The Patient Protection and Affordable Care Act’s (ACA’s) Transitional Reinsurance Program

Summary

Section 1341 of the Patient Protection and Affordable Care Act (ACA; P.L. 111-148, as amended) establishes a transitional reinsurance program that is designed to provide payment to non-grandfathered, non-group market health plans (also known as individual market health plans) that enroll high-risk enrollees for 2014 through 2016. Under the program, the Secretary of the Department of Health and Human Services (HHS) collects reinsurance contributions from health insurers and from third-party administrators on behalf of group health plans. The Secretary then uses those contributions to make reinsurance payments to health insurers who enroll high-cost enrollees (statutes required the HHS Secretary to determine how high-risk enrollees are identified, and the Secretary in turn defined high-risk enrollees as high-cost enrollees) in their non-group market plans both inside and outside of the exchanges (also known as the marketplaces). That is, contributions are distributive in which they are collected from most non-group and group health insurers, but payments are made only to eligible non-group market health plans.

Reinsurance is an extension of insurance and further acts as a risk transfer and risk spreading mechanism. The availability of reinsurance allows insurers to reduce their risk exposure and can affect the availability and affordability of health insurance coverage. That is, the availability of reinsurance may be one of many factors an insurer considers in assessing potential exposure to loss in a certain market. This may impact whether or not to enter a market, what types of products to offer, and what premiums to set.

To mitigate the financial risk and uncertainty insurers may face in the early years of ACA implementation as a result of the ACA’s private health insurance market reforms, the ACA establishes three risk-mitigation programs (the transitional reinsurance program, the permanent risk adjustment program, and the temporary risk corridors program).

Prior to ACA implementation, little information was available regarding health care usage and demand for the previously uninsured, as well as any pent-up demand due to the lack of health insurance coverage. Accordingly, to limit their risk exposure in offering plans on the non-group market, insurers would likely raise premiums to the extent possible to protect themselves against the potentially high cost associated with delayed care. However, some of the new ACA market reforms limit the degree to which insurers may vary premiums. The transitional reinsurance program is designed to mitigate the financial risk associated with individuals who had delayed needed health care while they were uninsured.

Under the program, the HHS Secretary collects reinsurance contributions from most non-group and group health plans and then uses those contributions to make reinsurance payments only to non-group market health plans with high-cost enrollees. The programs cover a portion of the claims costs for these enrollees based on payment parameters set by the HHS Secretary.

This report provides an overview of one of the three risk-mitigation programs, the transitional reinsurance program. The program’s aim is to offset the expenditures associated with high-cost individuals. The first section of the report provides background information on reinsurance and the ACA risk-mitigation programs. The second section describes the components of the transitional reinsurance program, as well as the amounts currently collected and remitted through the program. The third section discusses questions, including those raised by a recent Government Accountability Office report, regarding the scope of HHS’s authority to administer the transitional reinsurance program. The last section briefly summarizes relevant legislation regarding the transitional reinsurance program. Finally, the report includes a table in the Appendix that summarizes key aspects of the transitional reinsurance program.