the reinsurance institute: modeling, outputs, & implementation

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

http://www.urban.org/index.cfm


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



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?



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”



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



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!



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



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



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



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.



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



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



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



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



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)



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)



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



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)



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



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



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



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



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



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



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



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



EndTime for Questions


the reinsurance institute: modeling, outputs, & implementation

Documents

filenameauthors change

state consultationiii

state officials

sci reinsurance institute

statespecific resultsv

state datasets exitsolution

urban institute presentation

jdprincipal research