Last week, New Jersey’s 1332 waiver for reinsurance was approved. This waiver is a fairly straightforward waiver. It will drop unsubsidized premiums by 15% compared to the universe of not having a waiver. There are two things that are interesting about the waiver to me:
- It was approved very quickly (4 days after federal comments closed)
- It is taking advantage of the repeal of the individual mandate
I had thought the waiver would not be approved until early September but that is a minor note.
The second part is far more interesting. Reinsurance waivers work by the state injecting some new money into the claims coverage pool to take on some of the cost of a set of expensive claims. The new money lowers the index rate which lowers the amount of federal subsidies that are paid. The incremental gap in federal subsidies is then sent to the state to top-off the high cost claims fund. Reinsurance counts on an injection of outside/non-premium money to lower premiums.
New Jersey is funding a significant portion of the outside money by enacting an individual mandate. They are holding policy constant in between 12/31/18 and 1/1/19 while the law changes. The federal individual mandate is going away but it is immediately being replaced by a state based mandate with the same charge schedule.
This is a nifty use of resetting the baseline. New Jersey and Washington DC are the only two states that are taking advantage of this niche to reset baselines and capture previously federal cash flows. Furthermore, since the individual mandate is now happening under state law and not federal law, the states are not being dinged in the 1332 calculations for the mandate induced incremental enrollment.
Since there is no longer any federal revenue associated with the individual mandate, there is no revenue loss to be scored against Iowa or any other state whose 1332 waiver increases the insured population. This makes designing a budget neutral 1332 waiver significantly easier.
New Jersey is getting a lot of bang for its reinsurance buck as the pass-through amount from the feds is significantly higher in a no federal mandate world than it would have been. Furthermore, since people are still paying the individual mandate for 2018, they will experience no change in their tax rules in 2019 and beyond besides who they send their checks to if they are subject to the individual mandate.
This was a nifty piece of state policy making to increase enrollment, lower costs and hold policy otherwise constant. From the right point of view and counterfactual, it is a Pareto improvement.