The primary sticking point in health reform is what to do with high -cost individuals who have pre-existing health conditions. People with episodic medical needs are easy to insure, while those with persistent needs are far more difficult unless insurers are allowed to underwrite enrollees’ risk. Republicans have long favored high-risk pools to cover individuals who are otherwise uninsurable. Prior to the Affordable Care Act (ACA) just over two-thirds of states had some type of high-risk pool. Most people turned down prior to the Affordable Care Act could ultimately obtain coverage either at a higher price or after meeting some preconditions. In 2011, high-risk pool enrollment varied from 0.1% in Alabama to a high of 10.2% in Minnesota. By most accounts only about 2% of people are uninsurable. However, one Kaiser Family Foundation study argues the actual rate may be a dozen times higher.
Health reform’s biggest challenge
Medical needs are not distributed evenly throughout the population. The healthiest 50% of Americans only account for about 3% of medical spending. The healthiest half of the population also has a 73% chance of remaining in the healthiest group the following year. By contrast, the sickest 10% of Americans have medical bills that are 100 times, on average, of those in the healthiest 50%. The sickest 10% accounts for about half of medical bills in any given year. Nearly half of those (45%) will remain among the least healthy 10% of big spenders the following year.
Create a high-risk pool without actually having one
Republicans are now considering so-called invisible high-risk pools to protect those with pre-existing conditions while making coverage affordable for those with few health needs. Invisible high-risk pools are a type of reinsurance program that covers the cost of insured claims in excess of a certain amount and/or targets high-cost claims for specific conditions. Maine experimented with this strategy in 2011. The individual market in Maine had deteriorated due to regulations requiring guaranteed issue and strict community rating. The result was adverse selection: premiums doubled and enrollment plummeted by two-thirds over an 18-year period (1993 to 2011).
To counteract the incentive for healthy people to leave the individual market, Maine expanded its premium rating bands to 3:1 from an earlier ratio of 1.5:1. The state also agreed to reinsure 90% of claims between $7,500 to $32,500 and all claims above that $32,500 in the individual market. After Maine relaxed its rating bands and created an invisible high-risk pool, premiums for those in their 20s, 30s and 40s dropped by about $5,000 per year, on average. Premiums for individuals in their 50s fell by $6,000, while premiums for those 60 years old fell by about $7,000 annually.
Alaska also realized high-cost individuals are disproportionately driving up premiums, making coverage a bad deal for healthy enrollees. Alaska created a two-year reinsurance plan that targets specific conditions and reimburses costs for selected high-cost enrollees. Alaska contributes $55 million a year to cover very sick individuals. Whereas state residents were initially facing premium increases of 40% from insurer Premera, insuring the sickest enrollees in a separate risk pool kept the increase to about 7%.
A combination of high-risk pools and reinsurance all sound like great ideas for states to experiment with. One criticism I have heard is that government-funded reinsurance is a step towards Medicaid-for-All. As the cost of health insurance increases over time, all that is required to stumble into Medicaid for All is expanding the risks government is willing to insure.