By Sandy Ahn and JoAnn Volk
Congressional leaders and the President have said any plan to replace the Affordable Care Act (ACA) will ensure access for people with pre-existing conditions. However, how they are covered matters a great deal, in part because of the effects on the stability of the risk pool in the individual market.
Stabilizing the individual market risk pool is an important policy objective to ensure the 22 million people now covered through individual market health plans have access to a choice of insurers and plans at affordable rates. Under the ACA, insurers must place their individual market enrollees in each state into a single risk pool. Ideally, each insurer’s risk pool has both healthy and sick consumers so they can spread the costs of consumers with medical conditions throughout the pool. Approximately 50 percent of health care spending for adults under the age of 65 is driven by just 5 percent of this population. If primarily sick consumers are in a risk pool, insurers would need to raise premiums in order to cover their medical claims, which could make coverage less attractive to relatively healthy individuals who may see less value in buying insurance.
Insurers and policymakers alike have called for the creation of state-based high-risk pools to help keep people with pre-existing conditions insured and stabilize the individual insurance market. But there are two different types of “high-risk pools” that they could be referring to, and that difference matters both to taxpayers and individual market consumers.
One type of high-risk pool is called reinsurance. It is among the premium stabilization programs employed in the ACA. In place for just the first three years of the ACA’s marketplaces (2014-2016), the reinsurance program provided payments to insurers to help pay claims for high-cost enrollees. Another type of high-risk pool, included in Speaker Ryan’s ACA replacement proposal and others, would place unhealthy consumers into a risk pool that is separate from the rest of the individual market. Department of Health and Human Services Secretary Price’s ACA replacement proposal would give states a choice to use $1 billion in federal funding per year (up to 3 years) for a reinsurance program or a high-risk pool or other risk-adjustment mechanisms. Similarly, a leaked draft ACA replacement plan from the House of Representatives would establish a “state innovation grants and stability program” with $100 billion over 10 years flowing to states for programs such as reinsurance or a separate high-risk pool.
How do reinsurance and high-risk pools work?
Reinsurance programs transfer funds to individual market insurers to help pay the claims associated with high-cost enrollees. Reinsurance offsets some or all of an insurer’s costs above a certain threshold, known as an “attachment point,” and up to a cap. By helping to defray unexpectedly high costs, reinsurance is intended to discourage insurers from setting high premiums to cover potentially high-risk enrollees. Unlike high-risk pools, all enrollees, healthy and sick, are in a single pool and have the same choice of plans.
The federal government has used a reinsurance program in the Medicare Part D program and the ACA to help keep premiums stable and affordable, but there are important differences between the two programs. The Medicare Part D program includes a permanent reinsurance program whereas the ACA’s program was temporary (2014-2016). Funding for these programs also varies. With Medicare Part D, the federal government provides payments to insurers for their high-cost enrollees. Under the ACA, all insurers and employer plans, including those that self-fund, contributed funds to the reinsurance program. The financing structure matters. The ACA’s program may have been made temporary primarily because of employers’ opposition to subsidizing the individual market on a long-term basis.
There is evidence the ACA’s temporary reinsurance program helped hold down premiums and reduce net claims costs, as intended. The reinsurance program reduced net claim costs for high-cost consumers by about 10 to 14 percent in 2014, and health insurance actuaries have found reinsurance to be a stabilizer of premiums in the individual market. The ACA’s reinsurance program ended in 2016, which some actuaries note as part of the reason why premiums increased in 2017.
Reinsurance is also working to keep premiums down in Alaska, a state with traditionally high premiums. Individual market premium rates in that state for 2017 were originally slated to increase by 42 percent. After the reinsurance program was enacted, they only increased by 7.3 percent. Further, actuarial experts estimate that 2018 rates will be 20 percent lower with the reinsurance program compared to rates without the program.
High-risk pools separate individuals with high medical claims into a different risk pool from the rest of the individual market. Insurers would no longer be required to consider these individuals part of a single risk pool, or to use their healthy enrollees to subsidize the sick. In theory, this will lower premiums for healthy people, making their coverage more affordable. We have the experience of the 35 state high-risk pools that existed prior to the ACA as a guide to how that theory works in practice.
In most states, to qualify for high-risk pool coverage individuals had to be denied an insurance policy in the individual market, charged significantly higher premiums, or have a condition designated as “uninsurable,” such as cancer, hemophilia, multiple sclerosis, diabetes or pregnancy. However, many states found high-risk pools to be expensive to operate. The difference between premiums collected and costs incurred, or the net loss, was more than $1.2 billion for all 35 state high-risk pools combined in 2011. As a result, many states had to limit enrollment, impose waiting periods, cut benefits, and charge premiums as much as twice the price of traditional individual market plans. On the eve of the ACA, these pools covered just a fraction of potentially eligible individuals – just 5 percent, according to one government study. Generally, the more individuals enrolled in a state high-risk pool, the more affordable premiums would be for healthy people in the individual market. However, high enrollment in the high-risk pools drove up the losses associated with running the program.
State-run high-risk pools and reinsurance programs have significant differences in their operation costs and consumer experience. See table.
Table. Differences between Reinsurance and High-Risk Pool Programs
Access to Coverage
|Approximately 21.8 million people have coverage now on the individual market. Included in that number are high-risk enrollees or those with pre-existing conditions that can continue their current coverage if insurers are provided with reinsurance payments to offset costs associated with them.||226,615 people were enrolled in all states’ high-risk pools at the end of 2011. Minnesota’s high-risk pool, often cited as a successful program, enrolled only 7 percent of the state’s uninsured population.|
Adequacy of Coverage
|Coverage is the same as for consumers without medical conditions– no pre-existing condition waiting periods, the same deductibles and benefit package, and the same out-of-pocket cost protections.||State high-risk pools had lifetime and annual monetary limits, no cap on out-of-pocket spending, high deductibles, and pre-existing condition waiting periods for up to 12 months.|
|Approximately 85 percent of marketplace enrollees could find a plan with a premium of $100 or less with financial assistance in 2017.||Premiums were generally higher, from 125 to 200 percent of rates in the individual market, and many potential enrollees could not afford premiums.|
|In 2014, the ACA’s transitional reinsurance program spent $10 billion to offset claims of high-cost enrollees, which experts estimate reduced premiums by 10-14 percent.||High-risk pools must be heavily funded to cover losses and prevent cuts to coverage or enrollment caps, between $25 and $100 billion a year, according to estimates.|
Why does it matter?
An unstable risk pool can lead insurers to exit the market or charge higher premiums, leaving consumers with less choice and making coverage less affordable. Two approaches to achieving market stability while covering those with high-cost medical conditions are high-risk pools and reinsurance. But they are not created equal.
States’ experiences with high-risk pools suggest they are not as cost-effective as reinsurance. If given adequate government funding, they have been estimated to cost taxpayers $25–$100 billion per year. By comparison, a national reinsurance program is estimated to cost just one-third of a national high-risk pool program (roughly $10 billion per year).
High-risk pools also require people with high-cost medical needs to buy their coverage in a separate risk pool, which could lead to them facing different benefits, provider networks, and financial protections than people in the individual market. If government funding is inadequate, past experience with state-run high-risk pools suggests that, over time, high-cost consumers could face enrollment caps, eligibility limits, significantly higher premiums, long waiting periods for coverage, high deductibles, and annual or lifetime dollar limits on covered benefits.
To maintain a viable individual market, any ACA replacement plan will need to include some mechanism to offset costs for high-risk individuals. Congress will need to weigh carefully the costs and benefits of two very different approaches, both in terms of what is best for taxpayers and consumers.