The trouble with high risk pools as a “conservative alternative”

A little lost amid the din of President Obama’s administrative fix was an op-ed by Ramesh Ponnuru and Yuval Levin setting forward a “conservative alternative” to Obamacare.

[A] tax break would also be available—ideally as a refundable credit sufficient at least for the purchase of catastrophic coverage—to people who do not have access to employer coverage. This would enable people who now choose not to buy insurance to get catastrophic coverage with no premium costs. It also would give those who want more-comprehensive coverage in the individual market the same advantage that people with employer plans get. […]

All those with continuous coverage, which everyone could afford thanks to the new tax treatment, would be protected from price spikes or plan cancellations if they got sick. This guarantee would provide a strong incentive to buy coverage, without the coercion of the individual mandate. People who have pre-existing conditions when the new rules take effect would be able to buy coverage through subsidized, high-risk pools.

I’m unimpressed by hand-waving in the general direction of high-risk pools. The pools seem to be a necessary complement to reform plans built around catastrophic coverage—what good are high-deductible plans to those whose health needs require frequent episodes of care?—but such proposals rarely grapple with the problems that high-risk pools pose for their beneficiaries, the people who arguably need the most financial assistance with—and protection from—high health care costs.

High risk pools aren’t new: they existed in 35 states prior to reform, and suffered from being underfunded and under-inclusive. That is, they cover too few people, and the people they do cover face high cost burdens. As Austin previously wrote:

The main limitations to greater enrollment were enrollment caps and affordability. These are really two symptoms of the same thing: low levels of funding. Some states capped enrollment due to limitations of funding. And premium subsidies were, of course, subject to funding limitations.

We estimated that high-risk pool premiums were above 25% of family income for 29% of the medically uninsurable population. That is, even when high-risk pool enrollment was possible, for a large minority of medically uninsurable individuals, it was unaffordable. We simulated the effect of lowering high-risk pool premiums to 125% of the individual market rate and found that doing so would increase enrollment by 33%.

To overcome these issues, the pools would need to be incredibly well-funded—conservative health policy scholar James Capretta estimated that adequate funding would be on the scale of $15-20 billion a year to cover 4 million individuals. Remember that back in the real world, the GOP quashed a bill for $4 billion in  one-time high risk pool stopgap funding earlier this year.

In the context of Ponnuru and Levin’s plan, high risk pool funding is in addition to their proposed tax credits, which would be sufficient  for individuals without employer-sponsored coverage to purchase catastrophic plans. Ponnuru and Levin argue that their plan is cheaper and would offer more coverage than the ACA, but the column is fuzzy on details, like the Capretta “repeal and replace” proposal it seems to be patterned on. It would be helpful if they had actually defined what a “catastrophic” plan might entail, for example, so it’s difficult to assess how the costs of this proposal would stack up against the ACA. How much different from a bronze plan would their model HDHP really look? Which benefits, specifically, are “wasteful” after a $6,000 deductible?

Perhaps my reading of the op-ed is too careful, but it also seems to suggest that high-risk pools would only be available to those with pre-existing conditions at the time of reform. Where does that leave individuals who develop health issues that a catastrophic plan isn’t equipped to handle? The authors suggest that people who desire more generous benefits could purchase additional coverage to supplement catastrophic basics.  Okay, great—except the people who seek supplementary insurance would likely be high-utilizers, “bad risks” who are expensive to insure. That would drive up the costs of that coverage through the same adverse selection mechanism that fuels current fear of “death spirals” if exchange enrollees skew too old and sick.

This is why the AEI-sponsored plan shines where other conservative reform efforts fall short. People on both sides of the aisle plenty to find fault with—the left will take exception to risk-rating individuals, while the right is likely to perceive the plan as being too reminiscent of Obamacare (Austin and Harold debated the plan’s merits a few month ago). But the AEI plan doesn’t stratify insurance based on whether or not you need it, and it provides additional subsidies to those who require more generous coverage. My issues with the AEI proposal are more pragmatic than ideological—it relies on consumers maintaining long-term coverage contracts, and insurers’ ability to accurately underwrite individuals over those long stretches. And medical underwriting itself is not frictionless; it poses a greater administrative burden than community rating. Still, the proposal deserves more discussion than it’s sparked so far.

High risk pools may not be totally unworkable, but they pose concerns—possibly more concerns than they allay. It’s hard to seriously weigh any “conservative alternative” that glosses over their troubles.

Adrianna (@onceuponA)

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