The Mechanics and Implications of High Risk Pools as a Potential Element of National Health Care Reform

16th Feb 2017

Health insurance high risk pools have been mentioned by President Trump and Congressional Republicans as a potential element of their Obamacare replacement plans, but they are not a new idea.  Past experience with high risk pools suggests that they can help to address issues of affordability, stability, and fairness in the individual health insurance market.  However, to do so, they must be adequately publicly subsidized and have benefit designs and cost-sharing structures that are comparable to health insurance products available on the open market.

High risk pools were initially one of the options that states could adopt under the Health Insurance Portability and Accountability Act (HIPAA) for ensuring portability from the group health insurance market to the individual health insurance market.  The concept behind high risk pools is that a state can establish a health insurance option for individuals who are unable to purchase health insurance on the individual market due to medical underwriting (i.e., pre-existing conditions).  This pool is then subsidized with public funds to increase its affordability.  The challenges of high risk pools are intrinsic to their function and composition – they are pools of individuals who have been rejected by health insurers because they are likely to increase the cost of the overall pool, increasing premiums and driving others out.

Structural Challenges for the Individual Health Insurance Market

Before discussing risk pools further, it is important to understand what problem they were designed to solve, and how the Affordable Care Act (ACA) addresses the same problem in a different way.  High risk pools and the health insurance market reforms in the ACA are both intended to address the stability, affordability, and fairness of the individual health insurance market.  While rarely explicitly stated, the most significant insurance market reforms in the ACA were focused on the individual (or non-group) market.  Health insurance, like insurance in general, is essentially a risk contract – one individual or organization doesn’t like being exposed to a certain type of risk and so pays an insurance company a monthly premium to take that risk.  This arrangement works because the insurance company is able to pool risks from lots of different individuals or organizations.  As long as the risks are uncorrelated, the likely cost associated with the pooled risk is much more predictable than for the un-pooled risk.

Many people in the U.S. receive health insurance through their employers, which operate as natural groups to gather individuals into pools.  Since most people do not select jobs to get health insurance coverage, there is little reason to believe that the incidence of health care costs for the individuals in the groups established through employment arrangements will be correlated.  The individual health insurance market, on the other hand, is referred to in industry jargon as the ‘non-group’ market for a reason.  There is no natural group for aggregating individuals into a pool that is established for reasons other than purchasing insurance.  There is also reason to believe that the set of individuals seeking to purchase individual/non-group health insurance does not represent a representative sample of the population with respect to health status.

The individual health insurance market is bedeviled by certain empirical realities about health care spending, and characteristics of health insurance markets – the distribution of health care spending is highly skewed, health insurance has a downward sloping demand curve, and poor health status decreases the elasticity of demand for health insurance.  Health care spending is highly skewed toward a relatively small proportion of the population.  Analysis of the Medical Expenditure Panel Survey, an annual survey of health care expenditures administered by the federal Agency for Healthcare Research and Quality, shows that the top 5% of the population in terms of health care spending accounted for about half of all health care spending in the U.S. in 2012, while the bottom 50% accounted for less than 3% of all health care spending.  Therefore, if it could be possible to identify the most expensive 5% and systematically keep them out of a particular health insurance pool, then the spending for the pool and the corresponding premiums would be much lower than what they would be otherwise if everyone was in the pool.

As it turns out, many of the people who will have higher costs are readily identifiable because they have pre-existing conditions.  However, these people are also those who are most likely to need health insurance in the first place.  Like most other goods and services, the demand curve for individual health insurance is downward sloping – the more expensive it is, the fewer people will want to buy it.  However, individuals in worse health, such as those with pre-existing conditions, are less price sensitive than average because they know that they will use health services and are more likely to perceive the value of health insurance.  Healthy individuals, on the other hand, such as those in the bottom 50% of spending who consume almost no health care services, may not perceive the value in spending hundreds of dollars per month on health insurance.  Individuals with pre-existing conditions are not as small of a fraction of the overall population as one might think.  One study estimated that 27% of Americans had a pre-existing condition that might make them ineligible for health insurance in an unregulated individual/non-group market.

In an unregulated individual/non-group insurance market, insurers would seek to maximize enrollment by minimizing price.  Declining to enroll individuals with pre-existing conditions would be one way of decreasing the expected medical spend and the associated premiums, thus increasing the number of individuals willing to purchase policies.  However, this arrangement is likely to strike many as fundamentally unfair or unjust, since pre-existing conditions are often driven by happenstance or genetics – circumstances outside of the individual’s control.  In response to this situation, HIPAA required for states to have options for individuals to be able to have meaningful insurance portability as they transitioned from group health insurance to individual health insurance.  The most popular option adopted by states was a high risk pool.

The Mechanics of High Risk Pools

High risk pools are designed to offer an opportunity for individuals with pre-existing conditions to purchase health insurance through a separate, subsidized pool.  One of the challenges that high risk pools had prior to the Affordable Care Act was that they were very expensive, even once subsidized, and in many states policymakers did not choose to subsidize them very generously or structured the benefits and cost sharing in ways that discouraged enrollment.  In Texas, for example, during 2013, which was the last full year of operation of the Texas high risk pool before it was phased out due to the ACA, the premiums were just over $600 per member, per month (PMPM), but the actual medical costs were almost twice that at just under $1,200 PMPM.  (My calculations are based on the final financial report from the Texas risk pool.)  In the case of Texas, the balance of the costs associated with the risk pool not covered by premiums was covered by an assessment against all health insurance policies written in the state.  In other states, risk pools are subsidized by general revenue raised from other taxes.

Since health insurance risk pools draw an expensive set of enrollees by design, some effort to subsidize the premium cost to the enrollees is necessary in order to increase affordability and ensure some level of demand.  However, the level of subsidy may not be enough to bring the premium prices into line with the rest of the market.  At the same time that premiums in the Texas high risk pool were over $600 PMPM, the average premium on the individual market was just over $200 PMPM.  (Note: The figures cited above come from different data sources so may not be directly comparable due to data collection methods or populations considered.  In particular, Texas law at the time prohibited the premiums in the high risk pool from exceeding twice the Standard Risk Rate, which is related to, but not the same as the average premium rate.)

Given a highly skewed pattern of health care spending and a likely desire to establish some basic fairness or equity between the unregulated individual market and the risk pool in terms of premium prices, subsidies in the risk pool should probably be adequate to lower the cost of premiums in the risk pool to near or equal to the price of premiums in the individual market.  Speaker Ryan’s proposal has called for $25 billion over 10 years to subsidize high risk pools.  A credible analysis of a related proposal determined that the likely cost to the government to subsidize the cost of high risk pools would be $178 billion per year, or almost two orders of magnitude greater than what is being proposed in Speaker Ryan’s plan.  In addition to affordability, even when subsidized, other challenges with high risk pools have included benefit design and cost sharing decisions implemented to reduce costs, such as annual or lifetime benefit caps and high deductibles.

Individual Health Insurance Market Reforms in the Affordable Care Act

The ACA attempted to address the joint issues of fairness, market stability, and affordability in the individual market by significantly restricting medical underwriting for issuance and rate-setting, establishing minimum standards for health insurance policies, mandating health insurance purchase, and subsidizing health insurance costs on a sliding scale based on income.  Whereas high risk pools establish a parallel pool for higher cost individuals in order to prevent adverse selection against the individual market and decrease premiums, the ACA sought to broaden the pool by mandating and subsidizing health insurance purchase.

Conclusion

High risk pools create a mechanism within a deregulated individual health insurance market for individuals with pre-existing conditions to obtain coverage.  However, unless barriers to entry into the risk pool are minimized, the benefit design and cost sharing in the pool are comparable to the individual market, and the risk pool is highly subsidized, then a large proportion of potentially eligible people might choose to go without health insurance rather than purchase through the risk pool.

This article originally appeared on www.waterlooresearch.com.  Stephen Palmer, PhD is the Founder and Principal of Waterloo Research and Consulting, an Austin-based consulting firm that helps organizations navigate the intersections of health care, technology, and government.  Dr. Palmer can be reached at stephen.palmer@waterlooresearch.com.