Why Ryan’s high-risk insurance pools are a risky business

These are difficult times for Paul Ryan (R-Wis.), Speaker of the U.S. House of Representatives, what with the ideological chaos that presumptive presidential nominee Donald Trump is bringing to the Republican Party, and the need to continue to rally the voters around repealing ObamaCare as a 2016 election referendum. Nevertheless, one Affordable Care Act (ACA) replacement idea floated by the Speaker is bad news: triaging people with serious and expensive medical conditions into state-based high-risk pools.

{mosads}On the face of it, high-risk pools make some sense, particularly if you are one of the lucky Americans who is mostly healthy most of the time. Here is the theory behind having insurance pools based on individuals with above average medical risk: Sick patients who use a lot of medical services skew the risk within an average insurance pool, thus raising premiums for all. As more sick people enroll in health plans, premiums continue to rise for everyone in order to pay for services used by the sickest, which makes the marginal cost of insurance too expensive for the healthy. Once this happens, the healthiest drop out of the pool, leaving those who are less healthy to carry the risk and underwrite the ever-increasing premiums. Ultimately, the price-sensitive less healthy also bail, leaving only the highest utilizers who are motivated to keep their coverage. This march toward adverse selection is the Achilles heel of all insurance products. Insurance is the one commodity where everyone is financially better off if nobody uses it. But the opposite is also true: If too many people use too much and adverse selection ensues, it can lead to a “death spiral” where insurance becomes unaffordable for everyone. The ACA tried to counteract adverse selection by nudging the healthy into insurance pools through the use of the individual mandate penalty and through subsidies to make insurance affordable. Even so, and after two years of ACA enrollment, 30 million people remain uninsured and most say it is because insurance remains too expensive.

Enter Ryan and his support for high-risk pools. State-based high-risk insurance pools try to mitigate adverse selection in private health insurance markets by carving out the sickest and placing them into publicly funded insurance pools. According to Ryan and other supporters, shepherding those with expensive chronic medical conditions into high-risk pools would “dramatically lower the price for everybody else. You make health insurance so much more affordable, so much more competitive and open up competition.”

Retreating from the ACA’s social insurance model by enacting high-risk pools for the sickest could reduce the cost of insurance for some, but it would also upend the ACA’s guarantee of comprehensive coverage for the millions of Americans with preexisting conditions. Although estimates vary, the number of nonelderly Americans with preexisting conditions could be as high as 50 percent, far exceeding the “less than 10 percent” estimate given by the Speaker at his April 27 talk. But the proposal has political appeal. The idea of a solution — any solution — to moderate the cost of health insurance may be more palatable to the plurality of Americans who continue to disapprove of the law and for whom the ACA has brought little solace. Despite coverage gains under the law, one out of five insured Americans still struggles to pay medical bills.

Republicans are right when they say the ACA has increased the cost of insurance for many and that the ACA’s individual mandate will not alone prompt the young and healthy to buy insurance. But going back to the world of pre-ACA insurance risk segmentation through state-based high-risk pools is no panacea and would bring other market distortions and inequities.

A 2014 Commonwealth Fund study concluded that high-risk pools are not a workable alternative to the protections of the ACA for those with preexisting conditions. High-risk pools are not new and in the past have brought high administrative costs, unaffordable premiums and skimpy benefits. Prior to the ACA, 35 states ran their own high-risk pools, but premiums ran as much as 250 percent over the state’s average premium. Even with income-related subsidies, premiums were too high for many. In addition, the health insurance products available through high-risk pools often carried high deductibles and waiting periods for coverage of pre-existing conditions. The Commonwealth Fund report predicted that a switch to high-risk pools would result in greater spending, fewer people with coverage and plans that do not meet the medical needs of those with chronic conditions.

The ACA has its problems, and the hyper-partisanship surrounding it is great fodder going into November’s presidential election. However, since the ACA was set up in part to address the problems brought on by risk-rating individuals and the inadequacies of state-based high-risk pools, having the Republican leadership embrace the entity as a new strategy to ameliorate the failings of ObamaCare seems risky at best and quite ironic.

Engelhard is the director of the Health Policy Program at the University of Virginia School of Medicine’s Department of Public Health Sciences.