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In 2019, seven U.S. states tried an innovative experiment to improve the Affordable Care Act (ACA) by operating reimbursement pools, which pay back ACA insurers a specified portion of their expensive healthcare claims.
These pools significantly lowered premiums for individual policyholders in these seven states and generally upped the level of insurance enrollments. Moreover, these pools met a cost-benefit test: Benefits from these premium reductions almost always exceeded a state’s costs to finance these reimbursements.
To enhance the effectiveness of the ACA, all other states should look carefully at requesting federal approval to start reimbursement pools. As shown by the experiments in the seven states, these pools have proven to be a win-win for both health insurers and individual policy holders. Given the congressional stalemate on the future of the ACA, Democrats and Republicans in state legislatures should do whatever they can to make the current healthcare system work better.
The seven states were Alaska, Maine, Maryland, Minnesota, New Jersey, Oregon and Wisconsin. They were motivated to try reimbursement pools because they had few insurers offering policies on their ACA exchanges and/or the premiums on individual policies were rapidly rising. Most of these states reimbursed insurers for 50% or more of the cost of annual claims between a specified minimum and maximum dollar amount, though Alaska and Maine linked their reimbursements to claims for enumerated health conditions.
In each of the seven states, insurers sharply reduced their ACA healthcare premiums — on average, almost 20% less than they would have charged without these reimbursement pools. These lower healthcare premiums were offered on all individual policies in the state, both policies offered on ACA exchanges and other policies in the individual market (i.e., not through employers or group plans). Under the ACA, there must be a single risk pool for all individual healthcare policies within a state.
Minnesota is a model
To understand how these state reimbursement pools work, let’s consider the example of Minnesota. In 2019, the state agreed to reimburse ACA insurers 80% of annual claims between $50,000 and $250,000 per policy holder on its ACA exchange or in its individual market. In return, the ACA insurers reduced the average annual premiums for Minnesota’s individual healthcare policies by 23% in 2019 — $1,964 lower than insurers would have charged without the State’s reimbursement pool.
The cost of Minnesota’s reimbursement pool was financed partly by a “pass-through” payment of $84.7 million from the federal government to the state in 2019. This payment represented the reduction in federal subsidies, required by the ACA to be provided to low and moderate-income families buying healthcare policies on the ACA exchange in Minnesota. Since the premiums on ACA policies declined sharply due to Minnesota’s reimbursement pool, the federal subsidies for healthcare policies bought on its ACA exchange were significantly reduced.
In other words, the cost of this federal pass-through payment to Minnesota was effectively zero. This $84.7 million payment was a dollar-for-dollar transfer of the federal savings on ACA subsidies to families in the State. On the other hand, Minnesota did have to appropriate $132 million to complete the funding of its reimbursement pool for ACA insurers.
Did the benefits to Minnesota residents exceed the state’s cost of $132 million? We began by examining the benefits to unsubsidized state residents who purchased their healthcare policies off the ACA exchange in Minnesota’s individual market. As mentioned above, state residents received an average premium reduction of $1,964 per year because of the reimbursement pool. As a result, Minnesota received another significant benefit — the number of unsubsidized policy holders increased to 75,983 from 67,932 in 2019. Thus, 75,983 unsubsidized policy holders in Minnesota received total premium savings of $149 million. This benefit of $149 million for individual policies purchased off the ACA exchange alone exceeded Minnesota’s $132 million cost for operating its reimbursement pool.
The calculation of the benefits of a state’s reimbursement pool to subsidized policy holders on its ACA exchange is more complex. Under the ACA, low- and moderate-income families pay only a prescribed percentage of their income (based on income level and family size) for policies bought on ACA exchanges. This percentage is calculated on the assumption that these families will buy a middle-level silver policy, rather than a gold policy with more healthcare benefits or a bronze policy with fewer benefits. Accordingly, lower premiums resulting from Minnesota’s reimbursement pool did not reduce the actual premiums paid by such families if they purchased silver policies on the ACA exchange; they always paid the same predetermined percentage of their income.
Reimbursement pools in these seven states significantly reduced premiums in each state’s market.
By contrast, if subsidized families purchased gold healthcare policies on ACA exchanges, they would pay out of pocket the extra premiums required for gold instead of silver policies. In 2019, about 14% of subsidized families bought gold policies on ACA exchanges in Minnesota. We estimate that these families saved roughly $12 million in out of pocket costs because of the lower average premiums resulting from Minnesota’s reimbursement pool.
If subsidized families purchased bronze policies on ACA exchanges, they would receive discounts on these policies representing the lower premiums on bronze than silver policies. In 2019, about 54% of subsidized families bought bronze policies on ACA exchanges in Minnesota. We estimate that these families received discounts worth roughly $7 million because of the lower average premiums resulting from Minnesota’s reimbursement pool.
Read: This hidden Obamacare feature could save your family hundreds of dollars on health insurance
5 more states to establish reimbursement pools
In six of the seven states, the total premium reductions for all individual policies significantly exceeded the state’s costs to finance the reimbursement pool. In the seventh state, Oregon, these total premium reductions were slightly less than the state’s appropriation for the reimbursement pool. Impressed by these results in 2019, five more states (Colorado, Delaware, Montana, North Dakota and Rhode Island) will establish reimbursement pools in 2020 with similar structures to the Minnesota example.
In short, the reimbursement pools in these seven states significantly reduced premiums in each state’s market. The premium reductions went mainly to the purchasers of individual policies outside of the ACA exchanges and, to a lesser extent, the subsidized purchasers of gold- and bronze policies on ACA exchanges.
Before politicians push to replace the ACA, every U.S. state should seriously consider establishing reimbursement pools, which have consistently improved healthcare systems by delivering lower premiums and higher enrollments at reasonable costs.
Robert Pozen is a senior lecturer at MIT Sloan School of Management and a former president of Fidelity Investments. MIT undergraduate students Kevin Downey and Karina Zhang contributed research to this report.
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