Last Updated on January 26, 2026 by Chicago Policy Review Staff
Experts have been warning the public about the impending increase in health insurance prices in 2025, with even sharper increases expected this year in 2026. This anticipated increase comes with a shrinkage in coverage and a strain on low-income Americans who will not be able to afford these hiking premiums. Unfortunately, these price hikes are not the result of any single piece of legislation; they are an inevitable consequence of a broader healthcare system that was never designed to prevent them. Why does the U.S. healthcare system perpetually allow for these rising costs to be passed on to patients, especially when it is possible to address this structural weakness by redistributing risk through reinsurance programs?
The Bigger Picture
Health spending accounts for 17.8% of the country’s Gross Domestic Product (GDP). Despite this substantial investment, Americans experience worse healthcare outcomes than their global peers. This gap between spending and outcomes signals a systemic failure. While reducing spending seems like a fair tradeoff given current outcomes, these cost-cutting measures are being introduced at the expense of coverage quality and reach, and are not necessarily the solution.
As of 2025, more than 70 million Americans are enrolled in Medicaid, a joint federal and state program which provides health insurance for low-income adults and children. The federal government pays states a percentage of the program’s expenditures, called the Federal Medical Assistance Percentage (FMAP), which can range from 50-76% for each state based on their per capita income, making lower-income states more heavily reliant on federal dollars than others. Other Medicaid funding sources include state funds and healthcare provider taxes; however, the majority of Medicaid funding comes from federal dollars (64%), rendering it significantly impacted by any federal funding cuts. When Medicaid funding tightens, more people shift into the individual market and face higher premiums given that the risk is spread across a smaller pool of people.
Legislative Context and The One Big Beautiful Bill Act
On July 4th of 2025, the One Big Beautiful Bill Act, a bill introducing major changes to federal spending levels, was signed into law by the President. Several federally funded programs will be impacted, especially Medicaid, which will be receiving the largest cuts in the program’s history. The nonpartisan Congressional Budget Office (CBO) estimates this will lead to 10 million more people to become uninsured by 2034.
These changes include the rollback of pandemic-era Medicaid expansions and enhanced FMAP rates, tighter eligibility verification requirements and increased cost-sharing flexibility for states. As these provisions reduce coverage continuity and as Medicaid enrollment contracts, risk in the individual market becomes more concentrated leading to sharp premium hikes unless state intervention occurs. Reinsurance programs are an example of said intervention — they provide funding to insurers who cover consumers with high medical costs to prevent them from raising insurance premiums on all enrollees. This policy helps cover steep medical claims so insurance companies don’t pass those costs on to everyone through higher premiums.
States that have adopted reinsurance programs (throughout 2018-2021), such as Alaska, Colorado, Oregon and Maryland, have shown a decline in premiums ranging between 10% to 19% in the first year of implementation. This strongly demonstrates how risk pooling can mitigate the effects of federal cutbacks.
Why Are Insurance Premiums Increasing?
Rising healthcare costs can be attributed to several factors, such as the general population becoming more unhealthy (according to the CDC, 6 in 10 American adults have at least one chronic disease), newer technology and drugs becoming more expensive, providers demanding higher prices and medical inflation impacting the economy. Recent legislation such as Medicaid provisions and budget reconciliations, as well as the expiration of the Affordable Care Act enhanced premium tax credits will cause premiums to rise by an average of 30%. At the same time, tighter eligibility verification reduces enrollment continuity, leaving insurance pools smaller and sicker on average. When healthier individuals exit the market (adverse selection) or lose coverage eligibility, the remaining pool on average is sicker and faces higher costs.
States with a high Medicaid reliance will be impacted most, and low-income communities, especially in rural areas, will face harsh consequences. However, impacts such as hospital financial strain and higher out-of-pocket expenses reflect broader system dynamics that predate legislation. Reinsurance programs directly address these risks by covering a portion of extremely high claims, preventing these additional costs from inflating premiums for everyone else.
In the U.S., as opposed to many other countries with universal coverage pools, risk is pushed into fractured markets, which leads to inevitable hikes in premiums. State reinsurance programs, while not equivalent to universal coverage, can function as a domestic analog by shifting high medical costs away from individuals and insurers and into a broader and more predictable pool. Coming from Saudi Arabia, a country where despite its imperfect healthcare system still offers universal coverage, it is striking to see how much of the U.S. affordability crisis stems from a refusal to do the same. Reinsurance programs have the potential to massively improve the affordability of health insurance coverage by approximating this principal of risk distribution.
Admittedly, alternative approaches such as stricter price regulation or provider payment reform can offer more comprehensive solutions to rising premiums. Nevertheless, while these interventions may yield better long-term results, they face significant political and administrative barriers. Reinsurance demonstrates immediate and quantifiable premium reductions across various states, and remains the most market-stabilizing tool.
What Comes Next
Over the next few years, patients are likely to pay more for doctor visits, while insurers will be incurring higher costs as well. We may see shrinking Medicaid enrollment, healthier customers dropping coverage, employers shifting more costs to their employees, and increasing insurance premiums. In the long term, we might see impact on a larger scale such as hospital closures, a growing public dissatisfaction with the healthcare system and reduced employment opportunities as employers struggle with rising benefits costs.
While legislation is a contributor to this wider problem, it can also shift outcomes in a positive direction if it begins to treat affordability as a primary concern. Expanding reinsurance is a first step to prioritizing affordability and to creating protective measures against the instability caused by federal policy shifts. While reinsurance programs have proven successful in many states across the country, they do not appear to have an effect on insurer participation, making it necessary for policymakers to promote and scale these programs nationally if they want to make healthcare meaningfully more affordable for their constituents.