High-Risk Pools

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I. Introduction
II. How Health Insurance Works–Pooling Risks
III. High-Risk Pools Before the ACA
A. Eligibility for High-Risk Pool Enrollment
B. Cost and Coverage Under High-Risk Pools
1. Cost
2. Coverage/Benefits
IV. Success and Failure of High-Risk Pools
A. Historical Perspective: Funding Matters
1. State High-Risk Pools Pre-ACA
2. The ACA’s Funding of High-Risk Pools from 2010 to 2014
B. High-Risk Pools and the AHCA
V. Conclusion
VI. External Discussion and Analysis



I. Introduction


On May 4, 2017, the House of Representatives passed the American Health Care Act (“AHCA”), a bill seeking to repeal and replace the Affordable Care Act (“ACA”).  One of the more controversial parts of the bill is the provision on pre-existing conditions.  If passed, the AHCA would give states the option to allow health insurers to base premiums on health status or pre-existing conditions.  A pre-existing condition is a health condition that either began before a person’s health insurance went into effect or before they applied for their new plan, one that existed before the coverage.


Although the AHCA states that insurers may not deny coverage based on pre-existing conditions, the bill allows insurance companies to charge individuals with pre-existing conditions more for their health insurance.  In essence, this is a return to the pre-ACA era where insurance companies were free to charge those with pre-existing conditions significantly more than individuals without pre-existing conditions.  This practice often priced many individuals out of purchasing coverage.  Based on survey data, the Department of Health and Human Services estimates that currently up to 51% of the non-elderly population have pre-existing conditions for which they could be denied coverage on the individual market.  As such, the ACA’s protection  for those with pre-existing conditions is one of its more popular provisions.


For this reason, many legislators were hesitant to adopt any repeal of the ACA that did not offer some safeguards for those with pre-existing conditions.  However, some of the most conservative members of the House of Representatives wished to repeal the ACA entirely, including the protections for those with pre-existing conditions.  As a compromise, the AHCA includes funding for high-risk pools, which are supposed to offer a way for individuals with pre-existing conditions to obtain and afford health insurance.


In this article, we examine high-risk pools, including how they function, their history, how they are funded, and their role in the AHCA.



II. How Health Insurance Works — Pooling Risk


According to the Kaiser Family Foundation, in the United States, the healthiest 50% of the population account for only 3% of healthcare spending.  On the other hand, the sickest 10% of the population account for over two-thirds of healthcare spending.  Health insurance works by pooling the risk of these groups; healthier individuals who typically have lower claims pay premiums that help offset the more costly claims of sicker individuals.


Because the ACA does not allow for the exclusion of individuals with pre-existing conditions, premiums increase because the risk increases.  The AHCA attempts to control the cost of premiums on the individual market by allowing insurers to charge those with pre-existing conditions more.


In many ways the AHCA seeks to return to the status quo prior to the ACA where health insurance companies routinely based premiums on health status and often excluded individuals with pre-existing conditions from coverage.  Even when insurers did not exclude individuals with pre-existing conditions, the premiums were often so high that they were unable to afford coverage.  In fact, the Kaiser Family Foundation estimates that prior to the ACA, over 52 million people had pre-existing conditions that could have left them uninsurable on the individual market.  Most of these individuals acquired insurance through their employers or Medicaid; however, hundreds of thousands of the sickest people were left without coverage.


By excluding these individuals, health insurers could offer policies to healthier individuals that were less expensive.   In order to provide these individuals with some health benefits, many states turned to other mechanisms for coverage.  One popular mechanism was the operation of high-risk pools.



III. High-Risk Pools before the ACA


A high-risk pool is exactly what it sounds like — a pool of individuals who are at high-risk of having expensive health costs.  Instead of spreading out the expense of these claimants across a large swath of mostly healthy individuals, a high-risk pool lumps all high cost individuals into a separate insurance pool.  Prior to the ACA, when insurers were allowed to exclude individuals with pre-existing conditions, high-risk pools were one of the only mechanisms for health insurance for individuals who could not get group health insurance and who were ineligible for programs such as Medicaid and Medicare.


States were allowed to set their own benefits packages and insurance rates in these high-risk pools.  They could also limit enrollment and place caps on annual or lifetime expenditures.


In this section we examine how high-risk pools have historically operated in the U.S.



A. Eligibility for High-Risk Pool Enrollment


Prior to 2014, 35 states operated high-risk pools.  According to the Kaiser Family Foundation, in some states individuals were eligible if they met certain criteria for enrollment.  However, not all states offered individuals in each of these categories the opportunity to enroll in the high-risk pool; some states limited enrollment to only one or two of the eligible groups listed below.

Medically eligible: These individuals had to demonstrate that either 1) insurers had denied or restricted their application for health insurance on the individual market; or 2) in states pools with presumptively eligible medical conditions lists, that the individual had been diagnosed with an eligible condition.  For example, in some states, individuals with particular qualifying conditions such as HIV/AIDS, cancer, or diabetes were allowed to enroll in high-risk pools.

HIPAA eligible: The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) required that the individual health insurance market offer insurance to individuals who had pre-existing conditions and had lost access to group health insurance coverage.  Some high-risk pools opened enrollment to these applicants after HIPAA was passed into law.

HCTC eligible: The Trade Act of 2002 established a federal tax credit that subsidized HIPAA-like coverage for certain individuals with trade-related job loss.

Medicare eligible: About two-thirds of high-risk pool states allowed Medicare enrollees who needed supplemental coverage to enroll in high-risk pools.

Not all states used each of these categories in deciding who could enroll in high-risk pools.  For example, in California, Tennessee and Washington, high-risk pools were only open to the medically eligible and not to any other categories.  Furthermore, even if an individual met one of the criteria in their state, enrollment in a high-risk pool was not guaranteed.  Some states had caps on enrollment and placed qualified enrollees on long waiting lists.  Additionally, there was no guarantee that high-risk pools would continue to function; in Florida, high-risk pools stopped operating due to lack of funding.



B. Cost and Coverage Under High-Risk Pools


If an individual had qualified, made their way through the long waiting lists, and finally received coverage through a high-risk pool, what did their plans look like?   In this section, we examine the cost of belonging to a high-risk pool, as well as the coverage and benefits typically available.



1. Cost


Most states financed these high-risk pools primarily through enrollee premiums.  Because these pools were comprised of individuals at high-risk for costly medical expenses, the premiums were often very expensive.  An analysis from 2011 determined that an enrollee in a high-risk pool could spend upwards of 25% of their pre-tax income on high-risk pool premiums.  Most states capped premiums at 150% to 200% of the market rate.  However, other states had differing limits; in Florida, for example, premiums went as high as 250% percent of the market rate.  Unaffordability was often the greatest barrier to enrollment.  In 19 states, some lower-income individuals qualified for subsidies to help pay the high premiums.  However, which enrollees qualified for these subsidies, and how much they received, varied state-by-state.


In addition, many plans had high deductibles (some as high as $25,000) and often had annual coverage limits (as low as $75,000).  Many states also imposed lifetime limits between $1 million and $5 million.  Reaching these limits would not be difficult for individuals with certain medical conditions.  For instance, Utah had an annual limit of $400,000, while treatment for first round of breast cancer alone might reach $500,000.  In addition, the average cost of many newer cancer treating drugs is $10,000 per month; some cancer drugs can reach $30,000 per month.


The cost of caring for a premature infant is also expensive and could easily reach annual and lifetime limits.  In 2007, the average cost of caring for an extremely preterm baby (<28 weeks) was $65,600.  In a story published in Time, one family incurred medical expenses of $2.2 million in the first 18 months of their premature twin boys’ lives.


Additionally, claims coverage under high-risk plans was often minimal.  According to a 2008 assessment of the Kansas high-risk pool, non-elderly individuals in the risk pool paid a greater share of the cost of total claims (59%) than did those in the individual market (51%) or than those who had employer based insurance (31%).  That study also showed that only 42% of study participants were “reimbursed for at least half of their allowed costs” and 27% were not reimbursed at all due to failure to meet their deductibles.



2. Coverage/Benefits


All high-risk pools had a waiting period for coverage for those with pre-existing conditions.  In other words, the very condition that excluded a person from coverage on the individual market could also exclude that person from high-risk pool coverage for lengthy periods of time.  Most states had waiting periods of 6 months, but seven states, including California, had waiting periods lasting a year.  During that time, the enrollee did not have insurance coverage for the pre-existing condition or any related conditions even if they had paid a premium for coverage.


In addition, lifetime or annual maximums meant that individuals could reach a point where they were no longer able to make any claims under their policy.  Individuals with expensive conditions, such as hemophilia, might max out under a lifetime limit early and have difficulty obtaining further coverage.  Pools in 13 states had annual limits on certain benefits, such as prescription drugs, mental health, or rehabilitative treatment. Other states, such as New Hampshire, imposed daily limits on skilled nursing, rehabilitative services, and home health care.


Many individuals in high-risk pools were also likely to refrain from using certain medical services because they bore a greater financial risk (either through higher deductible or greater cost-sharing mechanisms).  Furthermore, lack of insurance (and/or adequate insurance) has been correlated with future disability, and many of these individuals likely faced significant hardships later.



IV. Success and Failure of High-Risk Pools


Even after the passage of the ACA, high-risk pools continued to operate until 2014 as part of the ACA’s Pre-Existing Condition Insurance Program (“PCIP”).  PCIP covered those that have been denied coverage by private insurance companies because of a pre-existing condition until 2014 when the ACA would make all plans cover pre-existing conditions.  These pools and the state high-risk pools before the ACA have shown that a high-risk pool’s success overwhelmingly depends on sufficient funding.  Here we look at the impact of funding on high-risk pools and whether the AHCA gives states the opportunity to create successful high-risk pool programs.



A. Historical Perspective: Funding Matters


In this section, we examine the impact of funding on the success of high-risk pools, whether operated by the states or as part of the federal PCIP.



1. State High-Risk Pools Pre-ACA


In the past, many states have set up high-risk pools to mixed results.  In the early 1990s, California set up a high-risk pool that, at its peak, covered roughly 21,000 otherwise uninsurable individuals.  However, even with coverage limits in place, costs were extremely high and the pool was underfunded.  As a result, thousands of medically eligible and uninsured Californians were unable to enter the pool. After 2001, California capped enrollment when over 7,000 people were on a waiting list for coverage.  By 2010, the cap was 7,100 enrollees, and the state enforced waiting periods that lasted up to a year.  Worse, the benefits proved minimal for those in the program.  The California program also had an annual medical maximum of $75,000, meaning the pool would no longer cover an enrollee once their medical costs reached that amount in a year.

Other states with grossly underfunded high-risk pools faced similar burdens.  Colorado’s high-risk pool (CoverColorado), which ran from 1991 until 2014, struggled with inadequate funding.   Despite enrollee premiums being roughly 50% higher than for healthy individuals, premiums only covered about one-half of the program’s expenses.  As a result of underfunding, the plan imposed lifetime limits and waiting periods.

Florida’s high-risk pool was also severely impacted by underfunding. Despite slow initial growth in the early 1980’s, Florida’s high-risk pool quickly encountered higher enrollment and significant financial losses.  By 1991, the Florida legislature voted to stop new enrollment altogether.  Other states, such as Kansas and New Hampshire, imposed narrow eligibility requirements to limit enrollment.

On the other hand, Minnesota’s high-risk pool was relatively successful.  The Minnesota Comprehensive Health Association was the oldest in the country when it shut down at the end of 2014.  According to Courtney Burke and Lynn Blewett, writing for the Health Affairs Blog, the Minnesota high-risk pool covered about 30,000 people annually, which amounted to “roughly one-sixth of all persons enrolled in high-risk pools nationally.”  The authors posit that Minnesota can attribute its success to the follow four reasons:

Broad enrollment eligibility: Enrollment was open to the medically eligible (either a private insurer had turned down coverage because of a medical condition or the individual had been presumptively eligible based on their condition), HIPAA eligible, and the Health Care Tax Credit eligible.  Spouses and dependents of eligible individuals were also allowed to join the pool.

Adequate funding: The pool had sufficient funding to allow everyone who needed coverage to enroll.  Funding came primarily from premiums and annual assessments on private health insurers operating in the state, with additional intermittent grants.

Lower premiums: Premiums in the high-risk pool were capped at 125% of the average cost of individual insurance and averaged around 119%.  Minnesota also allowed individuals who did not want prescription drug coverage to pay a different (and lower) premium.

Administration: Minnesota’s pool was governed by a not-for-profit corporation with a board of directors composed of individuals from a broad array of backgrounds, including (but not limited to) health care providers, employers, insurers, and, most notably, consumers.


Although better than most, Minnesota’s high-risk pools still faced challenges.  First and foremost,  costs continued to rise; growing health expenditures led to higher costs per pool enrollee, which were especially high compared to general healthcare spending across the state.  In addition, the pool was only able to cover a small percentage of its residents in need of insurance.  The high risk pool also did not receive funding from the state general fund, which required it to rely heavily on premiums and insurer assessments.  Burke and Blewett noted it would have been unlikely for states with low-revenue and/or greater budget deficits to achieve similar success.

Despite the relative success of the Minnesota high-risk pool, overall state high-risk pools were not cost effective.  In 2010 alone, states’ high-risk pools collectively incurred about $2.4 billion in total costs to cover just 221,879 people.  Yet typically even the sky-high premiums proved grossly insufficient to cover the cost of operating the program. According to The Commonwealth Fund, on a national level, premiums for high-risk plans typically covered only about 53% of claims and administrative costs.  As a result, states had to find funding elsewhere, and would often place assessments on insurance companies, look to general revenue funds, or use other funds (such as tobacco tax funds or income taxes).



2. The ACA’s Funding of High-Risk Pools from 2010 to 2014


The ACA’s PCIP program also established a type of high-risk pool insurance program for those with pre-existing conditions .  The program ran from 2010 until 2014 as a transition program to offer insurance to those with pre-existing conditions until  the ACA required all policies issued on the individual market to cover pre-existing conditions.  The PCIP plans had no waiting period.  The plan was available in every state, though individual states had some flexibility in program administration.  The ACA allotted $5 billion to the plan for the four years it was in service, which was spread across the states according to predicted state enrollment and needs. Premiums for those enrolled in PCIP were not based on health status.  Individuals who enrolled in the PCIP were charged the equivalent premium to what a typical person without a pre-existing condition would be charged in the non-group market.


By 2013, approximately 100,000 individuals enrolled in PCIP.  Once again, lack of adequate funding created problems for the program’s ultimate success.  By late 2012, only 2 years into the program, expenses amounted to nearly half of the entire $5 billion allotment and costs were quickly increasing.  By 2013, the loss ratio (the ratio of claims costs to premiums) was 600% — meaning the plan was expending significantly more than it was receiving in premiums.   Due to insufficient funds, the program had to cease enrollment a year earlier than planned, and in its final year, it suffered net losses of $2 billion.


The PCIP programs failed because they were not cost effective and had extremely high operating costs.  Like all high-risk pools, the PCIP pools were very expensive to operate “primarily because they [served] a high-health risk population that utilizes a greater number of services.”



B. High-Risk Pools and the AHCA


The history of high-risk pools illustrates that appropriate funding is essential.  Underfunded high-risk pools are typically unsuccessful.  The amount of funding that the AHCA would provide for the high-risk pools i depends upon how many states decide to set up high-risk pools.


Under the AHCA, the federal government would allot approximately $100 billion in federal grants over nine years to the Patient State and Stability Fund (“PSSF”).  The PSSF would assist states in stabilizing their insurance markets, including funding programs to cover those with pre-existing conditions.  States can choose to use some of their PSSF funds for high-risk pools, but are not required to do so.


To qualify for these funds, a state must contribute matching funds (7% in 2020, increasing to 50% by 2026).  If every state elected to participate and provided the required matching funds, then the state contributions would amount to an additional $20 billion for PSSF programs.  The PSSF would then have a total of $120 billion.  However, in its report on the AHCA, the Congressional Budget Office (“CBO”) anticipated that some states would choose not to participate, though it could not estimate precisely how many.  In addition to the potential $120 billion, the Upton Amendment allots an additional $8 billion over five years to those states that permit insurers to charge higher premiums to individuals with pre-existing conditions.


The AHCA also earmarks $15 billion for an “invisible risk pool fund” for the PSSF.  As noted in the Robert Wood Johnson Foundation (“RWJF”) and the Urban Institute’s detailed analysis of the AHCA’s high-risk pools, this additional $15 billion is not for traditional high-risk pools.  Rather, this money would let insurers shift some of the higher costs of insuring high-risk individuals in the individual market to the federal government.  Spread over multiple years, the funding would cover a portion of claims (particularly the higher cost claims of high-risk individuals) in the non-group market.  Under this, a high-risk individual is allowed into the non-group market, and the insurer who covers that person can charge a portion of those higher expenses back to the federal government.


The RWJF and the Urban Institute’s report further estimates that between 2.5 million and 7.6 million people could be eligible for a high-risk pool under the AHCA.  The exact number would depend on the rules that states use for the eligibility; the more broadly eligibility is defined, the larger the number of enrollees.  According to the analysis, this population makes up only 7% to 21% of those uninsured under the AHCA, but account for 38% to 57% of the healthcare costs associated with that group.


The Urban Institute’s analysis is similar to that of other analysts’ who found that the current allotment in the AHCA for high-risk pools insufficient.  The RWJF and Urban Institute report analyzes models of different types of high-risk pools, each with different eligibility requirements, cost-sharing mechanisms, and government subsidies.  They conclude that even if all states set up the least expensive high-risk pools with very narrow eligibility requirements, high-cost sharing, and no income-related subsidies, it would cost $359 billion over 10 years.  This would be “more than double the government funds under consideration for such a program.”   In addition, because many individuals would be unable to afford enrolling in a high-risk pool (particularly if there are no government subsidies to assist with cost), the number of uninsured would increase.



V. Conclusion


Most analysis concludes that high-risk pools are not an effective solution to the problem of insuring high-cost, unhealthy individuals. The pools require substantial amounts of money to function and historically have been underfunded.  As history shows, a lack of adequate funding can lead to high-risk pool closures, long-waiting lists, and unaffordable premiums for those who can get into a pool.


Despite very high premiums, these are generally insufficient to cover the actual cost of the high-risk pool.  As a result, states are forced to use state tax revenue to cover the funding gap — a cost that is eventually passed onto taxpayers.  Moreover, individuals who are unable to get into high-risk pools, or who have to drop coverage because of unaffordable premiums, will still require health care.  Non-profit hospitals will suffer financially as a result of increases in uncompensated health care and may shift costs to private health insurers (which will shift costs to consumers through increased premiums).


Funding for high-risk pools will always be a challenge and current federal proposals likely cannot meet these pools’ strenuous demands.



VI. External Discussion and Analysis


High-Risk Pools Under the AHCA: How Much Could Coverage Cost Enrollees and the Federal Government?
The Robert Wood Johnson Foundation and The Urban Institute
May 18, 2017

High-Risk Pools, a Centerpiece of GOP Health Care Bill, Have a History in Colorado
The Denver Post
May 5, 2017

Sounds Like a Good Idea? High-Risk Pools
Kaiser Health News
May 4, 2017

Essential Facts About Health Reform Alternatives: High-Risk Pools
The Commonwealth Fund
March 2017

High-Risk Pools for Uninsurable Individuals
Kaiser Family Foundation
February 22, 2017

Why High-Risk Pools Won’t Crack the Pre-Existing Condition Dilemma
Modern Healthcare
February 13, 2017

High Risk By Name: The Pitfalls of Replacing Obamacare
The Economist
January 26, 2017

Here’s How ‘Obamacare’ Covered Americans with Pre-Existing Conditions.  What Happens Next?
The Guardian
January 26, 2017

Why High Risk Pools (Still) Won’t Work
The Commonwealth Fund
February 13, 2015