High-Risk Pools Covered the Sick Before 2014, and They Could Do It Again

There is a question every health policy must answer, and the honest ones answer it out loud: who pays for the sickest five percent? Every system pays, one way or another. The difference between systems is who is asked, how much, and whether the person doing the asking has to admit it.

This post argues that the best answer is the oldest one in the insurance business: separate the very sick, fund their care directly and openly, and let everyone else buy ordinary insurance at ordinary prices. That is what a high-risk pool does. Before 2014 most states had one. A few states designed better ones. The federal government tried a national one for a few years, and Republicans put a version in their 2017 repeal bill. The idea has a record, and it deserves a hearing on that record, not on slogans.

Define the terms

Preexisting condition means a health problem a person has before he applies for coverage.

Risk pool means the group of people whose premiums fund one another's claims. An ordinary insurance pool works by mixing the healthy and the sick so that the average is manageable.

High-risk pool means a separate arrangement, usually run by a state or by a nonprofit association with state authority, that offers coverage to people with costly conditions who cannot get it, or cannot get it at a fair price, in the regular market. Because the people in it are expensive by definition, the premiums they pay do not cover the cost, so the pool needs outside funding, usually from a state appropriation, an assessment on insurers or both.

Reinsurance means insurance for insurers. The insurer pays most of the claims of its ordinary members and is reimbursed for the very large ones above a threshold. It is the same logic as a high-risk pool, applied behind the scenes.

I will use "pool" for the first arrangement and "reinsurance" for the second, and I will argue that both are variants of a single idea: the cost of the very sick should be funded openly, not smuggled into everyone else's premium.

The concentration of cost

The case begins with a fact about medicine. Health spending is not spread evenly. In every national survey of medical spending that I am aware of, a small fraction of the population accounts for a large fraction of the cost. The figure often cited is that roughly the sickest five percent of people account for about half of all spending. I would encourage you to check the current number in the published tables of the federal Agency for Healthcare Research and Quality, because the exact share moves from year to year. But the shape is stable: a few people with very large bills, and most with small ones.

That concentration is the whole reason for the debate. If you require every insurer to sell to every applicant at the same price, regardless of health, as the Affordable Care Act did, then you have decided that the premiums of all buyers will include the cost of the few. The people who pay more are not the rich or the poor in particular. They are the people who buy individual coverage without a subsidy, whose premiums rise to cover the expensive members of the pool. That is a hidden tax, collected by insurers and paid by the buyers least able to avoid it. It is the only tax in America whose collector sends you a letter calling it a premium increase and blames the weather.

The alternative is to pull the very expensive cases out of the ordinary pool and fund them directly. Then ordinary premiums reflect ordinary costs, and the cost of the sick is carried by a pool whose funding is visible in a budget, where voters can see it and argue about it.

The record before 2014

By the time the Affordable Care Act's main insurance rules took effect in 2014, roughly thirty-five states had a high-risk pool, though I recommend confirming the number in the state-by-state surveys. Minnesota and Connecticut are generally credited with starting the first ones in the mid-1970s, and over the following decades most other states followed. The pools covered a population of more than two hundred thousand people nationwide by the end of 2011. They varied widely in design: how they were funded, what they charged, what they covered, and who qualified.

The best of them were serious institutions. They gave people who had been turned down elsewhere a place to buy a comprehensive policy, with premiums set as a multiple of the standard rate, commonly capped at one and a half to two times. They were funded in some states by assessments on insurers and in others by a mix of premiums and state money. Some had limited benefits or waiting periods, and some had spending caps that made them unsuitable for the most severely ill. Those were real flaws, and I will come to them.

The point is that this was not a hypothetical. It was a working program in most of the country, run by the states, which could adjust it to local conditions. That is federalism doing what it was designed to do. It is also the rare case where fifty governors could not agree on a lunch order and still managed to build a working model. Justice Louis Brandeis wrote in 1932, in his dissent in New State Ice Co. v. Liebmann, that "a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country." The pools were fifty-odd small laboratories, and the 2010 law ended the experiment before most of the results were in. Federalism Lets Fifty States Experiment, and the Constitution Planned It explains how the Constitution was built for such experiments.

Maine's invisible pool

My favorite example is Maine, because it shows how clever the idea can be. In 2011 Maine created the Maine Guaranteed Access Reinsurance Association, which began operating in 2012, and the arrangement was nicknamed an "invisible" high-risk pool.

Here is how it worked. People with certain costly conditions were identified, by a list of conditions or by an assessment, and insurers could cede them to the association. The person stayed with his ordinary insurer, under his ordinary plan. He did not know he was in a special pool. He did not pay a higher premium or switch plans. But the association took on a large share of his claims, and it was funded by the premiums paid for those ceded risks and by a surcharge of a few dollars a month on every policyholder in the state. The sick enrollee kept the plan; the expensive risk went elsewhere.

That is the elegant part. A traditional pool segregates the sick into a separate plan, which can carry a stigma and a higher price, and which creates a cliff when a person moves between the pool and the regular market. An invisible pool removes the cliff. The person's care continues as before. The cost is handled in the background. The same logic, applied by a different mechanism, is the one that later reinsurance programs followed.

The federal attempt: the Pre-Existing Condition Insurance Plan

Here is a fact that surprises people. The Affordable Care Act itself began with a high-risk pool. Section 1101 of the 2010 law created the Pre-Existing Condition Insurance Plan, known as PCIP, a temporary program, intended to cover people with preexisting conditions who had been without coverage, until the main reforms started in 2014. The law appropriated five billion dollars for it.

The plan launched in the summer of 2010. Some states ran their own and others let the federal government run it. It enrolled well over a hundred thousand people at its peak. And then it ran into the problem that every pool runs into: the people who joined were expensive, and the money was limited. The federal government stopped accepting new applicants in early 2013 to make the funds last, and the program ended when the main reforms began in 2014.

This is important for the argument in two ways. First, it shows that even the architects of the 2010 law thought a pool was a reasonable bridge, which suggests that the idea is not an exotic conservative invention. Second, it shows the flaw critics have pointed to: a pool needs to be funded to the level of its need, and the federal pool was not.

The 2017 proposal and the section 1332 waivers

When House Republicans put together their 2017 bill to replace much of the ACA, the American Health Care Act, they built a high-risk pool in the form of a state funding mechanism. The bill included a Patient and State Stability Fund, with an initial one hundred billion dollars over nine years for states to use for a range of purposes, which could include high-risk pools and reinsurance. Before the House vote, an amendment added another eight billion dollars for states with approved waivers. The House passed the bill in May 2017, and it did not become law, because the Senate did not pass a version.

Meanwhile, the ACA itself contained a tool that states began to use. Section 1332 of the law allows states to apply for waivers to design their own approaches to coverage, within limits. Several states used the waivers to set up reinsurance programs. Alaska was the first approved, in 2017, and others followed, including Minnesota, Oregon, Wisconsin and Colorado. Under a reinsurance waiver, the state pays part of the cost of high-cost claims, and the federal government passes through to the state the savings it would otherwise have paid in premium subsidies. Alaska, for one, projected that its 2018 premiums would be about 20 percent lower than without the waiver. I would not rely on my summary for the size of those reductions, and I urge you to read each state's own published results.

The takeaway is that the model has been tested, in several states and in different forms, and it is part of the toolbox even under the existing law.

The numbered argument

1. Medical costs are concentrated. A small share of patients account for a large share of spending, so the question of who pays for them is the central question.

1. Hidden cross-subsidies raise premiums for everyone else. When insurers must charge the same price to all, the cost of the very sick is added to every ordinary premium. That is a hidden tax.

1. Open funding is more honest and more accountable. A pool or reinsurance program funded in a budget can be seen, debated and adjusted. A hidden cross-subsidy cannot.

1. A pool protects the sick better than a mandate protects them. A pool can be designed to give a person with a serious condition comprehensive coverage at a fair price, with the cost carried by the public purse and not by the insurer's other customers.

1. The states have already shown that it works, in pre-2014 pools, in Maine's invisible pool and in the section 1332 reinsurance programs, and the federal government's own temporary pool showed the idea was bipartisan enough to be tried.

The objection: pools were underfunded and had waiting lists

I have promised to state the best objection, and here it is, as its defenders would put it.

The critics say that high-risk pools were a failure for the very people they were meant to help. Premiums were high, often well above the standard rate, so even those eligible could not always afford them. Many pools had waiting periods before covering a preexisting condition, annual or lifetime caps on benefits, and long waiting lists when funds ran out. Enrollment was a small fraction of the number of Americans with preexisting conditions. The federal pool, PCIP, closed its doors to new applicants because the money ran out. If the aim is to protect everyone with a serious condition, the critics say, a system that depends on appropriations from legislatures that may decide to spend elsewhere is a poor substitute for a legal guarantee. The pools were a patchwork, and the patchwork had holes.

That is a strong objection. Every word of it is true of some pool in some year. I do not dismiss it. Washington has a gift for discovering that a program failed because it was starved, and then concluding that the cure is to feed a different program, which will be starved by the same people next year.

The answer

Here is my reply, in four points.

First, the flaw was in the funding, not in the idea. Every defect in the critics' list, the high premiums, the waiting periods, the closed enrollment, traces to a pool being starved of money. The remedy is to fund the pool to the level of its need. A guarantee that depends on an appropriation can be broken, but so can any promise that depends on subsidies, and the ACA's own subsidies depend on yearly appropriations and rules. If funding is the question, make the funding the debate. Do not abandon the model.

Second, funding a pool costs money, and so does the alternative; the difference is that the alternative hides the cost. Under the guarantee model, the cost is paid in higher premiums for unsubsidized buyers and in federal subsidies, with the result that the net price for a middle-income family without a subsidy can be quite high. Under the pool model, the cost is paid in a budget. A conservative should prefer the cost that can be seen, because what can be seen can be controlled.

Third, design can fix waiting lists. A pool with a dedicated funding stream, such as a share of a state tax or a fixed assessment on insurers, can be built to grow with demand. The invisible pool approach avoids a separate enrollment altogether. A well-built pool does not need a waiting list.

Fourth, the alternative has its own gaps. A mandate that insurers sell to everyone does not make coverage affordable; it makes it available. Seven Promises Made for the Affordable Care Act, Tested Against the Record tests the promises made for the law. And a person who is priced out of a regular plan in a system without a pool has fewer options than a person with access to a funded one.

I should be careful about what I am not saying. I am not saying any particular state's program worked flawlessly. I am not giving medical or financial advice to a reader with a health condition, and if you have one, your state insurance department and your own advisers can tell you what options exist where you live. I am saying that the policy design deserves a fair test, with real funding, in the states.

Where this fits with other conservative ideas

A pool is not a stand-alone solution. It fits into a larger conservative picture, in which ordinary insurance is for ordinary risks and costs are visible. Four Conservative Health Plans Side by Side, From Tax Credits to Block Grants compares several plans that include pools or reinsurance alongside tax credits or block grants. The Medicaid Match That Pays States More for Adults Than for Disabled Kids explains how federal funding rules shape state choices. And Read the Medicare for All Bill and You Will Find Your Insurance Abolished shows where the opposite approach leads, with a single plan for everyone and no room for any other.

The principle

Underneath the mechanics is a principle that I would defend on moral grounds. The sick deserve help, and the community should provide it. That is a commitment of the Judeo-Christian tradition and of ordinary decency, and nobody on the right has to apologize for it. The question is how. The answer that treats the sick as a distinct group to be helped with open, targeted public money honors both their dignity and everyone else's right to a fair price. The answer that disguises the help as a rule on insurers does neither: it conceals the cost, distorts the market and leaves everyone guessing who is paying.

A free people can afford to be generous. It cannot afford to be vague about who is paying for the generosity.

The case in brief

1. The sickest few account for a large share of medical spending, so how a system treats them determines what everyone else pays.
2. Before 2014 about thirty-five states ran high-risk pools, and Maine's 2012 invisible pool, the ACA's temporary PCIP and the 2017 Patient and State Stability Fund all drew on the same idea.
3. The section 1332 reinsurance waivers show states using the model today under existing law.
4. The best objection, that pools were underfunded and had waiting lists, is an argument for funding them properly, not for hiding their costs in everyone's premium.
5. Open, targeted public funding for the very sick protects them and keeps ordinary premiums honest.

What you can do: look up whether your state has a reinsurance program under a section 1332 waiver, read its latest published results on your state insurance department's website, and write your state legislator with one question about how it is funded.