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P E R S P E C T I V E :
N O N G R O U P M A R K E T
W E B E X C L U S I V E
23 October 2002
Expanding Individual Health Insurance Coverage:
Are High-Risk Pools The Answer?
Although thirty states operate
high-risk pools, only a few have found success,
this critical appraisal finds.
by Deborah Chollet
ABSTRACT:
Thirty states operate high-risk pools intended to offer coverage to persons
denied coverage in the individual health insurance market. But in most states
the high-risk pool mirrors the individual market’s problems: Coverage is
expensive, the waiting period for coverage of preexisting conditions is long,
and benefits may be limited. A few states with high-risk pools have addressed
these problems by adequately funding high enrollment and comprehensive benefits;
some also require the market to accept more risk. But most discourage enrollment
in the high-risk pool in myriad ways and fail to ensure access to the individual
market for persons with health problems.
Thirty states operate high-risk pools intended to offer coverage to persons
who are denied coverage in the individual health insurance market. Nearly all
states fund these pools by assessing both group and individual health insurance
premiums; some fund them from general revenues or other special assessments.
All spread the cost of high-risk enrollees widely.
In principle, high-risk pools are a brilliant solution to a serious dilemma:
They would solve a pressing social problem, guaranteeing access to adequate
coverage while allowing the private health insurance market to operate relatively
unencumbered by “social” regulation. Subsidies would ensure that they
are affordable to individuals not eligible for public coverage, and their cost
would be distributed broadly to minimize burden.
In practice, however, high-risk pools often fall well short of this mark. They
typically mirror the individual health insurance market’s problems of access,
affordability, and benefit adequacy, and they offer more costly and less complete
coverage than many policymakers might imagine.
A recent study of high-risk pools released by the Commonwealth Fund examined
high-risk pools’ benefit designs and premiums.1
This paper summarizes some of the findings of that report and addresses some
concerns about its intent and conclusions.
Open Or Closed? Enrollment In High-Risk Pools
Nearly all of the states’ high-risk pools are open to enrollment at any
time, and pool administrators work valiantly to ensure that their pools remain
open. However, Florida’s high-risk pool is closed permanently because of
inadequate funding; in California, Illinois, and Louisiana enrollment is capped,
and the pools have been closed temporarily, with applicants on a waiting list
for admission.2 When a high-risk pool is closed,
those who are denied or rated up in the individual market may have no options
for finding coverage.
Very few states—notably Minnesota, Nebraska, and Oregon—enroll large
numbers in their high-risk pools relative to the size of their individual markets.
Minnesota’s pool covers 6 percent of the state’s individually insured
population, accounting for nearly a quarter of high-risk-pool enrollment nationwide.3
Nebraska and Oregon each cover about 3 percent of their individually insured
populations in their high-risk pools. In these states insurance agents and consumers
appear to be aware of the high-risk pool and find it accessible.
In other states high-risk-pool enrollment is extremely low—typically much
less than 1 percent of the individually insured population. Many states require
insurers to inform people about the high-risk pool when they deny coverage but
not when they rate them up. Thus, those who cannot afford high quoted rates
may never investigate the high-risk pool. But when they do investigate, they
may find that it has serious shortcomings.
Waiting periods.
All high-risk pools require waiting periods for coverage of preexisting conditions,
including the very conditions for which the individual was denied market coverage.
The most common waiting period is six months, but in seven states it is a full
year.
Waiting periods are used to discourage individuals from buying coverage only
when they anticipate expenditures (and dropping it when they do not), but they
are very blunt instruments for this purpose. Shorter waiting periods may work
as well (four states limit the waiting period to three months), as might waiting
periods that are reduced by the duration of coverage held during the prior twelve
months (most states do not credit prior coverage that lapsed as recently as
thirty to sixty-three days).
In contrast, long waiting periods discourage enrollment at any time: The individual
pays the high-risk pool premium but receives no coverage for the preexisting
condition or any condition that may relate to it. If one-third of the individual’s
expected health care costs relates to the preexisting condition, a one-year
waiting period would raise the actuarially fair entry price for coverage by
two-thirds.4
Affordability.
No high-risk pool charges standard market rates. All charge a higher premium—typically
125 to 200 percent of the average standard rate for comparable coverage—and
also vary the premium for age and other factors. Six states provide specific,
modest subsidies for low-income enrollees.
In most states the average high-risk-pool premium ($3,083 in 1999) is high relative
to measures of ability to pay, and premiums for older persons range much higher
than the average. In 1999 high-risk-pool premiums (to cover just one person)
averaged at least 10 percent of median household income in six states. In only
four states was the average premium less than 6 percent of median household
income.
For enrollees nearing age sixty-five, premiums can be very steep. In six states
annual premiums ranged above $10,000 in 1999. In five states an older couple
with the statewide median household income could pay more than half of their
combined annual income for high-risk-pool coverage. Premiums at these levels,
together with long waiting periods for coverage of preexisting conditions, make
high-risk-pool coverage unaffordable for many middle-class Americans who are
denied private coverage.
Adequacy.
Like indemnity coverage in the private market, nearly all high-risk pools require
substantial cost sharing in the form of deductibles, coinsurance, or copayments.
In most states, cost sharing is similar to that in private insurance plans (typically
at least a $500 deductible, and 20–50 percent coinsurance). Some pools
offer managed care options that entail no deductible at all. But five states
offer only plans with a deductible of $1,000 or more (plus coinsurance). Two
states have no maximum on enrollees’ out-of-pocket spending. Eight states
have lifetime limits on coverage of less than $1 million, and three states have
annual limits below $200,000.
In addition, coverage of some major service categories can be meager. Most high-risk
pools impose separate limits or additional cost sharing for mental health care;
two do not cover mental health care at all. Similarly, ten high-risk pools do
not cover maternity at all, cover it only as a rider (in effect, requiring prepayment
of costs), cover only major complications, or impose a longer waiting period
for maternity coverage.
Funding.
All high-risk pools must pay for medical costs that exceed the pool’s cap
on premiums. How well they finance excess costs ultimately determines the extent
to which the high-risk pool is open and affordable, and whether benefits are
adequate.
Premium assessments have one important advantage: Revenues automatically increase
with general health care costs and therefore with the excess cost of the high-risk
pool. Other dedicated funding bases (such as California’s cigarette and
tobacco tax) may actually decline, and general revenue funding entails an annual
struggle for appropriations.
In states that assess health insurance premiums to finance the high-risk pool,
group insurers bear nearly all of the cost.5 Group
insurers typically chafe at paying the assessment, because it imposes a cost
that is unrelated to their enterprise (the Health Insurance Portability and
Accountability Act, or HIPAA, of 1996 prohibits group insurers from denying
coverage or rating on individual health status) and may put them at a competitive
disadvantage if employers self-insure rather than buying insurance that is assessed
to support the high-risk pool.
Twelve states have addressed this problem by allowing insurers to offset the
high-risk-pool payment against other state tax liability. Several others assess
insured lives (not premiums) to capture insurers’ stop-loss business and
extend the burden of financing the pool to self-insured plans as well.6
But in every state, funding remains a perennial issue and a political hot spot.
Inadequate funding leads most states to compromise the high-risk pool’s
benefits and affordability and, in myriad ways, to curtail access.
Can High-Risk Pools Do Better Than The Market?
Stating the facts of high-risk pools in an unvarnished way runs two risks. It
may appear to tar all high-risk pools with the same brush, when in fact the
variation among them is immense. It also may appear to place on high-risk pools
the responsibility for fixing the individual market’s problems, when in
fact the high-risk pool must operate in balance with the market. Any high-risk
pool that varies dramatically from the market—with a low premium markup
and distinctly more generous benefits—would gain enrollment quickly and
require more funding. Thus, very few pools realize their promise of ensuring
access to adequate coverage.
High-risk pools should not be faulted for mirroring the larger failures of their
markets; nor should they be viewed uniformly as an adequate remedy. Very few
states devote substantial resources to financing their high-risk pool. In states
that do (such as Minnesota, Nebraska, and Oregon), enrollment is a relatively
high percentage of the insured population, and the benefit design is similar
to that in group coverage. Some attempt to balance adequate financing of a smaller
high-risk pool with market rules that limit insurer denials and also rating
on health status; in these states (Washington and Utah) insurers are forced
to accept more risk.
These strategies are not likely to have the same impacts on market prices and
private coverage. But even so, in their commitment to broadening access to coverage,
these few states are the exception. Most neither finance their high-risk pools
adequately nor require insurers to accept more risk. As a result, in most high-risk-pool
states, too many people still have no feasible source of coverage.
This work was supported by a grant from the Commonwealth Fund. The author thanks
Cathy Schoen at the Commonwealth Fund and Karen Pollitz at Georgetown University
for their review and helpful comments.
NOTES
1. L. Achman and D. Chollet, Insuring the Uninsurable: An
Overview of State High-Risk Health Insurance Pools (New York: Commonwealth
Fund, August 2001).
2. States that use the high-risk pool to comply with HIPAA’s
portability rules may not close the pool to HIPAA-eligible individuals (that
is, individuals who are leaving group coverage, have had at least eighteen months
of continuous coverage, and apply for coverage in the high-risk pool within
sixty-three days).
3. Minnesota’s enrollment—6 percent—also offers
a reasonable measure of the proportion of the nonelderly population that is
uninsurable in a comprehensive managed care environment (in contrast to the
1 percent rule of thumb commonly used), although the number might be lower in
states where greater prevalence of indemnity coverage offers insurers more opportunity
to scale back benefit design or greatly raise cost sharing.
4. Assume that the individual’s expected health care costs
equal a certain expenditure (A) plus an uncertain and independent expenditure
[E(B)], that E(B) = 0.5A, and that the price of insurance (P) is actuarially
fair. Thus P = E(A) + E(B) = A + E(B). Solving for A, A = 0.67P. The individual’s
first-year expenditure would equal the full premium (P) plus the uninsured certain
medical expenditure (A): P + A =1.67P.
5. In 1997, group insurance premiums accounted for 95 percent
of total premium volume nationwide. See D. Chollet, A. Kirk, and M. Chow, Mapping
State Health Insurance Markets: Structure and Change in the States’ Group
and Individual Health Insurance Markets, 1995–1997 (Washington: Academy
for Health Services Research and Health Policy, December 2000).
6. P. Butler, “ERISA Complicates State Efforts to Improve
Access to Individual Insurance for the Medically High Risk,” Robert Wood
Johnson Foundation State Coverage Initiatives Program, Issue Brief 1, no. 3
(Washington: AHSRHP, August 2000).
Deborah Chollet is a senior
fellow at Mathematica Policy Research in Washington D.C.
©2002 Project HOPE–The
People-to-People Health Foundation, Inc.
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