2017, and rural areas in many states had only a single insurer. Among federal exchange states, single-insurer areas accounted for 29 percent of enrollees in 2018, up from 20 percent in 2017 and 2 percent in 2016 (Weinberg and Haase 2017; HHS 2017).

In 2019, however, insurer participation saw a notable uptick. No state saw any insurers withdraw or retrench for 2019, and eighteen had a new insurer (or two) enter (or reenter) (Abelson 2018; Mathews 2018).

That pattern is also seen in our study states. In both 2017 and 2018, six of the ten states saw declines, but only three had declines both years, and declines were noticeably smaller for 2018 than for 2017, with the exception of Iowa. Further, insurer participation increased for 2019 in half of these states.

Iowa is a good case study in the initial market tumult. The state initially had half a dozen insurers, but its consumer-operated health plan (co-op) failed, and Aetna and United withdrew as part of nationwide corporate decisions. A Wisconsin-based HMO was in one corner of the state for a while, but then withdrew due to losses and regulatory uncertainties. This left Medica and Wellmark Blue Cross. Initially, Wellmark remained out of the Iowa market but as other insurers withdrew, it decided to enter for 2017. It then left the Iowa market for 2018, however, in the face of substantial losses, along with tumult in the market after Republican efforts to repeal the ACA and cancel cost-sharing payments, which left only Medica for 2018.

The situation in Iowa has improved, however. Wellmark reentered the market for 2019, noting that legislative and regulatory uncertainty has “dissipated just enough that we think we’re able to step back in,” as long as “there aren’t any significant changes to the ACA” (Ramm 2018). Informed speculation also suggests that Wellmark’s reentry decision was tied to the state’s decision to allow it to start selling non-ACA-compliant coverage through the Farm Bureau. Some are concerned, though, that Wellmark’s reentry and its embrace of the non-ACA-compliant market could cause Medica to retract.

Signs of potential market improvement were evident in some other states. In Maine, Anthem Blue Cross withdrew from the exchange for 2018 but continued to keep a toe in the off-exchange market in a remote corner of the state, which allowed it to reenter the market fully in 2019 (due to the state implementing its proposed reinsurance program). In Ohio, Anthem Blue Cross withdrew both on and off the exchange for 2018, but kept its off-exchange presence in just a single county, which allowed it to reenter for 2019.

Elsewhere, although significant market entries were not anticipated, market participants and observers felt that insurer participation was not likely to substantially worsen, as things now appear, because the major market contraction had already happened in 2016. For instance, Texas now has eight insurers, down from fourteen in 2015, and only Blue Cross is statewide, but the major exodus was after 2016, in response to sustained losses. For 2018 and 2019, although Humana and a Nevada-based insurer (Prominence) left the Texas market, Centene entered and Oscar expanded its geographic territory, so the level of competition remained approximately the same as in 2017, the number of single-insurer counties having increased only 5 percent. Texas sources thought that substantial additional retractions or exits were unlikely because insurers are now profitable and enrollment remains sizable; in fact, some sources thought that insurers that previously left might consider reentering the exchange market.

Covering Bare Counties

A significant indication that the ACA marketplace is not on the precipice of collapse is that no areas had no insurers for the 2018 and 2019 open enrollments. For a time in 2017, it appeared that as many as eight states might be facing such “bare” counties, but they all were able to secure full market coverage, using techniques like the following from our study states (for more, see Lucia et al. 2017).

In several study states (including Colorado, Maine, Minnesota, and Ohio), insurers and informed observers credited “cooperative,” “flexible,” “proactive,” and “problem-solving” state regulators with helping keep insurers in the market and convince them to cover additional counties. Minnesota subjects in particular emphasized that insurers there “have largely stayed put through thick and thin” because the collective “desire to make the individual market stable [and] accessible [so that] everyone else gets insurance” is strong. As one observer remarked, “the individual market is a little bit of a labor of love and sort of a commitment to the state [by insurers] as much as it is sound business.”

The most frequently mentioned form of regulatory flexibility was the ability in most states to either file two sets of rates, or to quickly revise previous rate filings, to account for the Trump administration’s abrupt decision (discussed earlier) to stop funding cost-sharing subsidies. In Iowa, for instance, several sources noted that insurers were nervous about being in a market where cost-sharing payments were being used as a political bargaining chip, but Medica, now the state’s only insurer, decided not to withdraw after the insurance department allowed it to file contingency (backup) rates. In contrast, Medica’s exit from North Dakota was attributed to its not being allowed either to file alternative rates or to build into its rate structure the possibility of losing cost-sharing funding.

Reinsurance or other forms of risk-spreading did not emerge as a strong potential driver of insurer participation. Reinsurance can play an important role in stabilizing insurance rates, but we saw little or no indication that it has been key to an insurer’s decision to enter or leave a market altogether. Experience is still new with reinsurance, however, so its impact is not yet fully known. Also, it is quite possible that reinsurance could help participating insurers expand to cover more of a state they are in, even if it does not affect decisions to leave or stay out altogether. Reinsurance can make insurers more comfortable with entering underserved areas because it directly addresses concerns about the greater difficulty in establishing actuarially sound rates in less populous areas or in areas where an insurer lacks data to project local medical costs.

Maintaining Profitability

Despite these successful uses of persuasion and regulatory flexibility, observers and participants noted that insurer participation and market coverage is precarious, “on really thin ice,” unless insurers are able to make a profit in the exchange market. Prior to the 2018 regulatory upheavals, insurers were becoming profitable, some handsomely so. Just as sustained losses through 2016 were the main reason that insurers left the market then, many subjects noted the ability to now turn a profit as why insurers are now entering, or remaining in, these markets. Insurers now in the market are willing to adapt to almost any of a range of market rules, as long as the rules are clear and stable, so that they can rate for them accurately.

Several sources noted the continued likelihood of profits as why bare counties are unlikely to become widespread: given the ACA’s built-in subsidy structure, insurers that face no competition can basically “print money” as long as cooperative regulators allow them to set their premiums high enough to cover anticipated costs and a reasonable margin. Other analysts, however, note that even monopoly status does not guarantee insurer participation (Lucia et al. 2017). Making a profit, or avoiding substantial losses, depends on accurately forecasting medical expenses. Doing so is difficult in thinly populated areas, where even just one patient can cause pricing to be inadequate.

To end on a positive note, insurers in many of the study states thought that ordinary actuarial uncertainty is not destabilizing under the ACA. Therefore, many subjects thought that, “absent the distractions” of changes in federal regulatory policy, participation in the ACA market could stabilize and more insurers might reenter. That the ACA’s subsidy structure makes that portion of the market “hard to kill” is key (Abelson 2018). As a Maine health policy expert explained, “The subsidy structure saves everything. As long as we continue to have robust enough subsidies and subsidized people, the insurers will stay pretty solvent.”

The Congressional Budget Office endorses this view, explaining in 2018 that

the marketplaces are stable in most areas in large part because most enrollees purchasing subsidized health insurance there are insulated from increases in premiums. The subsidies—combined with the rules requiring insurers to offer coverage for preexisting medical conditions, the relative ease of comparison shopping in the marketplaces, and the effects of other requirements—are anticipated to produce sufficient demand for nongroup insurance, including among people with low health care expenditures, to attract at least one insurer almost everywhere. (CBO 2018)

However, the CBO also warned that

substantial uncertainty continues to exist about federal policies affecting the nongroup market and about the effects of eliminating the penalty related to the individual mandate. That uncertainty may affect insurers’ decisions to participate in the nongroup market in future years, and such withdrawals could threaten market stability in some areas of the country. (2018)

Confirming this assessment, an insurer in Maine said that “if it were not for the prospects of association and short-term plans, those things we are facing in 2019, we are at a relatively stable place.” A Minnesota insurer spoke similarly: “the premiums are [finally] covering the medical bills, the only question is, can we just stop changing the rules? And then if we could [reduce] premiums it will all kind of stabilize over time.” As an Ohio regulator put it, “just not making changes for a while” would be the best thing to improve stability.

Achieving Profitability

Following these earlier rounds of steep increases, observers in most of the study states thought that the market had become profitable by the second half of 2017. These impressions are confirmed by national analysts, which consistently report that the individual market became profitable in 2017 (Fritchen and Giesa 2018; Fiedler 2017; S&P Global 2018; Cox, Semanskee, and Levitt 2018). Indeed, the individual market now appears to be substantially more profitable than it was before the ACA. The Trump administration’s Council of Economic Advisers released an extensive report on “The Profitability of Health Insurance Companies” that explained in detail:

While insurers initially incurred losses in the ACA marketplaces as they adjusted to new regulations and a relatively unhealthy risk pool, insurers are now profiting on the [individual market], with higher premiums that are largely covered by federal premium subsidies. . . . Health insurance companies initially struggled to make a profit in the post-ACA individual and small group markets. Insurers were unsure how to price insurance with the new ACA requirements such as, guaranteed-issue, modified community rating, and an expansive minimum essential benefits requirement. They underpriced their products relative to their enrollees’ health risks. Many insurers left the market altogether. But the remaining insurers, despite the expiration over a year ago (2016) of the reinsurance and risk corridors programs which were meant to financially protect insurers, have started to make higher profits again. (White House 2018)

The White House report continues by documenting that “the gap between individual market premiums and claims payments was much higher in 2017 than pre-ACA. . . . Gross profit margins (premiums less claims) have increased as the small number of remaining companies gained experience with the . . . risk pool” (2018).

More than simply achieving profitability, recent rate increases substantially overshot their cost targets in two study states (Minnesota and Alaska), resulting in substantial rate decreases or even refunds.

Pricing for Uncertainty

Despite the profitability most insurers achieved by 2017, steep price increases continued into 2018 for several reasons. One was insurers’ ordinary actuarial uncertainty over the extent to which their 2017 pricing had in fact achieved profitability. Rates for 2018 needed to be filed by mid-2017 to allow time for review and revision before open enrollment in November. At that point in the year, however, insurers did not yet have a full picture of how accurate their prior year’s pricing was because claims tend to be higher in the fourth quarter once more patients have met their deductibles.

Moreover, sources explained that, in states with several competing insurers, insurers face actuarial uncertainty each year about whether their risk pool will change substantially from the previous year, due to an inherent volatility in enrollment. This volatility is caused in part by the ACA’s subsidy structure, which is set to the second lowest priced silver plan. As competing insurers adjust their prices, the reference plan can change each year, causing highly price-sensitive subscribers to seek out less costly options. A Texas actuary explained that this structure leads to “fierce price-cutting” as insurers attempt to gain, maintain, or regain market share each year. Not only can large numbers of subscribers change plans each year, but insurers that underpriced in the previous year will need steep increases the following year to avoid large losses, causing many of their new enrollees to switch again. This pricing dynamic can cause a “lot of churn” in enrollment, as much as 40 percent turnover (according to the Texas actuary), which “is terribly unsettling” to actuaries because they lack data to estimate the claims for their new pool of enrollees. Not knowing for sure, actuaries tend to price more conservatively, meaning with an additional rate cushion.

For these reasons, until year-to-year changes in pricing and market participation become more stable, some observers felt that insurers would continue to price conservatively, meaning add a cushion on top of the trend in expected medical expenses. Some subjects contrasted this element of instability in the ACA market with the much more stable enrollment patterns under Medicare, where people remain enrolled for the duration of their life and make enrollment changes infrequently.

Political Uncertainty

Although several subjects discussed these aspects of actuarial uncertainty, the type of uncertainty mentioned far more frequently was the political uncertainty that burst on the scene in 2017. As previously noted, this uncertainty has affected insurers’ decisions to enter or leave the market. For insurers that remain in the market, political uncertainty also affects their pricing decisions. For 2018, we heard that political uncertainty following the 2016 elections affected pricing decisions much more strongly than did actuarial uncertainty, which is confirmed by additional examples collected from insurers in other states (CBPP 2017; U.S. Congress 2017). The Blue Cross plan in Tennessee, for example, explained that, in deciding to reenter a part of the state it previously had exited, it had to increase 2018 rates more than expected, because, “given the potential negative effects of federal legislative and/or regulatory changes, we believe it will be necessary to price-in those downside risks, even at the prospect of a higher-than-average margin for the short term, or until stability can be achieved” (BCBS-TN 2017). Tennessee’s commissioner of insurance commented that, “until the insurers know the rules of the road, it’s that instability, that uncertainty, the insurers hate the most. They are going to price for that” (Fletcher 2017).

Overall, one national observer (Charles Gaba) calculated that, for 2018, the Trump administration’s “sabotage” of the ACA accounted for over half (17 percentage points) of the average rate increase of 28 percent (Gaba 2018a, 2018b). According to his credible calculation, regulatory uncertainty and change accounted for 50 percent more of insurers’ rate increases than the increase in underlying medical costs.

The American Academy of Actuaries also stresses the timing difficulty that regulatory change presents (2017). Even if insurers know the full extent of regulatory change in advance, it takes more than a year to have enough real-world data to gauge the effects of changes in a complex market environment. Given that rates need to be filed about six months in advance and cannot be changed for a year once they take effect, a full two years is usually needed to correctly adjust prices for regulatory change. Thus, if significant change occurs regularly, insurers will repeatedly struggle to achieve a stable and predictable pricing pattern. As an Ohio insurer explained, the specifics of any particular regulatory change are often not as important as simply the uncertainty created by ongoing regulatory change, stating that “not knowing what to expect” is the bigger problem for “an industry that likes certainty.”

Hope for the Future

Obviously, continuing rate increases are not sustainable at the levels experienced the past few years, and many subjects saw the pattern as an ominous sign of the market’s instability. Others, however, felt more optimistic because pricing in the individual market has, for the most part, reached a sustainable level and therefore, absent additional adverse regulatory changes, future increases should be moderated, more or less in line with the trend in medical costs. According to a Maine insurer, “If you put the whole market together, I don’t think the whole market was terrible before the uncertainty and federal changes [in 2017]. There was not a tremendous amount of underfunding [going into 2018] so we should have been pricing for trend at that point.”

Elsewhere, a good number of insurers and analysts thought that “the worst may be over,” as one Colorado source put it. In Texas, for instance, several informants thought that the exchange market was “settling down” because insurers were able to increase rates enough to catch up with initial adverse selection: “It used to be stressful, but now we’re used to it. . . . It’s steady. . . . The [initial] risk pool [proved] expensive, but [it’s] work[ing] okay” now.

These statements were made, however, before the 2019 federal regulatory changes that greatly expanded the ability to purchase noncomplying plans outside the ACA market. Thus, although insurers in many states held rates steady for 2019, ongoing developments could prompt insurers to increase future rate requests.

State-Based Exchanges

Enrollment has been stronger in the seventeen states that operate their own marketplace exchanges than in the thirty-four that default to the federal exchange. This is likely because states with their own exchanges are more committed, in various ways, to making the ACA work.

Sources in Colorado and Nevada for instance, attributed much of their success in “insulating” the market from recent federal policies to their ability to commit substantial funds to marketing and outreach in order to offset the “drastic” cuts that “slashed” and “gutted” federal funds for these purposes. Some sources also emphasized the need for state-based marketing to offset the Trump administration’s “messaging” and “narrative that intentionally feeds uncertainty [about the status of the ACA] and that undercuts the work that we were trying to accomplish” of informing people about the continued availability of highly subsidized coverage. A Minnesota source, for example, emphasized that there is “just a negative narrative out there that is I think just so damaging to consumer confidence.”

In North Carolina, which uses the federal exchange, actuaries for the largest health plan attributed a portion of their 2018 premium increase to “consistent messaging from Federal policymakers stating their intent to abolish the ACA coverage mandates, [which we believe] will embolden many healthier individuals to drop coverage” (BCBS-NC 2017). Similarly, the Blue Cross plan in Florida said that “one of the first messages we knew we had to [convey during] open enrollment is, ‘the ACA is still here.’ [W]e did not assume that people knew that, and they didn’t. They assumed that the President had ended it. . . . So, it’s a very confused marketplace” (Brookings Institution 2018).

Supporting the benefits of positive messaging, a study from California reports that marketing efforts by its state-based exchange have resulted in a much stronger capture (79 percent versus 64 percent) of the subsidy-eligible population than in federal exchange states, which has produced a risk pool in California that is 20 percent healthier than in federal exchange states (Lee et al. 2017). One attraction of investing in marketing and outreach is that the positive returns potentially compound each year (until market saturation) because these efforts can both attract new enrollees and help keep existing ones. Thus the California analysis estimates that increased marketing in other states could lower premiums nationally by 2 to 3 percent each of the next two years (Covered California 2018).

In addition to having their own marketing budget, the two state-based exchanges in this study that operate their own enrollment platforms (Colorado and Minnesota) also attributed their relative success to their ability to extend open enrollment for several weeks beyond the federal window, which was only half the length of the previous year. Others, however, felt that shorter open enrollment was not necessarily a major disadvantage. The shorter enrollment period is, they noted, similar to that used in Medicare (for Part D coverage and Medicare Advantage plans), and that six weeks is enough time once people have become used to the open enrollment process because people (who by nature tend to procrastinate) are motivated by a deadline, especially if they “know they need insurance.”

Despite the split views on the need for longer open enrollment, most agreed that state-based exchanges give states more control over measures that can maximize enrollment.⁴ Minnesota, for instance, at the last minute added an extra “special enrollment” week onto the end of its 2016 and 2017 open enrollment period to allow residents to take advantage of a just-enacted rebate for unsubsidized subscribers. A preference for a state-run exchange was also heard in Nevada, whose exchange currently contracts to use the federal HealthCare.gov platform. There, officials were frustrated both by the shortened open enrollment and by their sense that CMS was not flexible enough in its service hours and maintenance downtime to accommodate the large Nevada workforce (in gaming and entertainment) that has atypical work schedules. For this and other reasons, Nevada recently appropriated funds to launch its own web platform by 2020. Similarly, Minnesota’s Democratic governor vetoed a Republican-led bill in May 2017 that would have required the state to move to the federal exchange, citing the recent successes of their state-based exchange.

One additional factor that has affected enrollment is political viewpoint. All else being equal, enrollment nationally has been lower in areas with more Republican voters, ostensibly due to more negative attitudes about the ACA (Lerman, Sadin, and Trachtman 2017). Among our study states, sources in Alaska and Iowa especially noted that vocal opposition to the ACA by current or former public officials had dampened enrollment, even by people eligible for substantial subsidies. Owing to this lower take-up, national research shows that the risk pool is less healthy in Republican leaning areas, producing higher premiums in those areas in 2017 (Trachtman 2018). Interestingly, this partisan relationship did not exist in insurers’ initial pricing decisions for 2014, but emerged subsequently.

Further indication that supportive attitudes and regulatory measures improve the ACA risk pool comes from the rate increase data presented in table 3 and documented elsewhere (Hall and McCue 2018), which show that, although rate increases were very steep, over the previous two years they were 5 to 10 percentage points lower in states operating their own exchanges than in those that default to the federal exchange.

Unsubsidized Enrollment

Field interviews revealed an entirely different story about enrollment by individuals who are not eligible for an advance premium tax credit (APTC) subsidy. This story is somewhat more difficult to tell, however, because we lack clear and consistent data about off-exchange enrollment, where much (but not all) unsubsidized enrollment occurs. Most difficult to measure is enrollment in non-ACA-compliant plans, such as those that have been grandfathered from before March 2010, or grandmothered from before January 2014. Nevertheless, data are available for ACA-compliant plans sold to unsubsidized (non-APTC) purchasers, either on or off the exchanges. For that population, table 4 shows a notable decline in 2017, when ACA premiums began to spike; a subsequent report shows a further decline of 33 percent in 2018 (Semanskee, Cox, and Levitt 2018), resulting in a two-year exodus of roughly half the market. The unsubsidized decline was substantially greater in some states than others. As table 4 shows, states that defaulted to the federal exchange did twice as badly in 2017 (–27 percent) as those operating their own exchanges (–12 percent).

In our study states, key informants reported variously that enrollment declines among unsubsidized people were “disturbing,” “surprising,” or reflecting a “precipitous” “exodus.” A number of observers feared that this portion of the market was becoming a virtual “high-risk pool,” meaning that, for the most part, only people who remain will have expensive health conditions.

These concerns were heard both in states with more successful and less successful open enrollment on their exchanges. For instance, in Minnesota, although exchange enrollment has increased substantially, unsubsidized ACA enrollment dropped 53 percent in in 2017, and the individual market overall (including non-ACA plans) has declined from 309,000 in 2015 to 166,000 in 2017, and further still in 2018. This decline was reported to be most notable in rural areas, where the proportion of the population with individual coverage has dropped by more than half in the past few years.

A similar pattern has occurred in Iowa, which has had an especially strong off-exchange market. In earlier years, Iowa had substantially more unsubsidized than subsidized subscribers in ACA plans, but, by 2017, unsubsidized subscribers constituted only 42 percent of the ACA market, meaning that Iowa’s unsubsidized enrollment dropped by almost half. Similar, or even more severe, trends were noted in Alaska, Arizona, and Texas, but in half the study states (Colorado, Florida, Maine, Nevada, Ohio), unsubsidized enrollment held fairly steady or declined only moderately through 2017. However, in several of those states, subjects feared that the additional steep rate increases for 2018 drove away more people who do not qualify for subsidies.

Sharply increasing premiums accentuate the difference between those who do and do not qualify for subsidies. The ACA’s subsidy structure cushions the impact that premium increases have for those who qualify for a subsidy because the ACA caps the cost of the second lowest silver plan in each rating region to 9.7 percent of household income. Subsidies cease, however, for people above 400 percent of the federal poverty line (which, in the continental United States, equates to almost $50,000 for a single person or $100,000 for a family of four). If people earn even a dollar more than the 400 percent ceiling, they receive no subsidy—a phenomenon known as the “subsidy cliff” (Norris 2016).

When the ACA exchange first started, the subsidy cliff was not nearly as dramatic as it is now because premiums were substantially lower. Scenarios vary based on a person’s age and family size, but, in general, in 2014 and 2015, people would typically pay the same or a similar amount for insurance whether they were just below and just above the 400 percent subsidy ceiling. Once insurance premiums started to increase steeply, in 2016, the subsidy cliff became much more pronounced, and especially so following premium increases in 2017 and 2018. Now, earning more than the subsidy ceiling can cause someone to pay several thousand dollars more for their insurance.⁵ Insurer Medica, for instance, provided the following example for young parents with two children.⁶ If a family’s income is $98,000, their insurance premium for silver coverage is capped at $9,500 a year, but if family income is $101,000, there is no cap and the insurance premium increases to $27,000 a year (paid after taxes).

Steep premium increases would likely produce reduced enrollment even without the subsidy cliff, but the cliff creates an even greater divide in how rate increases affect enrollment, because only people who receive subsidies are sheltered from the brunt of premium increases. Indeed, the ACA’s subsidy structure can end up actually reducing the net cost for some plans as the sticker price increases, since the subsidy is based on a particular reference plan (the second lowest silver), which may end up increasing more than other plans. This auto-adjusting subsidy feature “insulates” most of the exchange market from price increases, but people above 400 percent of poverty remain fully exposed to those increases. Thus, only they are likely to find that premium increases make coverage substantially less affordable.

Accordingly, many observers noted that the individual market has “bifurcated” into essentially two submarkets: subsidized (through the exchanges), and unsubsidized (mostly off-exchange). The subsidized portion was seen by most informants as remarkably “resilient,” “surprisingly robust” (see Abelson 2018). But, those who are ineligible for subsidies are “SOL” [s*** out of luck] because that part of the market “is going to be terrible” and there is “no help on the horizon” for them.

Expanding Premium Subsidies

The most obvious measure to address the subsidy cliff is simply to expand subsidies to people who continue to face unaffordable premiums—especially those above 400 percent of the poverty level. Reinsurance helps that segment of the population only indirectly, by reducing premiums across the board. Reinsurance is also indirect in that it reimburses insurers’ claims costs after they have set their premiums, with the hope that this will help to keep premiums lower, but reinsurance offers no guarantee that all of its funding will accrue to the benefit of consumers in the form of lower premiums. Some of this funding might instead go toward increasing insurers’ profits.

For example, a study of Medicare Part D’s reinsurance program concluded that only about half of its reinsurance payments flow through to benefit consumers in the form of reduced premiums or better benefits; the rest is retained by insurers, and in less competitive markets, they retain more than 80 percent of the reinsurance benefit (Cabral, Geruso, and Mahoney 2017). Similarly, under the ACA, various estimates indicate that reinsurance appears to be a decidedly expensive way to increase the number of people purchasing insurance. Milliman’s analysis for Maine’s reinsurance proposal, for instance, estimated that its proposed $55 million in reinsurance funding would reduce the number of uninsured by only roughly one thousand, which equates to $55,000 per additionally insured person (Ely et al. 2018). Relative inefficiency is also reflected in a report by RAND, which analyzes various scenarios for improving the individual market. RAND’s analysis suggests that, for the levels of funding they specified, expanding subsidies could cost half as much per new enrollee as funding reinsurance (Liu and Eibner 2018).

Therefore, some interview subjects questioned whether reinsurance is the best use of funds for market stabilization. Prior to adopting reinsurance for 2018, Minnesota in fact used $500 million of state funding in 2017 to rebate 25 percent of the premium to individual market subscribers who did not receive subsidies in order to offset a portion of the massive rate increases that year. Unfortunately, the appropriation was not authorized until the end of open enrollment and thus it came as a pleasant surprise to those who had already enrolled, rather than being available earlier as an inducement for more people to enroll. Accordingly, observers thought that this was “a complete lost opportunity” or questioned whether it “makes sense” to “pour so much money into serving a small population of the market.”

Nevertheless, several Minnesota subjects thought that a direct consumer subsidy is an alternative worth considering for the future. Unlike reinsurance, one source noted that the rebate is “something people understand and don’t have to reinterpret.” Another noted that “at least you know that it’s offsetting directly versus thinking that the health plans are spending those resources effectively.” Others thought that the reinsurance program that Minnesota instituted following the one-year rebate was “just flushing money down the toilet,” by giving it to insurers without accountability for how it is used. One source commented that reinsurance is “hugely expensive for the number of people that are in the individual market,” and another commented “I’ve never seen a larger waste of taxpayer dollars in my time.”

However, even if expanding direct subsidies were preferred to reinsurance, direct subsidies would be much less effective than reinsurance in capitalizing on federal funds (via a Section 1332 waiver). Extending subsidies to people above 400 percent of poverty might reduce overall premium costs some, by bringing healthier people into the market, but the effect on marketwide premiums is much more attenuated for targeted subsidies than for marketwide reinsurance. Therefore, although targeted subsidies may be more effective in inducing more people to enter the market, this approach is less effective in reducing premium subsidies for existing subscribers, which is the key to using a 1332 waiver proposal under the ACA to secure supplemental federal support for market stabilization. Thus, in the absence of additional federal legislation, it appears that states would have to fund almost all of targeted subsidies on their own.