Making Sense of Invisible Risk Sharing

Mark Hall and I have a piece at Brookings and the Health Affairs Blog that takes a hard look at the “invisible risk sharing program,” the newest Republican amendment to the American Health Care Act. Here’s a taste:

Despite its novel title, the program embodies an idea that has circulated in obscure health policy circles for a quarter century: a behind-the-scenes reinsurance program for higher-risk subscribers whom insurers identify at the point of enrollment. This new (old) approach works differently from the “retrospective” reinsurance that the Affordable Care Act (ACA) used for its first three years. Under the ACA, insurers were reimbursed for enrollees who turned out to be especially expensive (initially, more than $45,000 in a year). Invisible risk sharing, in contrast, requires insurers to identify in advance which people they believe will incur large claims, and “cede” them (and their premiums) to a high risk pool, funded by both insurers and the government. The pool then pays all the medical costs for these ceded “lives” (people) beyond a somewhat lower threshold (e.g., $10,000).

Either form of reinsurance—AHCA’s prospective or the ACA’s retrospective—is “invisible” in the sense that high-cost subscribers are unaware of its existence. And both types of reinsurance use public funds to lower insurers’ costs and thus reduce premiums. Where the two programs differ is that AHCA’s invisible risk sharing pays nothing for people who unpredictably incur large claims.

Neither approach is inherently superior at reducing premiums. Premium reduction depends entirely on how much funding the program receives in relation to the risks being insured. Rep. Palmer’s amendment leaves all the critical details of the new, invisible program unspecified, making it hard to generate precise estimates. But, its $1.7 billion per year funding is no more than 2 percent of total premiums in the market. Whether these funds are injected at the front end, the back end, or in the middle, there is no alchemistic wizardry that can magically make more risk than this simply melt away.

Do read the whole thing!


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