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Chapter 5. Two Approaches: High-Risk Pools and Assessments to Cover High-Risk People
- Russell Sage Foundation
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Chapter 5 Two Approaches: High-Risk Pools and Assessments to Cover High-Risk People W e need to devise a policy approach that substantially reduces insurers’ risk of extremely high expenditures. The costs of using selection mechanisms will then exceed their advantages for insurers. Moreover, if the expenses of very high-cost people are spread among the total population, low-risk people will not face significantly higher premiums when they are pooled with high-risk people. So long as low-risk people can find low premiums, they will buy health insurance, ensuring that the overall level of expected medical expenses in the risk pool will not rise dramatically with the addition of high-risk people. Two policy approaches that have gained attention are state high-risk pools and assessment funds that reallocate monies from insurers with low costs to insurers with high costs. Both types of approaches have been used by states for more than twenty-five years. As mentioned earlier , high-risk pools exist in thirty-three states (and a thirty-fourth state, Idaho, has an arrangement for high-risk individuals that is quite similar ).1 However, it is not appropriate to review the states’ enrollment experiences with the objective of projecting how expanded versions of such pools would work as a vehicle for enrolling substantial numbers of the uninsured. At least originally, the state high-risk pools were not intended to be a source of health insurance for large numbers of people. Instead, they were designed to be limited programs that guarantee access to health insurance for people who cannot obtain it, primarily because of preexisting conditions or chronic illness. The high-risk pools were supposed to be very small complements to states’ individual markets rather than programs offering substitutes for policies sold in the individual market. Nonetheless, most studies of the states’ experiences with high-risk pools have judged them from the perspective of their numbers of enrollees and the extent to which their premiums exceed standard individual premiums .2 We will examine the states’ experiences with the risk pools to understand why their designs may prevent them from being a mechanism REINSURING HEALTH for spreading the risk of many people with very high costs to a broader population. The insurer assessment programs have not been systematically analyzed, so less is known about how well they work in terms of equitably spreading the costs of high-cost people among insurers. Both approaches to the adverse selection problem have the common feature of identifying people who are likely to have extremely high costs. Their health care expenses can then be shared among insurers and the general population. They are no longer the responsibility of just one insurer . But the drawback to labeling individuals “high-risk” based on a prediction of having very high costs in the future is that it does nothing to eliminate the strong incentive to continue to select only people expected to have low costs. HIGH-RISK POOLS FOR HIGH-COST PEOPLE Minnesota and Connecticut established the first high-risk pools in 1976. The idea was slow to catch on. It was not until the early 1980s that Wisconsin and North Dakota implemented the next two high-risk pools. By 1989, nine more states had created high-risk pools, and then the momentum picked up.3 Eleven states established pools between 1990 and 1995, and five more followed between 1996 and 2001. In 2002, as part of the Trade Adjustment Assistance Reform Act (Trade Act), Congress approved a Bush administration request for $100 million to be spent in fiscal years 2003 and 2004 to expand the use of state high-risk pools: $20 million was reserved to establish new pools, and the remaining $80 million was to offset the operating losses of qualified existing pools. To put this in perspective, the $40 million for fiscal year 2003 equals 7.4 percent of the total estimated losses of the state pools in 2003. As of mid-2005, six states had received $4.2 million to create (or study the feasibility of creating) a high-risk pool, bringing the total to thirty-three states with pools.4 Nineteen states had received Trade Act funds totaling $65.7 million to help defray their operating losses. (New Hampshire is the only state to have received both types of grants.)5 The remaining $14.5 million to defray operating losses was to have been awarded by the fall of 2005, and nine states (including five that have yet to receive...