States Rethink High Risk Pools

When the health insurance marketplaces open next year, it will mean that plans will be available to everyone regardless of state of residence, pre-existing condition, or potential risk to the insurance company. This means that individuals with existing illness and those at higher risk of becoming ill will be able to participate in the marketplace plans.  From an insurance perspective, these are high risk participants whose costs need to be offset by participation of less-costly, healthier individuals.

In the long run, federal officials expect costs attributable to high risk participants to be mitigated by participation of younger, lower risk individuals who would also pay into the program. In the short term, however, there are concerns that the higher cost individuals will enroll en masse, while the lower cost participants hold back. This could cause premiums for plans in the marketplace to skyrocket and become cost prohibitive for the healthy participants needed to balance out the program. The law that established the marketplaces tried to anticipate the problem by including a number of mechanisms aimed at avoiding the so called rate shock.

One such provision is known as reinsurance; a $20 billion fund run by the Department of Health and Human Services (HHS). All insurers are required to pay into the reinsurance fund, which will then be used to pay back insurance companies that carry a large share of high risk participants. The thought is that the payments will ensure that insurance companies do not have to raise premiums in order to recoup short term losses.

One problem with the reinsurance approach is that the fund is temporary and will disperse all funds in three years, but the bigger problem is that all the funds will go to insurance companies, not state high-risk pools that are currently carrying about 200,000 high risk participants.

These state high-risk pools that were once planning on slowly moving their participants into the new exchanges are now likely to move them faster, before the $20 billion in funding runs out. States such as Wisconsin and Texas will cancel their plans or force participants to move to the new marketplace in 2014 when the Federal reinsurance fund is expected to dole out $10 billion to insurance companies. The fund will pay $6 billion in 2015 and the remaining $4 billion in 2016.

Estimates of the impact of suddenly shifting some 200,000 people from the state pools onto the exchanges vary. According to a Politico article “some actuaries say it won’t make much of a difference as millions of people start getting covered; other studies see this population boosting premiums significantly in the individual market. One Indiana study projected premiums would rise by up to 45 percent.”  Meanwhile, HHS contends that payments through the reinsurance program will keep premiums 10 to 15 percent lower than they would be without it. They also hope that three years will be enough time for low risk participants to enter the exchanges and naturally mitigate costs.