Marketplace Pulse: High-Risk Pools in the Individual Health Insurance Market
The Marketplace Pulse series provides expert insights on timely policy topics related to the health insurance marketplaces. The series, authored by RWJF Senior Policy Adviser Katherine Hempstead, analyzes changes in the individual market; shifting carrier trends; nationwide insurance data; and more to help states, researchers, and policymakers better understand the pulse of the marketplace.
This piece was co-authored by Michael Cohen, PhD, director and senior consultant, Wakely Consulting Group.
Recently, an old idea has resurfaced: creating high-risk pools in the individual health insurance market to separate people who have more costly health conditions from those who do not. Those in high-risk pools would receive heavily subsidized coverage, while others would have lower premiums to reflect their health status. According to proponents, this is a solution with no downside in which low-risk enrollees would save on premiums and those in the high-risk pool would be no worse off.
Here, we describe the context for this proposal, a little history, and some estimates on how it might work. We consider the current state of the Affordable Care Act (ACA) market, the implications of restructuring the risk pool, market dynamics, and the likely operational impact of segmenting the risk pool. We conclude that high-risk pools are unlikely to solve any insurance problems and may well create some new ones.
High-Risk Pools in Context
Pooling risks is a fundamental concept in insurance of combining people with varying risk profiles in order to distribute the financial burden of coverage over a broad population. By pooling members with different risk profiles together, insurers can stabilize costs and lower the total cost of coverage.
High-risk pools usually emerge in contexts where insurers are allowed to charge higher premiums or even refuse to offer coverage to enrollees who are perceived to have a higher likelihood of claims. For example, high-risk pools exist in the state-regulated home and auto insurance markets where coverage is basically mandatory, but there are risks that insurers don’t want to cover. State insurance regulators set up substandard markets or “coverage of last resort” and require all insurers to participate, sometimes with some state funding added. People covered in these markets usually pay more for less coverage when compared with the standard market, but it is the only way they can obtain coverage at all.
Similarly, in the pre-ACA state-regulated individual health market, insurers used to charge higher premiums or reject many applicants for health insurance due to their health status—i.e. “preexisting conditions.” Individuals with higher risk, whether due to a preexisting condition or age/gender profile, would be charged higher rates or could only get less comprehensive coverage. In an attempt to partially solve the massive coverage problems that this created, some states created “high-risk pools” for uninsured people who had cancer or other expensive conditions. These pools were often state-funded or subsidized and many were capped, meaning that people might have to wait to be admitted and/or may have a limited level of coverage. Higher-risk individuals who could not get employer coverage would either be uninsured or be offered some semblance of coverage through these very expensive high-risk pools.
Since the ACA standardized the individual market and established community rating and federal subsidies, high-risk pools are no longer used. Nor are they used in other health insurance markets. In the employer market, and in both traditional Medicare and Medicare Advantage, enrollees with vastly different health statuses are part of the same risk pools and pay the same premiums. Many employer plans do not even rate by age. Given these reforms in the individual market, as in other health insurance markets, the context in which high-risk pools might make sense no longer exists.
The Concept Behind the Plan
Yet, whenever ideas of reforming the ACA are proposed, a recurrent suggestion is to find some way to segregate enrollees in the individual market based on their health status. In addition to high-risk pools, a closely related idea is to liberalize the use of short-term plans which can rate on health status. Both proposals are motivated by an underlying unhappiness with the way risks are currently being shared in the individual market. The view held by proponents of these proposals seems to be that, to an excessive degree, enrollees who are healthy are subsidizing enrollees who are less healthy, resulting in an unfair burden on healthy enrollees.
It is not clear what is driving that belief and what problem would be solved by segregating risks. The individual market risk pool is increasingly similar to that in the employer market, where no one would ever advocate the use of high-risk pools, and healthy and unhealthy employees pay the same premiums. Also, the community-rated plans in the individual market are heavily subsidized by the federal government so that they are affordable for everyone. Finally, the logistics of implementing a high-risk pool would create new administrative burdens that would increase costs for everyone.
Overview of Current Individual Market & Risk Observations
The individual market has experienced significant fluctuations since its inception, but it has grown tremendously in recent years. CBO projects that in 2025, the individual market will enroll a record-high number of people, approximately 26 million.[1] It’s important to note that the individual market is characterized by a good deal of churn, meaning that enrollment at any time understates the number of unique enrollees. For example, the Office of Tax Analysis estimated that during the first 10 years of the ACA, nearly one in seven U.S. residents had Marketplace coverage.[2] As the size of the individual market grows, the risk pool becomes increasingly similar to the employer market.
Operationalizing a High-Risk Pool
Within this large pool of people, there is significant variation in terms of health status and costs. Wakely’s nationwide ACA individual database, which aggregates detailed claims for millions of members each year, indicates approximately 25% of individuals enrolled in the ACA market from 2021 to 2022 had either a high-cost chronic condition (HCC) or a prescription drug (RXC) diagnosis. These include common diseases like diabetes, asthma, and mental illnesses, as well as expensive and life-threatening conditions like breast cancer and congestive heart failure. Understanding this distribution is crucial for evaluating the potential impact of creating a high-risk pool, as these diagnoses could be used as a mechanism to determine how many enrollees are considered high-risk.
To illustrate the cost impacts for different member subsets, the below graphic shows the breakdown of the number of people who would be impacted by segregating the risk pool into “high-” and “low-” risk components.[3]
One clear implication from the chart is that if membership in a high-risk pool was based on having at least one HCC or RXC diagnosis, approximately one-quarter of enrollees would fall into the high-risk pool. The two pools would have very different cost structures. While the majority of members would experience lower costs than they currently do (for example, gross premiums may be reduced to one-third of current levels), those that do have conditions would face gross premiums more than three times what they are today.
Holding aside the additional administrative costs associated with assigning members to the correct risk pool, members in the high-risk pool would face premiums potentially over 10 times as high as those without a health condition. For example, the premium for a healthy member could decline from over $7,000 a year to approximately $2,500. For a member with a condition, on the other hand, the annual premium could rise from $7,000 to over $21,000. The presence of federal premium tax credit subsidies means that for most people, the actual net premiums would not change regardless of health status, but for those who fall into the high-risk pool and don’t qualify for tax credits, coverage would surely become unaffordable. Furthermore, if there are cuts to premium subsidies, premiums could become unaffordable for anyone with a health condition in the individual market. Only unsubsidized enrollees without health conditions would benefit from separating the risk pools.
How Would the Market Be Disrupted?
The potential implementation of separate risk pools would disrupt the current market landscape significantly. One consequence would be increased volatility in enrollment, with consumers potentially exiting the market if they are assigned to the high-risk pool. This could increase the uninsured population and the problems that go with it, including rising levels of medical debt.
Financial benefits would be limited to a narrow segment of the population, healthy unsubsidized members, but would do great harm to unsubsidized enrollees in the high-risk pool who need healthcare but would find themselves without affordable coverage. The administrative cost of defining the separate risk pools, figuring out how to calibrate tax credits to separate risk pools, and allowing for anticipated challenges to pool assignments would create a net drag that would raise the overall cost of coverage.
From a coverage perspective, higher gross premiums and more uncertainty will lead to higher uninsurance rates. From an insurer perspective, higher churn and uncertainty will increase premiums beyond what they otherwise would have been. Operational impacts are expected as underwriting practices may require significant adjustments to account for the new risk pools. Insurers will need to develop new strategies to accurately assess risk, which could impact their overall underwriting guidelines. Additionally, changes in risk transfer payments and subsidies are anticipated as the market adapts to the new structure, potentially complicating the financial dynamics of the ACA market. Insurers will face increased operational complexity as they adapt to new risk-sharing arrangements resulting in higher overhead costs. These shifts could create additional challenges for insurers, which could further increase premiums.
From a population health perspective, the consequences of untreated health conditions would increase as those who suspect they are “high-risk” would stay away from coverage and likely underutilize the care they need. From a fiscal perspective, higher premiums and less coverage will reduce the effectiveness of the federal investment, as the government would spend more to cover fewer people.
Conclusion
The idea of separate risk pools stems from a belief that enrollees in the individual market should share risk differently than enrollees in the employer market or Medicare. It’s not clear why this view is held, especially since the individual market is heavily subsidized so that premiums are affordable for all, and the market is regulated to use community rating to set premiums.
In practice, a high-risk pool would raise administrative costs and decrease coverage. It would force some subset of unsubsidized high-risk enrollees to face unaffordable premiums, along with greater exposure to medical debt and, of course, increased risks to their health. While some healthy people might save money, this is clearly a policy proposal where the losers would lose far more than the winners would win. In fact, the likely outcome is the kind of scenario that the ACA market reforms themselves were designed to prevent.
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