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States think reinsurance might fix Obamacare troubles

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Through federal tax subsidies, the exchanges provide a way for people making less than $48,240 for an individual ​and ​$98,400 for a family of​ four​ to be protected from premium increases. (Andrew Harrer/Bloomberg)

Regardless of what happens in Congress over how to change Obamacare, the fifth open enrollment season when customers can sign up for subsidized health insurance will be held in the fall. The landscape looks dire: Insurers are fleeing, leaving empty counties behind, and premiums in many states will rise by double digits.

Enter reinsurance, a measure with bipartisan support that has a track record of reducing premiums. The program injects federal funding into the system, with parameters, so that medical costs for sicker enrollees are covered without significantly raising the cost of premiums for those who use the system less. Reinsurance programs were implemented nationwide under Obamacare, with $10 billion paid out in 2014, $6 billion in 2015, and $4 billion in 2016. The program was intended to provide stability as the exchanges were starting and was never meant to be permanent. Now, some lawmakers would like to bring it back.

Reinsurance allows for more targeted funding to be used where it is needed most, rather than raising the costs for everyone in the pool. In this way, it operates similarly to a high-risk pool, a strategy that is favored by conservatives in which healthier customers, who tend to pay a disproportionate amount in premiums compared to what they use, are shielded.

Through federal tax subsidies, the exchanges provide a way for people making less than $48,240 for an individual ​and ​$98,400 for a family of​ four​ to be protected from premium increases. When the premiums increase, so does the subsidy. Most of those who make more than that amount, however, do not qualify for subsidies and must pay for full premium increases, which can hit their finances, particularly if they don't often use medical care. Reinsurance helps protect this group.

The Better Care Reconciliation Act, the healthcare plan introduced by GOP Senate leadership, contained provisions for reinsurance, and four Democratic senators in January introduced a bill to bring back Obamacare's reinsurance program, and House Democrats issued several proposals in July to fix the exchanges, including a reinsurance program. If Republicans cannot agree on a healthcare plan, reinsurance would be one of the options they would have to keep premium increases at bay in 2018, the same year that many lawmakers are facing re-election. For now, however, bipartisan conversations on healthcare haven't gained momentum.

"I think reinsurance is one thing that everybody agrees on as a good idea," said Tim Jost, emeritus professor at Washington and Lee University School of Law. He noted that reinsurance funds every year go toward Medicare Part D, which covers prescription drugs for people on the government's insurance program for people 65 and older.

This year, unsubsidized premiums increased by an average of 22 percent nationwide, 4 to 7 percentage points of which were attributable to ending the reinsurance program, according to the American Academy of Actuaries. It's a short-term fix that doesn't specifically get to the root of the problem of rising medical costs, but it can provide relief to the exchanges, which have been badly damaged not only by uncertainty but by a disproportionately sick risk pool.

Without action from Congress, states can still use reinsurance programs through Obamacare's 1332 waiver, known as an "innovation" waiver, an alternative the Trump administration has encouraged. The waivers allow states to craft healthcare plans and to shift some of the funding they would have received from the federal government. Reinsurance is one of many options they can use.

Alaska decided to take this route. The state has the highest premiums in the country because of its small population and massive size. Its reinsurance program isolated 33 medical conditions, including hemophilia and cerebral palsy, and had those patients' medical care paid for through the reinsurance fund. As a result, premiums grew by 7 percent, rather than the expected 42 percent.

Alaska put forth the reinsurance funds first, but will be getting much of it back from the federal government through the innovation waiver. Because reinsurance funds reduce the cost of premiums, they also reduce the cost of premium subsidies for the federal government. In 2018, the federal government will fund $48 million in reinsurance and the state will pay $11 million.

The same plan may not be easily replicated in other states, however, because Alaska was able to inject state funding into the program initially, which other states may not be able to do. Another state that is trying is Minnesota, which approved a reinsurance program of $600 million through shifting funds that would otherwise come from its MinnesotaCare program for low-income people. Minnesota officials hope they can recoup funds through the waiver the state submitted, but if they don't, they will spend $120 million in rainy day funds each year to pay for it.

"Other states might not be in a good situation to put up the money," said Lynn Blewett, professor in the Division of Health Policy and Management at the University of Minnesota. "That may limit the number of states that do it."

States such as California, New Hampshire, Ohio, and Oklahoma also have considered the possibility, but much will depend on how Obamacare changes and what is approved in other states.

"A lot of authority lies with the secretary in terms of what is approved or not approved," Blewett said, noting that under the Obama administration states were watching for different patterns and likely policy changes as well.

Still, the innovation waivers must meet certain parameters under Obamacare. For example, ahead of a submission to the federal government they must be enacted through a state legislature and residents must be allowed to provide public comment. States also must provide data, such as actuarial and economic analyses, to demonstrate that their proposals would work to meet certain criteria, such as reducing costs for customers and covering at least the same number of people as under Obamacare.

The waivers cannot increase the federal deficit. For Alaska, the parameters were clearly demonstrated in terms of the savings in tax subsidy funding by the federal government.

But for other states such as Iowa, which is examining a short-term solution to its damaged exchange that would include reinsurance, the path to approval from federal officials may be more difficult. The state hasn't specifically followed the different guidelines the waiver requires, such as drafting and passing legislation.

Minnesota-based Medica is the only insurer that has committed to selling plans on the exchange in Iowa, but Wellmark Blue Cross and Blue Shield said it would return if the short-term solution drafted by Doug Ommen, the insurance commissioner, is approved.

The Iowa Insurance Division hasn't formally submitted the draft but has reviewed it with top federal health officials and is holding public hearings. Republican Sen. Chuck Grassley of Iowa has voiced support for the proposal.

"I hope the state of Iowa gets an answer soon on the waiver proposal that would help people in dire straits this fall," he said. "If nothing is done, the 72,000 Iowans on Obamacare will face hardship keeping their insurance this fall. The state's proposal would help, and it should go forward. Beyond that, the Senate should continue looking for ways to make health insurance more affordable and accessible."

But it will need to jump legislative hurdles to demonstrate it abides by law, and other states will be watching.

"I don't think the Iowa proposal is legal," Jost said. "You can't just say, 'Please give us lots of money, and trust us, we'll do something with it.'"

But Chance McElhaney, communications director and legislative liaison at the Iowa Insurance Division, indicated he is hopeful they can work to stabilize the exchange for next year.

"The highest levels at the Department of Health and Human Services have seen it, and we are working with them weekly getting it finalized," he said of the agency that oversees the Centers for Medicare and Medicaid Services.

"They have been very good to work with," he said of top federal health officials. "We have had weekly calls, and I think we are all working to get to yes."

He said the state would take federal funding from cost-sharing reduction subsidies and from Advanced Premium Tax Credits and apply them to a reinsurance fund.

"The hard part for this is every state is different," McElhaney said. "What we have come up with is a stopgap solution. It's not a permanent solution. The permanent solution will come from Congress eventually. We believe it'll work for Iowa in 2018."

An earlier version of this article mispelled the name of Chance McElhaney. The story has been corrected.