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Insurance Pools: How Do We Pay for the Expensive People?

Why you can’t fool all of the people all of the time.

I think for most people, including me at times, the effort to repeal and replace the Affordable Care Act is an exercise in taking something they didn’t understand well but have feelings about, and replacing it with something else they don’t understand well and will have feelings about.  I could comment on the state of our legislative process surrounding this case, but that’s for another day and another blog. 

Instead, if you can stand it, I’m going to use this column to try to explain the difficulty in reshaping the insurance pools in the ACA.

First, a few rules of economics:

JW_ECON.JPG

And one rule of insurance:

If participation is voluntary, you’d better give a heck of a deal to those who aren’t likely to use any stuff.  They effectively make it possible for the sick people to get what they need without going broke.  In the insurance biz, when you can’t attract healthy people, it’s called a “death spiral”.  If all you get in the pool are sick people, you have to charge so much that you can’t sell the product, and that makes it attractive to only those who are very sick, which makes it even more expensive, etc.  You get the idea.

The death spiral is a big deal in the insurance and policy worlds.  People spend a lot of brain power trying to avoid it.  Not surprisingly, Republicans and Democrats have different solutions for the death spiral.  The ACA solution was called the individual mandate, which made it a taxable event to go without insurance, and therefore if you didn’t buy a policy, you put into the government kitty to make up for the risk you didn’t assume with the rest of us.

The Republican solution involves a couple of things:

  • First, it allows rates to be more different than they are now.  Currently in the ACA, you can’t charge anyone more than three times the lowest rate offered to someone else for the same policy.  So if I’m 60 and have heart disease, I can’t have a premium more than three times my healthy daughter’s rate.  Under some Republican plans, that multiple rises to five times, which is about what the market was before the ACA.   But the benefit is that should make my daughter’s premium lower. 
  • Second, if you take a bunch of sick people out of the general pool, you can lower the rates for everyone else, because they’re no longer subsidizing all those sick people.  This is a concept called “high risk pools”, and many states including Colorado had them before the ACA.

But wait, don’t the really sick people have to pay a fortune in the high risk pool to get care?  The answer is yes, but in Republican solutions, the government kicks in a bunch of money to make it affordable for the sick people as well.  Since the government’s money comes from all of us, we’re still subsidizing the sick, but we’re doing it through government rather than private insurance pools.  (Yes, you read that right, one of the critical features of the Republican plans is government subsidies.)

Okay, what’s not to like?  We avoid the death spiral because we attracted young invincibles with low rates, we give healthy people a break by taking sick people out of the pool, and we subsidize the sick in their own special off-to-the-side pool. 

Yogi Berra is (wrongly) thought to have said, “In theory there’s not a lot of difference between theory and practice.  In practice, there is.”  When high risk pools existed before, they were chronically underfunded, and therefore really expensive for people, such that only well-off people could afford the premiums.  It was a terrible slog to go to the legislature every year to ask for more money, and you can imagine what the answer was.  In Colorado at least, one of the solutions was to tax the health plans, so that—you guessed it—healthy people buying insurance were effectively subsidizing sick people in a now not-so-off-to-the-side pool. 

There are other ways to lower premiums for the well.  You can make their policies cover less, and then the actuaries will tell the insurance companies that they can charge less and still have a business.  Annual limits, lifetime limits, stripping out mandated services that don’t apply to particular individuals—all these used to exist before the ACA but don’t now, and make insurance cheaper.  They may return in a future iteration of American health care. 

But the fundamental rule of insurance pools is you’ve got to come up with enough money to pay all the bills.  So that makes this a key question: do we want to make insurance rates for people more alike, or more different?   What is the “fairest” way for all of us to pay for care through a common pool or set of pools? 

What do you think? Feel free to use the comment section below to let us know.

Related article: High-Risk Pools for Uninsured Individuals (Kaiser Family Foundations)

This blog previously appeared on wanthealthcarellc.com.
About the Author: Jay Want is CIVHC's CMO. Contact him at jwant@civhc.org

 

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Comments

Jay Want
Thanks, George. I think you have the right sense of the article, that we are going to be shifting who pays for what, but we also need to get to underlying costs. Your comment about the buckets reminds me of Berwick's "wedges": failures of care delivery, care coordination, overtreatment, administrative complexity, pricing failures, and fraud and abuse. SDOH doesn't appear specifically in this list, but is contained within the other categories. Shifting who pays for what may have some effect on the wedges, but not clear to me that it will be a net favorable effect. Thanks for commenting!
2/27/2017 9:17:21 AM

George Swan
Hi Jay,
Very informative article. Seems we'll be robbing Peter to pay Paul until we can provide concurrent tracking of overall premiums and overall costs (like the National Health Expenditures). Overall premiums cannot go down until costs go down. Those costs fall into a number of buckets. One of the biggest are the costs of multi-payer insurance companies (15-20%). Another bucket of costs are the inefficiencies of healthcare delivery. But one of the biggest buckets are the 'social determinants of care." Costs can go down when communities engage exercise, nutrition and healthy attitudes. And we should be tracking key metrics for transparency and accountability.
2/26/2017 1:38:48 PM

Jay Want
Hi Dick,
Thanks for your comment. I'd like to hope you are right, but I don't think the math adds up. Premiums plummeting are a pretty rare event, and all the Republican plans I've seen still call for federal subsidies in the form of refundable tax credits. The reason for this is the thought that by creating high risk pools you get all the sick people out of the general pool is seriously flawed. They're not the same people year over year. See the Kaiser Family Foundation article attached to the blog. As for the actual levels of subsidy offered, most commentators I've read say that the subsidies will be far short of the current levels and the coverage skimpier. Fortunately, we have a CBO to score this thing, so we won't have to wonder about effects on coverage and affordability long after a detailed plan is advanced. Here's hoping!

Best,
Jay
2/24/2017 1:10:33 PM

Jay Want
Thanks, Mike. I agree that part of what is hard is having to face the question of whether everyone "deserves" to be in the pool. The rhetoric is, "Of course we should have everyone in a pool," from both sides of the aisle. But in practicality as you point out, there's in the pool and there's in the pool. Different viewpoints will have different answers to what actually constitutes reasonable access to care. Thanks for commenting!
2/24/2017 9:23:05 AM

Michael Pramenko
Jay - thanks for your clear and concise review of insurance pools. I think the current Congress needs to first decide if they want everyone in the insurance pool. From what I'm hearing from the Freedom Caucus - they don't.
In that case - people will fall back to 911 and the emergency room for their "access" to American health care.
2/24/2017 9:01:06 AM

Dick Allison
Jay, I believe we should look at all Federal money thrown at ACA to discern whether there's enough of it to adequately finance high risk pools. Insurance rates for the non-high risk participant's should plummet and not require a government subsidy.
2/22/2017 12:53:03 PM

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