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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.