Obamacare replacement: What the heck is a “high risk pool?”

I am pleased that the House is still working to repeal and replace Obamacare. Here was one of the sticking points. As with any form of insurance those at higher risk to file a claim need to pay more. We complain when an accident raises our automobile insurance, but we still pay the increase.

In the world of medical care certain groups are often referenced using shorthand terminology. One that is a bone of contention among Republican congressmen is the so-called “high-risk pool.” Do you really know what they are talking about? I’m a physician and I’m not sure that I do. Perhaps this will help.

[Source: Understanding High-Risk Pools as Part of Obamacare Replacement, by Edmund Haislmaier]

[From the Haislmaier article] Traditionally, the term “high-risk pool” refers to a separate arrangement under which insurance companies operating in a given market collectively subsidize (that is, pool) the extra costs for providing coverage to individuals who, because they are poor risks, have been refused coverage under standard policies. In this construct, those individuals are given coverage that is separate and different from that obtained by other people in the general market.

However, the term “high-risk pool” has also been sometimes used as shorthand for two other related, but different, concepts. One concept can be more accurately described as a “risk transfer pool.” Under this design, for a given market, each insurer’s claims experience is compared to the collective (that is, pooled) experience of the whole market. Then, based upon an agreed formula, a portion of premium revenues are transferred from the insurers whose experience was significantly better than the norm to the insurers whose experience was significantly worse than the norm. The idea is to adjust for potential selection effects so that an insurer is compensated if it attracts a larger than normal share of costly enrollees.

Thus, as with a traditional high-risk pool, under a risk transfer pool the cost of expensive enrollees is spread across all insurers in the market. However, unlike in a traditional high-risk pool arrangement, costly individuals aren’t given separate coverage. In sum, the difference is that the latter concept involves moving money, but without also moving people into different coverage.

Finally, the third concept basically consists of relabeling publicly funded “reinsurance” and calling it “high-risk pool funding.” Unlike private reinsurance, for which claims must be funded entirely of the premiums charged to purchasers (just like other forms of insurance), a public reinsurance program provides a government subsidy to offset insurer losses on expensive individuals.

That difference also distinguishes a public reinsurance program from both the traditional high-risk pool design and the risk transfer pool design. These latter two designs consist of pooling and reallocating premium dollars within the market, whereas a public reinsurance program adds additional money from taxpayers.

These may appear to be arcane differences, but one can readily see that the Freedom Caucus might object to one and not another. Yet when we read about the dissention in the ranks the true source of the disagreement may not be apparent. What each of these differing methods of dealing with “high risk pools” does is reduce insurer uncertainty over the mix of risks that their plans are likely to attract. Insurance actuaries are then able to price plans with less need to build a “cushion” into their premiums to cover those uncertainties—and can, thus, result in premium reductions for the remainder of the population. 

These differences need to be considered in the broad context of the entire legislative action proposed. Clearly, there are differing methods of addressing this thorny issue. Do you believe that individuals with expensive medical conditions should be able to purchase insurance without damaging the marketplace for everyone else? As you are currently reading the Rugged Individualist, I suspect you do.

Hopefully this helped a bit.

Roy Filly

About Roy Filly

Please read my first blog in which I describe myself and my goals.
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One Response to Obamacare replacement: What the heck is a “high risk pool?”

  1. David L. Wood, M.D. says:

    The author, Edmund Haislmaier, wrote a paragraph in which he relates monies are transferred from “from the insurers whose experience was significantly better than the norm to the insurers whose experience was significantly worse than the norm. That leaves me with the question: Does this mean that private insurance companies “whose experience was significantly better than the norm” actually give or “pool” money to competing other private insurers to compensate for their “worse than the norm” business decisions? Oh my, I have never heard of such action between private computing businesses.

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