Understanding High-Risk Pools as Part of Obamacare Replacement
Edmund Haislmaier /
As House Republicans try to negotiate an agreement on the design of Obamacare repeal and replace legislation, specific elements are often referenced using shorthand terminology.
While understandable, this can result in confusion if the same (or similar) term is applied to different concepts.
An example is the term “high-risk pool,” which has recently been used as a shorthand reference for what are really three different concepts, depending on who is using the term.
Traditionally, the term “high-risk pool” refers to a separate arrangement under which insurance companies operating in a given market collectively subsidize (that is, pool) the extra costs for providing coverage to individuals who, because they are poor risks, have been refused coverage under standard policies.
In this construct, those individuals are given coverage that is separate and different from that obtained by other people in the general market.
However, the term “high-risk pool” has also been sometimes used as shorthand for two other related, but different, concepts.
One concept can be more accurately described as a “risk transfer pool.” Under this design, for a given market, each insurer’s claims experience is compared to the collective (that is, pooled) experience of the whole market.
Then, based upon an agreed formula, a portion of premium revenues are transferred from the insurers whose experience was significantly better than the norm to the insurers whose experience was significantly worse than the norm.
The idea is to adjust for potential selection effects so that an insurer is compensated if it attracts a larger than normal share of costly enrollees.
Thus, as with a traditional high-risk pool, under a risk transfer pool the cost of expensive enrollees is spread across all insurers in the market. However, unlike in a traditional high-risk pool arrangement, costly individuals aren’t given separate coverage.
In sum, the difference is that the latter concept involves moving money, but without also moving people into different coverage.
Finally, the third concept basically consists of relabeling publicly funded “reinsurance” and calling it “high-risk pool funding.”
Unlike private reinsurance, for which claims must be funded entirely of the premiums charged to purchasers (just like other forms of insurance), a public reinsurance program provides a government subsidy to offset insurer losses on expensive individuals.
That difference also distinguishes a public reinsurance program from both the traditional high-risk pool design and the risk transfer pool design.
These latter two designs consist of pooling and reallocating premium dollars within the market, whereas a public reinsurance program adds additional money from taxpayers.
Injecting taxpayer money into the equation also complicates the picture by raising secondary issues, such as the limits set on the amount and duration of taxpayer liability and the likely effectiveness of those limits.
While these differences will strike many as arcane, understanding them is important for assessing the appropriateness and effectiveness of various proposals.
For instance, two weeks ago Rep. Gary Palmer, R-Ala., offered an amendment to the House bill to create what he termed a “Federal Invisible High-Risk Pool,” which had elements that were similar to some of the structure of a risk transfer pool, including no explicit outside funding.
However, this week the Rules Committee adopted a new version of Palmer’s amendment (this version co-sponsored by Rep. David Schweikert of Arizona), which would create a “Federal Invisible Risk Sharing Program.”
In this version, the basic structure is that of a publicly funded reinsurance program, with $15 billion in federal funding over nine years.
All of this leads to three larger points.
First, these approaches need to be considered in context rather than in isolation. How they work (and thus, how appropriate they are) depends on how they fit within the broader legislative and public policy design.
For instance, if the broader design involves giving costly individuals separate coverage, then a traditional high-risk pool is the way to spread their extra costs fairly among insurers in the market.
On the other hand, if the broader design stipulates that costly individuals will be able to obtain the same coverage as everyone else, then a risk transfer pool is the way to spread their extra costs fairly within the market.
In contrast, a public reinsurance program shifts some portion of the excess costs to others outside the market—either to those with other sources of coverage (as the Obamacare temporary reinsurance program did by taxing enrollees in employer plans), or to taxpayers generally (as the second version of the Palmer amendment would by authorizing $15 billion of federal spending).
Second, these options show that there are in fact different ways of addressing the same issue—namely, ensuring that those with expensive medical conditions can get coverage without, in the process, damaging the market for everyone else.
That is an important point because too often defenders of Obamacare assume or imply that their approach is the only way.
Third and finally, none of these approaches directly affect the underlying cost of coverage. What they do is reduce insurer uncertainty over the mix of risks that their plans are likely to attract.
At best, that enables insurance actuaries to price plans with less need to build a “cushion” into their premiums to cover those uncertainties—and can, thus, result in some marginal premium reductions.
However, the insurance rules that have the most effect on premiums are those that specify the allowable coverage parameters.
In the case of Obamacare, that means the law’s essential benefit mandates, prohibition on charging copayments for certain services, limits on enrollee cost sharing, and minimum actuarial value requirements. It is those provisions that are responsible for much of Obamacare’s premium increases.
In other words, any risk pooling or public reinsurance arrangements will determine who pays the costs and how, but not the size of the total bill.
It is those cost drivers that lawmakers need to address in their legislation if they want to give their constituents meaningful Obamacare relief.