the reinsurance institute: modeling, outputs, & implementation
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Bovbjerg-Garrett, 3 Aug 2007; slide 1 SCI Coverage, Marriott Denver Cntr
The Reinsurance Institute:Modeling, Outputs, & Implementation
Randall R. Bovbjerg, JDPrincipal Research Assoc.
A. Bowen Garrett, PhDSenior Research Assoc.
Lisa Clemans-Cope, PhDResearch Associate
Health Policy Center, The Urban Institute†
Presentation to State Coverage Initiatives Workshop for State Officials, Denver, CO; August 3, 2007
† standard disclaimer applies
The Reinsurance Institute is funded through the State Coverage Initiatives (SCI) program, which is a national program of the Robert Wood Johnson
Foundation, administered by AcademyHealth, Washington, DC
Bovbjerg-Garrett, 3 Aug 2007; slide 2 SCI Coverage, Marriott Denver Cntr
What is the SCI Reinsurance Institute?
SCI/AcademyHealthEnrique Martinez-Vidal, Director SCI
Donald Cohn, Alice Burton (now working for MD)... and three participating states (RI, WA, WI)
Pool Administrators. Inc.Karl Ideman, President
Richard Larose, Vice President
Actuarial Research CorporationGordon R. Trapnell, President
Jim Mays, Vice President
ConsultantsKatherine Swartz, Hvd. Sch. Pub. Hlth
Patrick Collins, American Re.
Urban Institute HPC & TeamRandall R. Bovbjerg A. Bowen
GarrettLisa Clemans-Cope Linda
BlumbergAaron Lucas Paul Masi
Bovbjerg-Garrett, 3 Aug 2007; slide 3 SCI Coverage, Marriott Denver Cntr
Roadmap
I.Introduction to reinsurance as part of reform II.Project roles: modeling and state consultationIII.Modeling: data base construction & policy simulationIV.Modeling: state-specific resultsV.Face validity and other implementation issuesVI.Some lessons learnedVII. Can it work in my state?
Bovbjerg-Garrett, 3 Aug 2007; slide 4 SCI Coverage, Marriott Denver Cntr
Reinsurance = Insurance for InsurersSimplified Sketch: HealthyNY
$0-25,000
$25K-100K
$100K+
primary carrier pays 100%
Allowable annual claims/person
reinsurer pays 90%, primary carrier 10%
primary carrier pays 100%
threshold
ceiling
corridor:
Shares for primary insurer, reinsurance
“specific, retrospective, excess of loss”
Bovbjerg-Garrett, 3 Aug 2007; slide 5 SCI Coverage, Marriott Denver Cntr
Rationales for Public Reinsurance
• Encourage enrollment by subsidizing cost• Targeted subsidy; ex post risk adjustment• Reduce costs of unfavorable selection, cut benefit of
cream-skimming• Help new market entry by assuming high, unfamiliar risk
N.B.:• Costs vary with size of population targeted, generosity of
public subsidy• Impact depends partly on financing: not surcharges on
targeted sector, but broad financing base
Bovbjerg-Garrett, 3 Aug 2007; slide 6 SCI Coverage, Marriott Denver Cntr
Simulations that Can Aid Policy
• Reinsurance approach to be modeled:– HealthyNY-style end-of-year reinsurance of high claims, not
individuals “ceded” at start– But, participating states target already insured, not just uninsured – Want to know costs & effects by design of policy option(s)
• Why is this hard to do? Need good population data– costs, coverage, demographics, employer characteristics– health expenses in the upper tail of risk sample size concerns
• Problem: No such state datasets exit• Solution: Build a new dataset!
Bovbjerg-Garrett, 3 Aug 2007; slide 7 SCI Coverage, Marriott Denver Cntr
Simulation Model has Two Main Parts
Dataset Construction -individuals -firms -medical spending
Premium Imputation
Benchmark to WIWI “Model” of Reinsurance
Offer and Take-Up Changes Policy Effects
Baseline Dataset
Reinsurance Simulation
Bovbjerg-Garrett, 3 Aug 2007; slide 8 SCI Coverage, Marriott Denver Cntr
Baseline Overview: From National to State-specific Microdata
End state database ready for simulating reinsurance options
• Key: “MEPS-HC” has medical expenses, other key data• Make consistent with National Health Accounts and
high-cost claims data• Re-weight to match each state's pop’n characteristics• Assign workers to "synthetic" employers, matching to
state's known firm size/industry mix• Build up premiums from covered medical expenses• Benchmark to state data
Start national, population-based data from household survey
Bovbjerg-Garrett, 3 Aug 2007; slide 9 SCI Coverage, Marriott Denver Cntr
Reweighted Distribution of Family IncomeClosely Matches CPS data (Rhode Island)
16.5
16.7
15.1
16.7
16.7
19.2
27.6
27.4
30
39.2
39.1
35.7
0 25 50 75 100
ReweightedDatabase forRhode I sland
CPS RhodeIsland 2005
NationalMEPS-HC
2001-2003
Percentage of Population
<100% FPL 100-199% FPL 200-399% FPL 400% + FPL
Bovbjerg-Garrett, 3 Aug 2007; slide 10 SCI Coverage, Marriott Denver Cntr
Reweighted Health Expenditures for Wisconsin(shows familiar pattern)
1,857
2,747
1,678
2,684
1,603
3,941
2,153
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
$0-2,500 $2,500-5,000 $5,000-10,000 $10,000-15,000 $15,000-30,000 $30,000-50,000 $50,000+
0%
10%
20%
30%
40%
50%
60%
70%
80%
Total annual private health expenditures and % of populationby expenditure group
Tota
l pri
vate
hea
lth
expe
ndit
ures
(in
mill
$)
Percent of population
Expenditure groups Up to $2.5k $2.5k-$5k $5k-$10k $10k-$15k $30k-$50k $50k and up$15k-$30k
Source: Reweighted MEPS-HC merged data 2001-2003.
Bovbjerg-Garrett, 3 Aug 2007; slide 11 SCI Coverage, Marriott Denver Cntr
Application of Reinsurance RulesPolicy Parameters Subject to Modeling
• Definition of reinsured expenditures– Lower reinsurance threshold (i.e., attachment point)– Upper limit– Coinsurance retained by original insurer
• Targeted eligibiles– Group market, nongroup market, or both– Firm size criteria (under 10, 10 to 24, 25-49, 50-99, 100+)– Income or wage brackets
• Premium rating rules– Nongroup pooling follows state regulations– Can vary by age, health status, gender, single/family, family
composition of age/gender/health status
Bovbjerg-Garrett, 3 Aug 2007; slide 12 SCI Coverage, Marriott Denver Cntr
Construction of initial premiums• Employer Sponsored Insurance (ESI) premiums:
– expected expenses = blend of own experience, that of risk group– add administrative “loading’ factors by firm size
• Nongroup premiums– blend own covered expenses and predicted covered expenses
within appropriate rating cell, add nongroup loading factorEstimating response to reinsurance
• Use “elasticities” (responsiveness of offering firms and individuals to drop in price from reinsurance subsidy)
• Compute resulting costs, coverage shifts, etc.• Iterate in cycle (pictured, next)
Premiums, before and after Reinsurance
Bovbjerg-Garrett, 3 Aug 2007; slide 13 SCI Coverage, Marriott Denver Cntr
Dynamics of ReinsuranceIterative Flow of Simulation Model
5. ComputeESI/NG premiumsfor new risk pool
1. Specify reinsurance
policy parameters
4.Compute changes in “take-up” of ESI/NG
3. Compute ESI offer changes
2. Recompute ESI/NG premiums
Baseline dataincluding initial
premiums
Bovbjerg-Garrett, 3 Aug 2007; slide 14 SCI Coverage, Marriott Denver Cntr
Effectiveness of Modeling
• Model has some key limitations:– precise magnitude of behavioral effects somewhat uncertain– model does not capture admin. costs, benefit design, insurer
response like exit/entry, underwriting behavior... – so, significant role remains for qualitative analysis
• Model does well in addressing:– big-picture--the effects on premiums, coverages, costs– who goes where (insurance status by characteristics)– where premium savings are concentrated– how risk pools change– how composition of uninsured changes
Bovbjerg-Garrett, 3 Aug 2007; slide 15 SCI Coverage, Marriott Denver Cntr
Emerging State Results – Washington State Example
Design• Target all small groups (<50) and nongroup markets• Corridor: $10,000 - $90,000; coinsurance: 10%
Overall Effects• Small group premiums drop about 31%• Nongroup premiums declines 38%• Offer rate of small firm workers rises from 71% to 81%• Number of uninsured falls from 624K to 563K (-61K)
Bovbjerg-Garrett, 3 Aug 2007; slide 16 SCI Coverage, Marriott Denver Cntr
Emerging State Results – Washington State Example, State Program Costs
• Small group costs: $376 Million • Nongroup costs: $224 Million Total state cost: $600 Million• Cost per newly insured: $9,800• Reduced premiums for existing insured
– Small group single policy: -$1,115– Nongroup single policy: -$1,461
(estimates are preliminary)
Bovbjerg-Garrett, 3 Aug 2007; slide 17 SCI Coverage, Marriott Denver Cntr
Emerging State Results – Wash. St. Example, Changes in Nongroup Single Premiums
-47%-$6,894$7,870$14,764Age 45-65, fair or poor health
-35%-$1,797$3,418$5,215Age 45-65, healthy
-35%-$906$1,691$2,597Age 25-45, healthy
-35%-$643$1,215$1,859Age under 25, healthy
Pct. changeChangeAfterBeforeRating group
Bovbjerg-Garrett, 3 Aug 2007; slide 18 SCI Coverage, Marriott Denver Cntr
Emerging State Results – Wisconsin Example
• Want to target smallest employer groups (1-9 employees) with subsidy of roughly $100 million
$93 Million-25,500-26% / -35%$20K-$75K / 20%
$116 Million
-27,600-33% / -42%$15K-$75K / 20%
$106 Million
-26,400-28% / -40%$35K-$75K / 10%
Program cost
Change in uninsured
Premium change (single/family)
Policy (LL-UL / Coins)
(estimates are preliminary)
Bovbjerg-Garrett, 3 Aug 2007; slide 19 SCI Coverage, Marriott Denver Cntr
State Costs beyond Claims
Administrative Costs, Start-Up•Can be high, although experience varies•Many set-up activities, from governance structure &
mechanisms (e.g., board) to negotiated line of creditAdministrative Costs, Ongoing
•Biggest is general administration, also outside fees•Substantial fixed costs create economies of scale•Other influences include complexity of activities,
number of insurers, administrative procedure rulesEstimating the Total
•Experience shows range of costs from 0.6% to about 3% of reinsured claims expense
Bovbjerg-Garrett, 3 Aug 2007; slide 20 SCI Coverage, Marriott Denver Cntr
Impacts beyond Subsidy
• Potential benefits– reduced year-to-year claims volatility, risk premium– reduced need for capital under risk-based rules– reduced year-to-year turnover across plans, transaction
costs– lower need for/costs of private reinsurance– less underwriting, lower costs
• Potential costs– New transaction costs– Moral hazard for primary insurers
Bovbjerg-Garrett, 3 Aug 2007; slide 21 SCI Coverage, Marriott Denver Cntr
Implementation
Three Phases from Policy Idea to Program Execution• Develop general reinsurance concepts of interest• Operationalize selected concept(s) with specific
program provisions, legislation• Roll out program administratively, monitor, correct
Bovbjerg-Garrett, 3 Aug 2007; slide 22 SCI Coverage, Marriott Denver Cntr
A. Develop General Concepts
• Start with goals of reinsurance– intended beneficiaries, specific problem, logic of how interventions
help, role within overall vision• Understand context
– existing market, regulation, insurer behavior– accompanying interventions, e.g., “Connector”
• Model expected impacts vs. intended– formally, as here, or other approach– compare with other alternatives
• “Sell” concept/vision to constituencies– build shared understanding, even if not political consensus
Bovbjerg-Garrett, 3 Aug 2007; slide 23 SCI Coverage, Marriott Denver Cntr
B. Operationalize Concept(s)
• Tailor intervention to intended beneficaries• Tailor to perceived problem(s)
– high-end reinsurance plausibly helps new, small insurers, very small groups (e.g., $30-100K)
– lower-corridor reinsur. helps more insurers, does more to reduce risk selection (e.g., $5-75K)
• Worry about key issues– make subsidy credible, durable– track/regulate premium savings & their distribution – address moral hazard & transaction costs– HIPAA, other legal compliance issues
• Write enabling legislation
Bovbjerg-Garrett, 3 Aug 2007; slide 24 SCI Coverage, Marriott Denver Cntr
C. Administrative Roll-Out
• Budget realistically for start-up costs• Expect slow ramp-up of claims experience• Phase in functional capabilities
– many nuts and bolts to assemble– plan, do roll-out, monitor, make mid-course corrections– give administrators tools & flexibility to cope with unintended
consequences• Allow sufficient time to complete tasks
Bovbjerg-Garrett, 3 Aug 2007; slide 25 SCI Coverage, Marriott Denver Cntr
Some Lessons Learned
• Starting with clarification of goals helps clarify other options as well reinsurance ones
• Data bases, programming, & iterations take time• State stakeholders think existing programs & products,
whereas model uses demographic, other characteristics• Achieving consistency with state data helps buy-in• Large changes require large per-uninsured subsidy • Must trade off helping uninsured and helping market• Implementation needs good information & active
management
Bovbjerg-Garrett, 3 Aug 2007; slide 26 SCI Coverage, Marriott Denver Cntr
Can It Work in My State?
• Rhode Island, Washington, and Wisconsin are all considering resinsurance, despite their different current circumstances and divergent goals
• Do need to be able to make assumed effects real:– subsidy made credible, durable– premiums respond as expected– able to monitor evolving effects, make mid-course corrections
• Also need to achieve buy-in, manage expectations• Data monitoring and administrative capabilities are
important
Bovbjerg-Garrett, 3 Aug 2007; slide 27 SCI Coverage, Marriott Denver Cntr
EndTime for Questions
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