The Next Generation High-Risk Pool

Can this be a lifesaver for the individual market? Liz Leif and Cecil Bykerk July 2017 Web Exclusive

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With ongoing debate about the viability of the Affordable Care Act (ACA), a spotlight is once again shining on the concept of pooling high-risk individuals as a way to stabilize the individual market. The purpose of this article is to provide an unbiased look at the high-risk pools of the past, to share information about interesting and recent state variations, and to spur thought about what the next evolution of these programs might look like.

Because high-risk pools are not a new concept, lessons learned from the past can stimulate thought about the potential for innovative high-risk pooling approaches for the future. We will describe two approaches to pooling high-risk individuals. The first is the traditional high-risk pool, and the second is high-risk reinsurance, sometimes referred to as an invisible risk pool.

Traditional high-risk pools were designed in the era prior to the guaranteed access requirement of the ACA. Prior to 2014, persons with pre-existing conditions who applied for commercial health insurance could be turned down or given a higher rate than healthier applicants. If rejected or rated up, the applicants were then given access to the high-risk pool, which was a separate health insurance program designed specifically for them. The goal was to provide the additional funding needed for these high-risk individuals through a separate funding mechanism, while keeping the cost for the majority of insured individuals at a lower level. While the implementation of the ACA essentially eliminated the need for traditional high-risk pools, some pools still exist (e.g., in Alaska, Iowa, Nebraska, New Mexico and Washington).

High-risk reinsurance pools also focus on financing the cost of health care for high-risk individuals; however, the approach is much different. In this approach, high-risk individuals remain in the commercial market, but behind the scenes, the insurance carrier cedes all or part of its risk exposure for those individuals to the reinsurance pool in exchange for a premium. The state of Maine implemented a version of this approach in 2012 but it remained operational for only 18 months. The state of Alaska recently implemented a different version of this approach in January 2017. Because the existence of the funding mechanism is invisible to the high-risk individual and the approach allows individuals with pre-existing conditions access to the commercial market, it recently has gained favor at the federal level.

The History of High-Risk Pools

Traditional high-risk pools were created in the mid-1970s by the states of Connecticut and Minnesota. Other states soon followed, and over the next 30 years, 33 additional states established similar programs.

In 2011, the last year the National Association of State Comprehensive Health Insurance Plans (NASCHIP) published consolidated results, enrollment in traditional high-risk pools nationwide was approximately 226,000 individuals. The cost of claims and administration totaled about $2.6 billion, and enrollee premiums covered about half of that amount. The remainder of the funding came from a variety of sources, with the primary source being assessments on insurance companies.

With the implementation of the ACA in 2014, insurance carriers were no longer allowed to reject applicants for individual health insurance due to their health status. Individuals with pre-existing conditions would be in a single risk pool with healthier individuals, eliminating the need for high-risk pools. As a result, most of the 35 high-risk pools closed, and their enrollees migrated to the commercial insurance market.

Maine has a state population of about 1.3 million. It was an early adopter of guaranteed access in the mid-1990s. Individuals were not mandated to purchase coverage, but community rating was required with a maximum age ratio of 1.5 to 1.0. By 2011, only two carriers remained in the individual market, and rates had reached unaffordable levels. To stabilize and subsidize the individual market, the state raised the maximum age ratio to 3.0 to 1.0 and created the Maine Guaranteed Access Reinsurance Association (MGARA). The reinsurance program was implemented in July 2012. The combination of the age band change and the reinsurance program immediately led to increased participation and rates that were 20 percent lower in the individual market. However, as a result of conflicts between the reinsurance program and the ACA transitional reinsurance program that was implemented in 2014, the program was suspended at the end of 2013.

Alaska has an estimated state population of 737,000, and its health care costs are the highest in the nation.¹ In light of the fact that only one health carrier was expected to remain in the Alaska individual marketplace in 2017—and with the expectation that its rate increase would be in excess of 40 percent for the third year in a row—the Alaska legislature passed a bill in 2016 creating a reinsurance program. The Alaska Reinsurance Program (ARP), which was implemented in January 2017, will reimburse the one remaining insurer for the health care costs of individuals with one or more of 33 high-cost health care conditions. Due to the $55 million in reinsurance funding included in the law, the carrier agreed to reduce its rate increase to 7.3 percent.

Eligibility Requirements

Individuals who purchased coverage from traditional state high-risk pools were required to provide proof of residency in the state and generally fell into one of several categories of eligibility:

• Persons who had been turned down for coverage by one or more individual health insurers
• Persons who were offered coverage by an individual health insurer but only at a higher rate than the pool rate
• HIPAA eligible individuals, generally those who had been covered by a group plan, who had elected COBRA coverage and reached the end of the COBRA continuation period and had not had a significant break in coverage

Some states also had additional eligibility criteria, such as the following:

• In addition to state residency, some states also required U.S. citizenship.
• In states where Medicare Supplement insurers were not required to sell policies to Medicare-eligible persons under the age of 65, some states allowed or required the pool to offer such coverage.
• Many states established a list of conditions that would typically lead to rejection by an individual insurance carrier. The list provided a shortcut to enrollment by skipping the insurer application process for persons who could provide evidence of having a condition that was on the list.

Individuals would not be eligible for traditional high-risk pool coverage if they had or were eligible for similar coverage from another source. They were not eligible for the high-risk pool if they were eligible for Medicaid or incarcerated. Most states had a pre-existing condition waiting period of six months or 12 months, but it was waived if the individual had been continuously covered without a break in coverage. Individuals who terminated their high-risk pool coverage generally were not allowed to re-enter the program for 12 months.

In contrast, the eligibility rules for high-risk reinsurance programs are invisible to the enrollee and deal only with identifying the individuals that the insurer can cede to the reinsurance program. In this regard, the Maine and Alaska programs differ in their approach:

• Maine used a prospective approach. Based on a health questionnaire completed at application, if the applicant had one of eight health care conditions (chronic obstructive pulmonary disease, endometrial cancer, metastatic cancer, prostate cancer, congestive heart failure, renal failure, rheumatoid arthritis or HIV) or another condition deemed to be costly by the insurer, the individual would be ceded to the reinsurance program.
• Alaska uses a retrospective approach. Based on the claims incurred by an enrollee during the year, if the enrollee was treated for a diagnosis related to one of 33 identified conditions, he or she will be ceded to the reinsurance program retrospectively for the entire year.

Benefit Design for High-Risk Pools and Reinsurance Programs

The plans traditional high-risk pools offered were originally similar to plans offered in either the individual or small group market in the state. They were most often preferred provider organization (PPO) plans with deductibles and coinsurance. A cost-sharing structure with 20 percent coinsurance after a $500 or $1,000 deductible was common. Most pools offered several different plan design options, with deductibles ranging from $500 to as high as $15,000. HMO-style benefit structures with significant use of copays rather than coinsurance typically were not offered. Most high-risk pools had a lifetime maximum for benefits, generally in the $1 million to $2 million range, although upward adjustments that mirrored the regular marketplace were beginning to take place. Indiana, Montana, New Hampshire, New Mexico and Washington had no lifetime maximums. High-deductible health plans that were HSA-eligible were available in more than half of the pools.

The Centers for Medicare and Medicaid Services (CMS) declared that traditional state high-risk pool coverage established on or before Nov. 26, 2014 in any state is minimum essential coverage for satisfying the ACA’s mandated coverage requirement, regardless of its benefits.

In contrast, high-risk reinsurance pools do not have unique plan designs for high-risk individuals. The ceded individuals purchase any plan they choose from the plans available in the marketplace, and the reinsurance happens behind the scenes. The benefit design relative to high-risk reinsurance pools is the formula by which the insurance carrier is reimbursed for the claims of the ceded individuals. Again, the Maine and Alaska reinsurance programs are quite different here:

• In Maine’s reinsurance program, the insurers were responsible for the first $7,500 in claims plus 10 percent of the next $25,000 for individuals placed in the program, for a total insurer liability of $10,000. The program picked up 100 percent of claims over $32,500.
• In Alaska’s reinsurance program, once the individual has been ceded, 100 percent of the individual’s claims for the entire year are reimbursed to the insurer.

Premium Rates

In traditional high-risk pools, participants paid a premium rate based on a formula included in state law. The premium was generally a multiple of the average individual health insurance rate in the state, with a range that allowed some flexibility for the pool’s board of directors. A typical high-risk pool rate was 125 to 200 percent of the average medically underwritten individual health insurance market rate, otherwise referred to as the standard risk rate.

The rate structure used by traditional high-risk pools typically followed the rate structure used in the individual market in the state. If gender-specific rates were allowed in the state, the pool would use gender-specific rates, and there was similar consideration for rating by age and geographic area.

With typical premiums at 125 to 200 percent of the standard market rates, pool coverage was not affordable for many individuals. Some of the states developed premium discount programs for low-income individuals in order to help with the affordability problem. In 2011, over half of the pools had a premium discount program.

In contrast, high-risk reinsurance pools do not have unique rates for high-risk individuals. The ceded individuals pay the same rate as healthy individuals of the same age and geographic location for the commercial plan they have chosen in the marketplace. The reinsurance pool then requires the insurer to pay a premium to the pool in exchange for ceding the risk. The Maine and Alaska reinsurance programs differ in their approaches:

• In Maine’s reinsurance program, insurers were required to give 90 percent of the premium collected from the ceded individuals to the program.
• In Alaska’s reinsurance program, insurers are required to give 100 percent of the premium collected from the ceded individuals to the program.

Claim Experience

The claim experience of high-risk individuals in traditional high-risk pools was, as expected, worse than for average-risk individuals. In 2011, the average nationwide annual claim cost for high-risk individuals was $11,139, but this figure varied widely by state from about $6,000 (North Carolina and West Virginia) to $25,000 (Washington and Alaska). The variance in claims among states was often a function of the types of high-risk individuals being covered and whether the state had controls in place to guard against large claims. Figure 1 shows the extent of the variability among states.

Here are some reasons why claims fell at the low or high end of the claim cost spectrum.

• North Carolina’s law required that all high-risk pool claims be paid at Medicare reimbursement levels. North Carolina was the only state that was successful in purchasing reinsurance coverage. It secured a policy that paid 90 percent of the difference between the $300,000 attachment point and the pool’s $1 million annual maximum.
• West Virginia had a $200,000 annual maximum for medical claims and a $25,000 annual maximum for pharmacy claims.
• Neither North Carolina nor West Virginia allowed premiums to be paid by government agencies or special interest groups.
• Washington allowed premiums to be paid by third-party special interest groups, specifically kidney centers and state-funded HIV/AIDs organizations.
• Alaska also allows premiums to be paid by special interest groups and state-funded HIV/AIDS organizations.

Since Maine’s high-risk reinsurance program was only in place for 18 months, only limited claim information is available. According to the program’s February 2017 report to the Maine legislature, approximately $66 million in reinsurance claims were paid to the state’s individual health insurance carriers during its 18 months of operation.

Since Alaska’s high-risk reinsurance program is new for 2017, claim information is not yet available.

Administration Costs

Because of the large claim costs associated with traditional high-risk pools, administrative costs tended to be a low percentage of total costs, with the nationwide average being 4.7 percent. On a per-person basis, the average administrative cost was approximately $46 per month.

The high-risk pools handled administration in one of two ways:

• Twenty-seven states employed their own staff to handle administrative activities and manage contracts for items such as claim administration and medical management.
• The remaining eight states had no staff but used a combination of board members and contractors to manage the administrative functions.

Many of the high-risk pools contracted with Blue Cross Blue Shield plans in their state to handle customer service, claim adjudication and provider network access. Others contracted with third-party administrators and rented commercial provider networks.

Administration costs for high-risk reinsurance pools are expected to be significantly lower than those of traditional high-risk pools, since the programs primarily serve a financial function and do not perform traditional health insurance administrative functions like customer service, adjudication of health care claims or maintaining a provider network.

Funding Needs and Sources

Because traditional high-risk pool participants were persons with pre-existing health conditions, premium rates higher than the standard risk rate were still not adequate to cover the cost of the health care and administration of the program. As a result, additional funding sources were necessary.

In 2011, the last year in which NASCHIP kept nationwide records, the high-risk pools needed funding of approximately $1.25 billion more than what they collected in premiums. With an average enrollment of 226,000, this equated to about $5,520 of additional funding needed per high-risk enrollee per year.

One of the challenges faced by states in creating and maintaining a program that serves high-risk individuals is identifying the right level of funding to meet the program’s objectives. Some states aimed to keep the need for external funding at a minimum by keeping the pool rates high, which limited the number of pool enrollees and the funding needed. Other states aimed to keep pool coverage affordable through low multipliers and discount programs in order to reduce the state’s uninsured rate, thus requiring more funding.

States adopted a wide range of approaches to funding traditional high-risk pools. The most common approach was an assessment on the insurers in the state. Often, the insurer assessment was accompanied by a premium tax offset, so the state also contributes to the funding. In some states, an appropriation was made directly from the state’s general fund. While an assessment on insurers resulted in the cost being passed on to persons purchasing insurance policies from the commercial market, the cost of the high-risk individuals was more equitably shared than if the carriers had been required to insure them directly.

In addition to the carrier assessment, premium tax offset and general fund approaches, here are some other ways the states provided the additional funding needed for their high-risk pools:

• California used funds from its State Cigarette and Tobacco Surtax.
• Colorado accessed unused funds from the state’s Unclaimed Property Fund.
• Idaho, Nebraska and North Carolina used premium tax funds.
• Kentucky used Master Tobacco Settlement receipts.
• In Louisiana, hospital patients were assessed a service charge of $2 per day for inpatient admissions and $1 for outpatient procedures.
• Maryland assessed hospitals at the rate of 1.0 percent of net patient revenues.
• Mississippi, Tennessee and Wyoming assessed third-party administrators (TPAs) in addition to insurers.
• West Virginia assessed hospital gross revenue at a rate of 0.025 percent.
• Wisconsin provided partial funding from provider discounts.

The federal government was supportive of traditional state high-risk pools by making substantial grant funds available to assist with operational expenses and special programs. Grant funds were available starting in 2003 and 2004, when $80 million was appropriated for high-risk pools for operational expenses and seed money for states to start new high-risk pools. In addition, $75 million was authorized for each of federal fiscal years 2006 through 2010, plus $15 million for seed grants to assist states in creating and initially funding high-risk pools. However, the $75 million gradually was reduced due to sequestering requirements, and eventually it continued under “continuing resolutions.”

In the case of high-risk reinsurance pools, the premium paid by the insurance carriers in exchange for ceding the risk also is not expected to be adequate to cover the total cost. The states of Maine and Alaska took different approaches to address the shortfall:

• In addition to 90 percent of the insurers’ premiums for the ceded risks, Maine also imposed a $4 per member per month (PMPM) assessment on the individual, small group and large group health insurance markets, as well as third-party administrators of self-funded plans. According to MGARA’s February 2017 report to the Maine legislature, the assessment provided $41.2 million in funding. An additional $2 PMPM assessment was allowed in the law, but it was not needed.
• Alaska received a $55 million appropriation from the state premium tax fund for 2017, which will supplement the premium paid by the insurer. If the funds ultimately are not adequate, the amount of reinsurance payments to an insurer will be reduced. The Division of Insurance has also applied to CMS for a 1332 waiver. Such a waiver would potentially provide federal money for support of the reinsurance program in 2018 and beyond.

Federal High-Risk Pool: The PCIP Program

The ACA provided for an interim national high-risk pool, modeled on traditional state high-risk pools already in operation in 2010. Coverage was available in all states beginning in late 2010 to provide coverage to uninsured people with pre-existing conditions. The program was known as the Pre-Existing Condition Insurance Plan (PCIP).

The PCIP program was operated either by the states through existing high-risk pools or other nonprofit entities, or by the federal government in states that declined to participate. Twenty-seven states elected to run their own PCIP programs. Applicants had to have been without creditable coverage for at least six months in order to be eligible. Applicants also needed to be U.S. citizens or legally in the United States.

Benefits offered in the PCIP were required to have an actuarial value of at least 65 percent and could not impose any pre-existing condition exclusions. The maximum annual out-of-pocket cost sharing was capped at the level set for tax-favored high-deductible health plans ($6,050 in 2012). Premium rates could vary only by age, geographic area and tobacco use, and the highest age rate could be no greater than four times the lowest. The rates were set at 100 percent of the rate that individual insurers in the same state would charge for comparable benefits for a standard population.

Congress allocated $5 billion to fund the program, which was scheduled to terminate at the end of 2013. Enrollment nationwide reached approximately 115,000 in March 2013. The PCIP plans were closed to new enrollment after March 2013 in order to preserve remaining funds. Expenditures for claims and administrative expenses in excess of premiums reached approximately $4 billion by the end of September 2013. Coverage for existing enrollees continued until March 31, 2014.

In the CMS PCIP Report from January 2013, the following information was provided:

• In 2012, the average annual claim cost per enrollee was $32,108. Costs varied widely across the states, from a low of $4,276 per enrollee to a high of $171,909 per enrollee.
• The high average claims per enrollee were the result of a small percentage of enrollees with average annual claims of $225,000. Approximately 4.4 percent of the enrollees accounted for more than 50 percent of the claims. Approximately two-thirds of enrollees had $5,000 or less in claims.
• The top four diagnoses or procedures by cost included cancer, ischemic heart disease, degenerative bone diseases and follow-up medical care required after major surgery or cancer treatments.

Claim costs in the PCIP program were nearly three times the claims in state high-risk pools. There were a number of reasons for this result:

• In contrast to state high-risk pools, there was no waiting period for PCIP coverage. High-cost conditions were covered from the first day the PCIP coverage began.
• Individuals eligible for PCIP could not have been insured in the last six months. Thus, they were likely to have unmet medical needs that could be satisfied immediately upon entering the plan.
• Benefits were more generous in the PCIP due to the limit on out-of-pocket cost sharing. Also, there were no annual or lifetime benefit limits.

Why Some Traditional State High-Risk Pools Still Exist

In the years following the 2014 implementation of the ACA, not all state high-risk pools closed. Some stayed open simply because their existence was spelled out in statute and those statutes had not yet been changed. Others stayed open to meet specific needs the ACA insurance market did not meet. The few remaining pools depopulated rather quickly, as enrollees who now had access to more affordable coverage in the marketplace or through Medicaid expansion migrated to new coverage.

Individuals who still remain in the state high-risk pools after ACA implementation generally fall into a few categories:

• Undocumented immigrants. These individuals are not eligible to buy coverage through the state exchanges. In some states, insurance carriers have chosen not to accept undocumented applicants outside of the exchange. In this case, the high-risk pool may be the only potential source of health insurance. This situation exists only in those states that do not require pool applicants to be U.S. citizens.
• Medicare-eligible individuals under the age of 65. The ACA did not resolve the problem of the lack of availability of Medicare Supplement policies for disabled persons under the age of 65 in states that do not require carriers to issue such coverage. Thus, there are certain states where the high-risk pool is the only place these individuals can purchase the coverage, either in the form of a supplement or a Medicare carve-out policy. Some states also allowed individuals older than age 64 into the high-risk pool, if for whatever reason they missed the open-enrollment period around their 65th birthday.
• Third-party premium payment. Some state high-risk pools allow payment of premium by government agencies, providers and advocacy groups. Health and Human Services (HHS) requires issuers of qualified health plans to accept premiums and cost-sharing payments made on behalf of enrollees by the Ryan White HIV/AIDS Program; other federal and state government programs that provide premium support for specific individuals; and Native American tribes, tribal organizations and urban Native American organizations. HHS has expressed concern that third-party payments of premium provided by hospitals, other health care providers and other commercial entities could skew the insurance risk pool and create an uneven competitive field in the insurance market. Thus, high-risk pool enrollees whose premiums are paid by these other organizations can only take advantage of the third-party premium payment through the pools that allow these payments.

High-Risk Pools: Why This Approach Works

Traditional high-risk pools have a number of advantages that make them a valuable tool in a market where insurance carriers are allowed to medically underwrite or rate-up applicants for individual health insurance.

• High-risk pools are a good mechanism for keeping rates lower in the individual market, because the cost of the highest-risk individuals is segregated from the insured risk pool and funded in a different way.
• When high-risk pools are funded through a broad-based mechanism, such as assessing carriers in all markets or using state general funds, the shared cost is less for all. In contrast, the cost of the high-risk enrollees in the ACA individual market is spread only within the individual market, driving up premium costs and leading to healthier individuals dropping out.
• High-risk pools can focus their efforts on the unique needs of their high-risk customers through communication, education and specialized care management programs.
• High-risk pools can achieve consistency in coverage and provider network from year to year, so enrollees are not subject to the current market instability and ACA rules that result in frequent changes in benefits and carriers.
• High-risk pools have no profit motivation, and their goal is to serve the needs of this specialized population. They traditionally have been governed by boards that include consumers and medical professionals in addition to insurance professionals.

High-risk reinsurance programs are valuable tools in a market where guaranteed access is required. The advantages of this approach include:

• The existence of the reinsurance program is invisible to the insured individual, so there is no stigma attached to the source or type of insurance coverage.
• The high-risk individual’s premium rate level is the same as other individuals with the same plan, age and geographic location.
• The high-risk individual has the same plan choices as others in the same geographic location.
• The administration is primarily a financial function, so it is less expensive than administering a health insurance plan.

Pooling high-risk individuals may encourage carriers that have left the market to once again offer individual coverage. The reinsurance program in Maine was not in operation long enough for that to happen. The Alaska reinsurance program is only in its first year, so it is too soon to know if it will result in an expansion of carrier participation.

High-Risk Pools: Criticisms

• The high-risk pool concept is often criticized for not being self-sustaining and always requiring outside funding. Whether through a traditional or high-risk reinsurance program, this is clearly a given for this population, as they are the highest-cost patients. Premiums established for their coverage will never achieve the goals of being both affordable and adequate to cover costs. So, of course, additional funding is needed for this population. The primary challenge is establishing from where this additional funding should come.
• Traditional high-risk pools typically do not offer multiple carrier choices, since they operate as self-funded rather than fully-insured programs. In a self-funded structure, typically only one provider network and one third-party administrator will be offered, in order to streamline administrative functions and keep costs lower. High-risk pools typically do offer multiple choices of plan design. This criticism is resolved in the high-risk reinsurance approach, since the individual purchases coverage in the commercial market.
• Traditional high-risk pools result in the segregation of high-risk individuals from other individuals who can purchase lower-cost policies directly from the insurance market. Thus, there can be a perceived stigma attached to high-risk coverage. This criticism is also resolved in the high-risk reinsurance approach.
• Traditional high-risk pool premium rates historically have been high because of statutory rules allowing for the price to be set at a multiple above the standard risk rate. This is not a given, however, as traditional high-risk pools can establish premium discount programs and states can modify the statutory premium rate levels. In the high-risk reinsurance approach, high-risk individuals pay the same as healthier individuals.
• High-risk reinsurance programs that reimburse insurers for the payment of large claims leave the insurer with less incentive to appropriately manage care and seek cost-saving alternatives.
• High-risk reinsurance programs that limit reimbursements to a defined list of conditions may not sufficiently account for the financial impact of rare, costly diseases that occur only occasionally.
• Certain subsets of the high-risk population may not be well-served by these approaches. In the case of traditional high-risk pools, the most common barrier is cost, but other barriers might include limited condition lists or access to out-of-network specialists. For high-risk reinsurance plans, the barriers are related to the ACA structure itself, such as the inability of undocumented immigrants to secure coverage, the lack of assistance for Medicare-eligible individuals or the reluctance of insurance carriers to accept payment by third-parties.

Is There a Future for High-Risk Pools?

If the ACA was to be repealed in its entirety—or modified to eliminate guaranteed access or to allow carriers to charge higher rates for high-risk individuals—the traditional high-risk pool concept could make a comeback. Traditional high-risk pools continue to have a limited ongoing role in certain states, meeting the health insurance needs of populations that remain unserved by the commercial insurance market. Whether these programs will play a role on a broader basis in the future is still an open question.

If guaranteed issue remains and the current provisions of ACA are not adequately modified to stabilize the individual market, high-risk reinsurance pools could become more prevalent in states that are working to reduce rates and keep a choice of carriers in the market, especially if federal funding could support the program.² Reinsurance pools have shown that rates in the individual market can be lower with such programs in place, and this approach has been included in proposed revisions to the ACA.

With the future of the ACA under debate, it is unclear at this time whether its impact on the federal budget and rising premium costs will result in modifications that might carve out a role for traditional high-risk and reinsurance pools on a larger scale in the future.