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How would a reinsurance program at state or federal level compare to extended ACA subsidies?
Executive Summary
A state or federal reinsurance program lowers market-level premiums by subsidizing insurers’ high-cost claims, which chiefly helps unsubsidized, higher-income enrollees and can stabilize insurer participation and premiums; by contrast, extended ACA premium tax credits directly reduce out-of-pocket costs for low- and middle-income consumers and are better targeted to affordability. Whether reinsurance or expanded subsidies is superior depends on whether enhanced subsidies continue, program design choices, and political feasibility — states can use 1332 waivers to run reinsurance without new federal appropriations, while subsidy extensions require federal action [1] [2] [3].
1. Why reinsurance looks attractive to policymakers and insurers
A reinsurance program functions as “insurance for insurers,” absorbing a portion of very high claims so carriers face lower loss exposure; that reduction typically lowers the sticker price of premiums across the individual market, which can attract carriers and reduce premiums for people who buy coverage at full price. States implementing reinsurance under Section 1332 have documented premium declines and greater insurer participation, which policymakers highlight as market-stability wins; advocates for state action also point to political feasibility because reinsurance can be funded with state resources or pass-through savings rather than new federal spending [2] [3] [4]. These features explain why 17 states adopted reinsurance by 2023 and why additional states consider it amid concerns about insurer exits and premium spikes [4].
2. The affordability tradeoff: who really benefits when premiums fall
Reinsurance lowers premiums market-wide, but ACA premium tax credits are tied to benchmark premiums, so when premiums fall the dollar value of subsidies often falls too. That mechanism means subsidized enrollees frequently see little or no net savings from reinsurance; in some designs, people between roughly 251% and 400% of the federal poverty level can actually face higher after-subsidy costs because their subsidies shrink as benchmark premiums decline. Analysts warn reinsurance can therefore worsen affordability for some subsidized households and potentially reduce enrollment among near-poor consumers if subsidies are not adjusted [1] [5] [2].
3. Extended subsidies hit affordability directly — and predictably
Extended ACA premium tax credits enacted by recent federal laws directly cut the share of income that eligible low- and middle-income households pay, irrespective of market-level premium movements. These enhancements reduced average enrollee premiums and blunt the need for reinsurance as an affordability tool; if these enhanced subsidies are continued, they remain the more effective, better-targeted instrument to lower out-of-pocket costs for people up to and above 400 percent of the federal poverty level. Empirical projections tied the expiration of these enhanced credits to large premium increases and spikes in uninsured rates, underscoring how directly targeted federal subsidies operate on consumer affordability in ways reinsurance does not [1] [2] [6] [7].
4. Timing and policy contingency: one tool may substitute when the other falls away
The practical choice between reinsurance and subsidy extensions is contingent. If enhanced federal subsidies lapse, state reinsurance programs become politically and technically more attractive as a tool to blunt premium spikes and preserve insurer participation without new federal appropriations. Conversely, if enhanced subsidies persist, they undercut the marginal value of reinsurance for affordability and shift the policy priority toward sustaining federal subsidy levels. Observers note that reinsurance and subsidies are complementary in some designs but can work at cross-purposes when the mathematics of benchmark subsidies reduces consumer benefit from lower premiums [2] [3] [8].
5. Distributional and political implications policymakers should weigh
The distributional impacts are stark: reinsurance primarily benefits unsubsidized, higher-income consumers and insurers, while extended subsidies primarily and directly assist lower- and middle-income households. States weighing 1332 waivers may value reinsurance because it can be financed locally and framed as market stabilization rather than federal spending, but that framing can mask the regressive impact on affordability for some subsidized groups. Political actors advocating reinsurance often emphasize market health and insurer participation; advocates for subsidy extensions emphasize equity and direct relief to households most at risk of losing coverage [1] [4] [8].
6. Bottom line — design details determine winners and losers
The technical contours matter: the reinsurance attachment points, the share of high-cost claims covered, and whether states adjust benchmark calculations all change outcomes. Similarly, the income thresholds and generosity of extended subsidies determine how many people gain and by how much. There is no one-size-fits-all winner; policymakers must choose between political feasibility, budgetary constraints, and distributional goals, or deploy both carefully designed together to preserve market stability while protecting affordability for lower- and middle-income consumers [1] [5] [3] [4] [7].