Understanding High Risk Pools

In “The Insurance Fix,” in the latest National Review, Thomas Miller and James Capretta offer a roadmap for health reform that addresses the anxieties of the insured and uninsured without sharply increasing regulation and centralization. They call for the creation of larger, better-funded high risk pools.

A better alternative, and one much less disruptive to current policyholders, would be to provide adequate and sustainable funding of high-risk pools. Today, most–but not all–states have subsidized high-risk pools that are intended to reduce premiums in the individual marketplace for people with expensive preexisting conditions. They are the most common way for states to comply with HIPAA’s requirement that workers leaving group plans have access to the individual market.

Unfortunately, these pools haven’t worked well, largely because they have invited a mismatch between funding and demand. State and federal subsidies for high-risk pools have been meager relative to the size of the problem they are intended to address, and insurers have been able to steer applicants toward the pools with impunity. Politicians tend to prefer rate restrictions and hidden subsidies to more transparent and straightforward funding for high-risk pools, because the former measures are off-budget and seemingly costless to taxpayers. In truth, that approach backfires, imposing heavy burdens on a very narrow base of private purchasers in the individual market.

There should be substantial new federal funding for these high-risk pools–but also new operating rules.

Note that Miller and Capretta note the inadequacy of existing HRPs, and call for their expansion. Ezra Klein objects to high-risk pools, and he offers a helpful link.

A high-risk pool is where a state creates a special insurance pool for people with preexisting conditions and then subsidizes their coverage. About 200,000 Americans are currently in these pools, the costs are high, the coverage varies wildly in quality and the service is often quite poor, as a couple thousand low-income sick people aren’t much of a political constituency. To put it simply, if you eventually developed a preexisting condition — asthma, say — would you rather a world in which insurers couldn’t discriminate against you or a world in which you could send in a form to the state of Missouri and ask if they had any room in their Big Pool o’ Sick people?

Thought so. For more on high-risk pools, see Harold Pollack’s interview with HRP expert Katherine Swartz.

But of course not everyone believes that banning discrimination, i.e., banning underwriting, will actually end adverse selection. If the incentives to engage in adverse selection remain strong, it will continue to happen, albeit in harder-to-detect and possibly more corrosive ways. This is why health policy experts have advocated HRPs and reinsurance, areas that have been neglected in the Democratic reform proposals. There is a small reinsurance component that is not adequate to the task.

I was, however, delighted to see Ezra link to a TNR interview with Katherine Swartz, who wrote the excellent book Reinsuring Health, which I’ve cited at The Agenda in the past.

Pollack: How about specific lessons of state risk pools?

Swartz: Minnesota and Oregon are the only two that have large enough numbers of people that have been covered, but again, I don’t think that the current structure of the risk pools is what we should be looking at if we are going to greatly expand them. They weren’t set up for this. They were set up, really, to take very small numbers of people out of the insurance market. They weren’t meant to be a substitute for public or private insurance.

Pollack: How about the reinsurance provisions in the various leading bills? I take it you believe that reinsurance would be useful in a state insurance exchange to address the really extreme cases that are going to come up.

Swartz: I think reinsurance is a way of more fairly and widely spreading the burdens of people who have extraordinarily high costs. It’s pretty random who lands in that top one or two percent in the population in terms of healthcare costs in any given year. So, having a broadbased population paying most of their costs makes a lot more sense to me than placing the burden on others who happen to be covered by that person’s particular insurer or insurance policy.

Swartz didn’t address the question directly — that is, she didn’t make note of the paltry reinsurance provisions in the main proposals.

Interestingly, Swartz has in the past advocated a public reinsurance plan aimed at the small-group and individual markets as an effective way of reducing premiums and thus increasing access to affordable insurance coverage. While I’m sure Swartz would be happy with a more comprehensive approach, the virtue of her proposal in Reinsuring Health is that it would cost far less than the reform model championed by the president and his allies. Granted, it would do very little to contain costs, yet that is true of the dominant reform model as well. Swartz’s public reinsurance plan does have the added virtue of not stifling business model innovation. 

Ultimately, I think we need to create the conditions for integrated fixed-free providers to flourish. The health reform debate we’re having is a sideshow that would be funny if it weren’t so powerfully counterproductive. Pretty serious misunderstandings and misrepresentations are being deployed to dramatically increase the role of the federal government in the health sector, and this will make the kind of business model innovation we need less likely.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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