Section 1341 of the Patient Protection and Affordable Care Act (ACA; P.L. 111-148 , as amended) establishes a transitional reinsurance program that is designed to provide payment to non-grandfathered, non-group market health plans (also known as individual market health plans) that enrolled high-risk enrollees for 2014 through 2016. Under the program, the Secretary of the Department of Health and Human Services (HHS) collected reinsurance contributions from health insurers and from third-party administrators on behalf of group health plans. The Secretary then used those contributions to make reinsurance payments to health insurers who enrolled high-cost enrollees (statutes required the HHS Secretary to determine how high-risk enrollees are identified, and the Secretary in turn defined high-risk enrollees as high-cost enrollees) in their non-group market plans both inside and outside of the exchanges (also known as marketplaces , where individuals can shop for and purchase private health insurance coverage). This report provides an overview of the ACA's transitional reinsurance program. The transitional reinsurance program's aim is to protect against the potential incentive to increase premiums by offsetting the expenditures associated with high-risk individuals. The first section of the report provides background information on reinsurance and the ACA risk mitigation programs. The second section describes the components of the transitional reinsurance program, as well as implementation of the program. The third section discusses questions, including those raised by a 2016 Government Accountability Office (GAO) report, regarding the scope of HHS's authority to administer the transitional reinsurance program. Finally, the report includes a table in the Appendix that summarizes key aspects of the transitional reinsurance program. The concept underlying insurance is risk (i.e., the likelihood and magnitude of financial loss). In any type of insurance arrangement, all parties seek to manage their risk, subject to certain objectives (e.g., coverage and/or profit goals). In health insurance, consumers (patients as insurance beneficiaries) and insurers (as providers or sellers of insurance) approach the management of insurance risk differently. From the consumer's point of view, a person (or family) buys health insurance to protect against financial losses resulting from the unpredictable use of potentially high-cost medical care. The insurer employs a variety of methods to manage the risk it takes on when providing health coverage to consumers to assure that the insurer operates a viable business (e.g., balancing premiums against the collective risk of the covered population). The insurer uses these methods when pooling risk so that premiums collected from all enrollees generally are sufficient to fund claims (plus administrative expenses and profits). Sometimes, however, even with the variety of methods an insurer may employ to manage risk, the risk taken on by the insurer may not be sufficient to protect against the chosen risk management strategies. For example, a single health insurance company may be unable to cover a catastrophic loss (i.e., individuals who experience illnesses that result in huge expenditures). To limit their risk exposure, insurers often transfer some of their liability or risk to another insurer, a reinsurance company. That is, just as an insurer pools the risk of its covered consumers, a portion of that risk gets further spread to other insurance companies, known as reinsurers. Reinsurance, thus, is an extension of insurance and further acts as a risk-transfer and risk-spreading mechanism. Insurers often purchase reinsurance for four reasons: (1) to limit liability on specific risks; (2) to stabilize loss experience; (3) to protect against catastrophes; and (4) to increase capacity by taking on more risk (i.e., more covered individuals). The availability of reinsurance allows insurers to reduce their risk exposure and can affect the availability and affordability of health insurance coverage. That is, the availability of reinsurance may be one of many factors an insurer considers in assessing potential exposure to loss in a certain market. This may affect whether or not to enter a market, what types of products to offer, and how premiums are set. Reinsurance also may be structured in different ways depending on the insurers' needs and can range from simple to complex. Generally, however, reinsurance contracts either may be a broad agreement covering some portion of the business or may cover a specific risk. Occasionally, the government may act as the reinsurer in certain markets to provide a stabilizing influence. Governmental involvement in insurance and reinsurance is not a new concept, and the government covers risks in many markets (outside of health insurance). One example of the federal government acting as a reinsurer is through the Terrorism Risk Insurance Act of 2002 (TRIA; P.L. 107-297 ). Prior to the September 11, 2001, terrorist attacks, insurance covering terrorism losses was normally included in general insurance policies without additional cost to the policyholders. Following the attacks, both primary insurers and reinsurers pulled back from offering terrorism coverage. TRIA created a temporary, three-year terrorism insurance program to calm the insurance markets through a government reinsurance backstop sharing in terrorism losses. The ACA provides another example in which the federal government acts as the reinsurer in an insurance market. The ACA includes provisions that restructure the private health insurance market by implementing several market reforms, including some that impose requirements on health insurance plans. As part of a larger set of private health insurance market reforms, the ACA requires private health insurers to provide coverage to individuals regardless of health status, medical history, and preexisting conditions. Under the ACA, insurers can adjust premiums based solely on certain ACA-specified factors (i.e., individual or family enrollment, geographic rating area, tobacco use, and age). Further, some individuals may be eligible for financial assistance (i.e., premium tax credits and cost-sharing subsidies) through the health insurance exchanges (also known as the marketplaces). In addition, the ACA requires that most individuals maintain health insurance coverage or pay a penalty for noncompliance (i.e., the individual mandate). As previously mentioned, the insurer often employs a variety of methods to manage the risk it takes on when providing health coverage to consumers. For instance, insurers often use projected enrollment, projected claims costs, and other policy-specific features (e.g., consumer cost sharing, provider networks) for a pool of individuals to set health insurance rates. Yet, prior to ACA implementation, little information was known regarding many of these factors in the newly created markets. Accordingly, the new ACA market reforms and the expanded pool of individuals seeking to purchase health insurance coverage contribute to the uncertainty that insurers face in the early years of ACA implementation. Much of the uncertainty centers on the types of individuals who may or may not seek coverage. For example, to what extent would healthy individuals decide to seek coverage in addition to unhealthy individuals? Also, did the expanded pool extend to individuals who were previously uninsured and/or may have delayed receiving health care services? Furthermore, what was the demand for health care services for this expanded pool of individuals? To mitigate the financial risk that insurers face and to stabilize the price of health insurance in the non-group and small-group markets, the ACA establishes three risk mitigation programs: the transitional reinsurance program, the permanent risk adjustment program, and the temporary risk corridors program. Table 1 summarizes the goals, objectives, and potential sources of uncertainty or risk that each of the ACA's three risk mitigation programs aims to moderate. Table 1 does not include information on program implementation. The remainder of this report addresses the transitional reinsurance program. Section 1341 of the ACA establishes the transitional reinsurance program. The transitional reinsurance program is a temporary program (plan years 2014-2016) that provides payment to non-group market health plans that enroll high-cost (specified in statutes as high-risk) enrollees both inside and outside the exchanges. Prior to ACA implementation, little information was available regarding health care usage and demand for the previously uninsured, as well as any pent-up demand due to the lack of health insurance coverage. Accordingly, to limit their risk exposure in offering plans on the non-group market, insurers would likely raise premiums to the extent possible to protect themselves against the potentially high cost associated with delayed care. However, some of the new ACA market reforms limit the degree to which insurers may vary premiums. For example, individuals who were previously uninsured may apply for coverage on a guaranteed-issue basis; insurers must accept these applicants and can only vary premiums based on the factors noted above. The transitional reinsurance program is designed to mitigate the financial risk associated with individuals who had delayed needed health care while they were uninsured. The ACA requires that a transitional reinsurance program be established in each state for 2014 through 2016. The ACA establishes the transitional reinsurance program to be redistributive in nature in which the HHS Secretary collects reinsurance contributions from health insurers and from third-party administrators on behalf of group health plans; the HHS Secretary then uses those contributions to make reinsurance payments only to health insurers offering plans in the non-group market both inside and outside of the exchanges. Under the program, only non-group market health plans with high-cost enrollees are eligible for reinsurance payments; the program covers a portion of the claims costs for these enrollees based on payment parameters (see " Payment Parameters " section of this report) set by the HHS Secretary. Overall, the transitional reinsurance program transfers a portion of the funds collected from most non-group and group health insurers to non-group market plans with high-cost enrollees. The statutes specify that the aggregate collection for all states for the transitional reinsurance program is to be $10 billion for plan year 2014, $6 billion for plan year 2015, and $4 billion for plan year 2016. The statutes also specify that an additional collection be deposited into the general fund of the U.S. Treasury.