How Reinsurance Could Lower Premiums – But Premiums Could Go Up Anyway

One of the sticking points as Minnesota leaders debate a proposal called "reinsurance" to try to stabilize the state's individual health care market is how much of an effect it will actually have.

Gov. Mark Dayton on Thursday criticized health insurers for not being willing to make firm promises to sell affordable insurance if lawmakers spend up to $300 million in taxpayer money on reinsurance.

"Your letter says that you 'intend to continue serving Minnesotans' but you do not explicitly state that you will continue to serve the state," Dayton wrote. "The letter also clarifies that the money for reinsurance will be used to pay medical bills but does not commit to actually bringing down premiums for consumers."

Dayton's correct that the health insurers haven't promised to offer plans next year. But his second criticism gets at a subtle issue sparking confusion as lawmakers work on the policy.

"You mentioned that this would result in an 18 to 23 percent reduction, and then immediately after that, you said rates may go up," Sen. Greg Clausen, DFL-Apple Valley, said in debate Wednesday night.

The heart of the confusion: there are actually two different things being discussed. As with many complex issues, it depends on what premiums are compared with.

Dayton's Department of Commerce estimates that spending $300 million per year to cover expensive medical costs under a reinsurance bill would reduce premiums by 21 percent to 23 percent "from what 2018 premiums otherwise would be without a reinsurance program."

That last bit is key. The Department of Commerce is predicting that reinsurance will lower 2018 premiums compared to what they otherwise would be - but not necessarily that 2018 rates will be lower than 2017 rates.

Similarly, insurers promised Dayton that reinsurance would lower rates, but aren't promising him that premiums will go down compared with 2017.

Insurers set premiums to cover the costs they incur paying out claims. If they predict their costs will increase in the next year, they charge higher premiums to compensate. Reinsurance takes some of those costs away from insurers, so they can set premiums lower and still expect to break even.

Imagine a reinsurance program that's expected to reduce premiums by 20 percent. If health costs stay the same, then premiums should go down by about 20 percent.

But health costs have been rising for years. If that same reinsurance program still lowers premiums by 20 percent, but expected health costs rise by 20 percent, then premiums wouldn't change at all.

And if expected health costs rise by 40 percent, then premiums would go up despite reinsurance. The net effect on premiums under this scenario would be a 20 percent increase - more than the prior year, but less than they'd have gone up without reinsurance.

Consider an analogy: someone who goes for a 1-mile run every day but eats nothing but junk food. If he or she ends up heavier, that doesn't mean that the running didn't help his or her weight - it just means that another factor offset the benefit from the running.

Minnesota's HMOs are promising lawmakers that a reinsurance measure will lower premiums compared to the alternative. But months before they finish their rate proposals, they haven't been willing to make any promises about how 2018 premiums will compare to 2017 premiums.