Health Affairs Blog
Invisible High-Risk Pools: How Congress Can Lower Premiums And Deal With Pre-Existing Conditions
March 2, 2017
As Congress and the Trump administration move forward with plans to repeal and replace the Affordable Care Act (ACA), they are looking for proven state-led reforms that maintain access for those with pre-existing conditions in the current exchange market while also lowering premiums for everyone buying insurance in the individual market.
Maine faced similar challenges in 2011 as it sought to unwind failed experiments that pushed its market into a long-term death spiral. But by creating an invisible high-risk pool and relaxing its premium rating bands, Maine policymakers were able to cut premiums in half while still guaranteeing those with pre-existing conditions access to plans.
Maine faced similar challenges in 2011 as it sought to unwind failed experiments that pushed its market into a long-term death spiral. But by creating an invisible high-risk pool and relaxing its premium rating bands, Maine policymakers were able to cut premiums in half while still guaranteeing those with pre-existing conditions access to plans.
As a result of these changes, individuals in their early 20s were able to see premium savings of nearly $5,000 per year, while individuals in their 60s saw savings of more than $7,000. As premiums dropped, more young and healthy applicants entered the market, total enrollment increased for the primary insurer in the market, and the individual market’s multi-year death spiral was finally reversed.
Maine’s experience provides federal policymakers with key lessons as they work to repeal and replace the ACA.
Maine’s Failed Experiment With Strict Guaranteed Issue And Community Rating
More than 20 years ago, Maine began enacting disastrous insurance market changes that would eventually become some of the building blocks for the ACA. Those changes led to the same problems now facing the rest of the nation — high premiums, high deductibles, and reduced access to medical providers.
In 1993, Maine policymakers imposed guaranteed issue and community rating requirements on all individual insurance plans. Guaranteed issue requires health insurance plans to sell to all individuals, regardless of their health status. Community rating prohibits insurers from charging actuarially sound premiums based on health status and limits differences insurers can charge based on age.
Maine was one of just eight states (Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, New York, Vermont, and Washington) who experimented with these changes in the 1990s. Despite promises to expand access to everyone, the net result of Maine’s changes was a perverse incentive for individuals to wait until they were sick to purchase coverage. As average claims increased, premiums and deductibles for everyone skyrocketed. Young and healthy individuals soon fled the market as premiums and deductibles rose, prompting even higher premium hikes. More premium hikes were followed by more exits, creating a death spiral in the individual market.
Insurers fled the market, and premiums more than doubled between 1995 and 2001 as the market deteriorated. The number of individuals covered dropped to just 36,000 by 2011 — a 65 percent decline from the 102,000 individuals enrolled in 1993.
The ACA required a similar guarantee issue and community rating regulatory standard, but used the individual mandate, limited open enrollment periods, taxpayer subsidies, and a slightly more expansive community rating band to attempt to mitigate negative enrollment or inflationary premium trends. But those measures were not enough. Millions of Americans witnessed premium and deductible increases, while insurers have cancelled plans and even fled markets.
Maine’s Fix: An Invisible High-Risk Pool And Expanded Age Band Reforms
In 2011, Maine enacted major changes to address its struggling insurance market.Public Law 90 was designed to improve the market using free-market principles and the lessons learned are important for policymakers as they work to unwind the ACA and reshape insurance regulations.
The first thing Maine did was establish an invisible high-risk pool for individual insurance applicants with pre-existing conditions. In practice, it functioned like a hybrid of a reinsurance program and a high-risk pool. It operated like a reinsurance program in that it helped cover claim costs for individuals with high medical claims in the market. It operated like a high-risk pool in that it only targeted a subset of individuals based on specific conditions. However, unlike “traditional” high-risk pools Maine’s program did not remove individuals with pre-existing conditions out of the traditional market or charge them higher premiums.
Secondly, the state expanded rating bands from 1.5-to-1 to 3-to-1, the maximum allowed under the ACA. (Unfortunately, further changes were not possible within the framework of the ACA.)
It was the combination of these reforms—an invisible high-risk pool and expanded age rating bands—that produced positive results by lowering premiums and attracting younger and healthier people to purchase insurance.
It is important to note that lower premiums were not the result of changes to existing requirements that insurers offer coverage year-round to anyone regardless of health status, prohibitions of rating premiums based on health status or sex, or changes to any required benefit mandates.
Transition: Continuing Old Plans But Providing New Options
When Maine began its reform efforts in 2011, it faced a similar challenge to that posed by repealing and replacing the ACA: Maine needed to transition from one set of market rules to another. To minimize market disruption, Maine allowed insurers to simply close existing books of business and open new books under the new reforms. In the closed books, existing policyholders had the option to renew existing policies, but insurers stopped selling those policies to new enrollees.
The insurers were allowed to manage the risk pools of old policies and new options separately, enabling them to independently price the two types of products. Individuals in old policies had the choice to renew their existing policies indefinitely or choose to buy new plans in a reformed market with lower premiums. But the choice remained for the individual to make — no plans were cancelled for any individuals.
Like most states, Maine also discourages insurers from leaving the market by restricting reentry. If insurers leave the individual market, they cannot reenter for at least five years — a significant deterrent for insurers who naturally wish to maintain future access to the market.
In contrast to the mass exits under the failed experiments with community rating and guaranteed issue, no insurers left the market in Maine during its 2011 reform transition.
A Lower Cost Option To Address Pre-Existing Conditions
Maine’s experience with its invisible high-risk pool provides important lessons as Congress and states move forward with repealing and replacing the ACA. One important feature of Maine’s invisible high-risk pool, called the Maine Guaranteed Access Reinsurance Association (MGARA), is that it operated completely behind the scenes.
All applicants were required to complete a health statement with their application for insurance. Insurers used the data provided to determine who to place in the invisible high-risk pool, but individuals were not treated differently. They were enrolled in the same plan they applied for at the same rates, whether placed in the invisible high-risk pool or not. In fact, enrollees had no idea that they were even in the high-risk pool, hence why it is called “invisible.”
The purpose of the pool was simply to help defray the expenses of the highest cost policyholders so those costs didn’t raise the premiums of all policyholders. In effect, everyone was priced as if they were healthy because those with the known high risks were subsidized. By contrast, in a traditional guarantee issue environment, everyone is priced as if they are sick.
The Invisible High-Risk Pool In Action
Initially, the MGARA board identified a handful of specific conditions that were driving cost increases in the individual market. This allowed the program to target subsidies at conditions that would have the biggest impact on lowering overall premiums. They identified eight conditions driving claim costs: chronic obstructive pulmonary disease, endometrial cancer, metastatic cancer, prostate cancer, congestive heart failure, renal failure, rheumatoid arthritis, and HIV. Under a federal repeal and replace plan other states may identify more conditions or even a different set of conditions entirely. State flexibility is critical in this area as it enables focused programs that maximize insurance rate relief while targeting the population health conditions unique to their states.
In Maine, the health statements also asked a broad set of additional questions to allow insurers the ability to voluntarily place other individuals likely to incur large medical expenses in the invisible high-risk pool at the time of application.
Individuals were automatically placed in the invisible high-risk pool if they indicated on their completed health statements that they had one of these eight conditions at the time of application. If they developed one of those conditions later, the insurers remained fully responsible for all costs.
However, insurers were required to transfer 90 percent of collected premiums for all individuals placed in the invisible high-risk pool to MGARA. This helped prevent insurers from gaming the system by removing the opportunity to profit off individuals placed in the invisible high-risk pool. Conversely, if insurers aggressively placed individuals to avoid claim risk, they lost premium revenue. As a result, if insurers effectively placed high-cost claimants, they could offer lower premiums to attract more policyholders.
Here is how it worked in practice. The Maine invisible high-risk pool reimbursed insurers for 90 percent of individuals’ claims between $7,500 and $32,500 per year and 100 percent of claims more than $32,500.
Yet, because insurers bore the risk for up to $10,000 in claims (i.e. the first $7,500 plus 10 percent of the next $25,000), they had little incentive to inappropriately place people in the invisible high-risk pool as they lost almost all premium revenue but remained responsible for up to $10,000 in expenses.
Data from Anthem—the largest insurer in the individual market—reveals that just four percent of applicants had a condition that triggered an automatic placement in the invisible high-risk pool while another 10 percent were voluntarily placed in the pool. Altogether, just 14 percent of applicants were placed in the invisible high-risk pool. This indicates that the invisible high-risk pool was a targeted approach that protected certain individuals with pre-existing conditions while still maintaining lower premiums for all.
Financing The Invisible High-Risk Pool
The program had two primary funding sources. As noted, insurers were required to transfer 90 percent of pool premiums to MGARA. This covered approximately 42 percent of all claim expenses paid by MGARA. The remainder of costs were financed by a $4 per member per month assessment on all policies — raising nearly $28 million on approximately 575,000 covered lives. These funds were sufficient to run the program, unlike many of the “traditional” high-risk pools that ran out of funds.
(For comparison, the ACA’s temporary reinsurance program assessed policyholders $5.25 per member per month in 2014, with funding available only for claims between$45,000 and $250,000.)
To contrast the two programs, Maine’s largest insurer indicated that the invisible high-risk pool reduced premiums by 20 percent. By contrast, the same insurer’s rate filingsindicate that the ACA’s reinsurance program only offset premiums by 8.5 percent.
Put another way, every dollar assessed under the invisible high-risk pool produced a 5 percent reduction in premiums for all individual enrollees. But every dollar assessed under the ACA’s reinsurance program produced just 1.6 percent reduction in premiums. Simply put, the invisible high-risk pool’s targeted approach was more than three times as effective at reducing premiums as the ACA’s reinsurance program for every dollar assessed.
The Invisible Risk Pool’s Independent Structure
MGARA was set up as an independent non-profit organization run by a board of directors. Insurers in the individual market appointed a minority of board members while the majority of the board represented various stakeholders appointed by the state’s Superintendent of Insurance. The independent nature ensured that the funds managed by the program were used solely for their intended purpose, out of reach of legislators who may have wished to raid the funds to balance the state budget or fund other projects during budget crises. This structure helped keep administrative costs for the invisible high-risk pool relatively low — just 2.5 percent of total costs.
Impact Of The Invisible High-Risk Pool
Individuals’ Premiums Dropped By Nearly 70 Percent For Better Plans
As a direct result of the high-risk pool, the state’s largest insurer introduced a suite of new plans with rates as much as 70 percent lower than existing products. These plans were more than 50 percent lower in the highest age category (60 or older). Although critics of the law predicted lower rates for younger applicants at the expense of older applicants, all ages actually gained access to lower cost individual policies and those with pre-existing conditions shared these same savings.
These reforms meant individuals in their early 20s saw savings of roughly $5,000 per year while those in their 60s saw savings of more than $7,000 per year. Those lower-cost new options even had lower deductibles than the higher-cost plans under the old system.
The Largest Insurer In The Individual Market Grew Membership By 13 Percent In Just 18 Months
Prior to the reforms, the individual market was in a death spiral. During the 18 months, immediately before the invisible hig- risk pool launched, Anthem’s individual enrollment dropped 7 percent, continuing a multi-year trend. But after the invisible high-risk pool was implemented, new sales soared.
Comparing the last half of 2012 to the same time period in 2011, Anthem—the largest active insurer in Maine’s individual market—saw new individual contract sales increase by a whopping 59 percent. In the first 18 months of the invisible high-risk pool, Anthem’s individual market enrollment climbed 13 percent.
Younger And Healthier Applicants Voluntarily Enrolled
Anthem also saw a decrease in the average age of their individual policyholders after Maine’s reforms were implemented. The average age of enrollees dropped from 44 just before implementation to 42.5 by March 2013, a decrease of about 3 percent in just 9 months. Insurers were not only attracting new enrollees, but those enrollees were younger on average, reflecting a larger, more stable risk pool and a healthier insurance marketplace.
Lessons For ACA Replacement
Maine’s experience provides Congress and states with the opportunity to learn a number of important lessons as they work to repeal and replace the ACA.
First, it was the combination of expanded age bands and the invisible high-risk pool that resulted in significantly lower rates for consumers. These reforms must happen concurrently. Adjusting the ACA’s restrictive three-to-one age bands to reflect something closer to actuarial reality, such as a five-to-one rating band, will allow insurers to offer lower rates and attract younger applicants.
Second, states need tools to address the expense of high-cost individuals to ensure stable individual insurance markets. One proven approach is to design invisible high-risk pools that:
- Are invisible to applicants;
- Do not discriminate with limited options or higher premiums for high-cost individuals;
- Include mandatory placement of individuals with specific health conditions tailored by the state to maximize the impact on insurance rates;
- Allow insurers to make ongoing voluntary placement decisions for conditions over and above the eight conditions, but only at the time of application while still maintaining some claim exposure such as the first $10,000;
- Stretch every dollar as far as possible by capturing 90 percent of premiums of individuals placed in the invisible high-risk pool and through other mechanisms.
On this last point, there is opportunity to further enhance the effectiveness of these programs by adding the ability to manage claims for covered individuals. For example, setting guidelines for the invisible high-risk pools’ claims reimbursement to Medicare or Medicare Plus rates would further lower the costs of the program.
Third, if federal funding for state-run risk management programs is included in an ACA replacement plan, Maine’s assessment formula presents a model that could be utilized to develop a federal funding formula that is simple, targeted, unambiguous, and encourages insurer participation.
Fourth, policymakers need to draw a distinction between a new market or new plan options from the existing policies under the ACA. How to effectively transition those on old plans should be a separate conversation from what new options should be available in the market. Combining the two in a one-size-fits-both strategy can significantly undercut the potential of reform on new plans and new applicants.
Finally, linking participation in new markets to maintaining current enrollment can effectively prevent insurers from abandoning existing markets during the transition period. This is a practice common at the state level.
At the town hall, Rep. Palmer said that an actuarial study was obtained from Milliman. He also mentioned the actuarial study in an interview with Matt Murphy on April 10th. A podcast of the interview may be found at http://www.talk995.com/podcasts/.
Rep. Palmer needs to give fuller discussion of the level and extent of health care that will be provided to insureds who are placed in the invisible high risk pools, as compared to what they get under Obamacare. In particular, he needs to explain why that health care under his invisible high risk pools proposal will not be very much less than under Obamacare.
This inquiry can be understood by first considering the situation under Obamacare and its health insurance plans in a hypothetical state X. In simple terms, the cost paid to all providers of all the health care provided to all Obamacare insureds in state X is equal to the total of the insurance premiums paid by the insureds and the deductibles and co-pays that the insureds pay, minus a 10% or so amount that goes to health insurance company overhead and profit,
As I understand the invisible high risk pools proposal, the cost of all health care paid to all providers of all the health care provided to all insureds under the proposal in state X will also similarly be equal to the total of the insurance premiums paid by all the insureds and the deductibles and co-pays that the insureds pay, minus a 10% or so amount that goes to health insurance company overhead and profit, The difference is that that total cost paid to providers is supposed to be very substantially less in comparison to the total cost under Obamacare.
Rep. Palmer needs to explain how this difference in cost can be achieved.
There are two main possible explanations.
One is that the sum total of all health care provided will be the same, but there will be a substantial reduction in provider charges under Rep. Palmer's proposal, so that the total cost of the same quantum of health care provided under his proposal will be substantially less.
The second possibility is that the total quantum of health care provided under Rep. Palmer's proposal will be less than the quantum of health care provided under Obamacare.
To the extent the total quantum of health care provided is reduced, Rep. Palmer needs to specify the elements in the reduction of health care that will be provided, and which insureds will receive the less health care.
Based on the description of Rep. Palmer's proposal, it would seem likely that the insureds in the high risk pools will be the ones who will have their health care reduced to the greatest degree.
If there is not going to be a reduced quantum of health care provided, Rep. Palmer needs to explain how provider charges will come down, so that the same total quantum of health care will be provided at a much lesser cost.
It is the case that, under the principles of supply and demand, if the total quantum of health care is reduced (i.e., there is reduced demand), that should result in reduced charges to some extent. The amount of reductions in charges resulting from reduced overall demand would be very hard to predict, could be negligible, and would be dependent on how great the reduction of overall demand is.
There is an argument to be put forth that Rep. Palmer's proposal will result in increased plan choice and increased competition among plans, and that such increased competition will get translated into reduced provider charges.
It is submitted that this is a chimera, and the insurance companies best understand why it is a chimera. The insurance companies are most informed about provider charges, and the contracts they negotiate with providers about charges, and consumers are without information or ability to make meaningful marketplace choices about insurance plans that will filter through to impacting provider charges. Further, insurance companies are practiced in navigating the provider marketplace, out of sight of consumers, with a view to higher insurer profitability, and with little concern about consumer plan choice translating into reduced charges.
Unless and until Rep. Palmer provides explanations about the above, his constituents should express strenuous opposition to Rep. Palmer rushing back to Washington next week to get the House of Representatives to pass his proposal.
Addendum for Rep. Palmer
I have set forth above my critique of your proposed "invisible high risk pools" solution for health care reform.
I believe my critique raises very substantial questions about your proposal, and these questions are deserving of a response from you and also from someone else in the 6th Congressional district who understands your proposal and is capable of vouching for your response and/or giving further articulation of the basis for such person vouching for your response.
If such a response is not provided by you and such other person, you may be presenting a situation in which there is no one in the 6th Congressional district who understands your proposal and is able to vouch for your proposal to your constituents. If that is the case, and you nonetheless propose to return to Washington to advocate in the House of Representatives for your proposal, I think you need to tell your constituents that you are not able to put forth to them anyone in the 6th Congressional district who understands your proposal and can vouch for your proposal, and your constituents will need to rely solely on your analysis and judgment about your proposal with no vouching for it by anyone else. This may call your proposal into question for some of your constituents, and perhaps a sufficient number will express doubts that you will have second thoughts about your proposal. If you don't have second thoughts, and nonetheless proceed, you may be held accountable by your constituents in 2018.
As I believe you know, I have made extensive solicitations of input on this matter from the other Alabama Representatives and Senators in Congress, from persons in Alabama having special expertise and knowledge relevant to health care reform, and to persons in the media in Alabama who should be endeavoring to inform Alabamians about the subject of health care reform. Little or nothing has been forthcoming. (This is memorialized in this blog, which can be accessed by starting at the blog entry Health care, and also memorialized in my Twitter account's Tweets & replies.)
A starting point for you to be respond might be to get the other Alabama Republicans in Congress to adopt and vouch for your proposal.
Going all in with the Liar-in-Chief
The evidence of the past couple of days appears to be that Rep. Palmer is going all in with President Trump, the Liar-in-Chief to the American people about their health care. Watch the below video prepared by Shea Rives of Alabama Indivisible - District 6, and start to formulate your own conclusions about the situation. Rep Palmer will be offered an opportunity to reply and, if he replies, his reply will be posted beneath the video.
Addendum for Rep. Palmer
I have set forth above my critique of your proposed "invisible high risk pools" solution for health care reform.
I believe my critique raises very substantial questions about your proposal, and these questions are deserving of a response from you and also from someone else in the 6th Congressional district who understands your proposal and is capable of vouching for your response and/or giving further articulation of the basis for such person vouching for your response.
If such a response is not provided by you and such other person, you may be presenting a situation in which there is no one in the 6th Congressional district who understands your proposal and is able to vouch for your proposal to your constituents. If that is the case, and you nonetheless propose to return to Washington to advocate in the House of Representatives for your proposal, I think you need to tell your constituents that you are not able to put forth to them anyone in the 6th Congressional district who understands your proposal and can vouch for your proposal, and your constituents will need to rely solely on your analysis and judgment about your proposal with no vouching for it by anyone else. This may call your proposal into question for some of your constituents, and perhaps a sufficient number will express doubts that you will have second thoughts about your proposal. If you don't have second thoughts, and nonetheless proceed, you may be held accountable by your constituents in 2018.
As I believe you know, I have made extensive solicitations of input on this matter from the other Alabama Representatives and Senators in Congress, from persons in Alabama having special expertise and knowledge relevant to health care reform, and to persons in the media in Alabama who should be endeavoring to inform Alabamians about the subject of health care reform. Little or nothing has been forthcoming. (This is memorialized in this blog, which can be accessed by starting at the blog entry Health care, and also memorialized in my Twitter account's Tweets & replies.)
A starting point for you to be respond might be to get the other Alabama Republicans in Congress to adopt and vouch for your proposal.
Going all in with the Liar-in-Chief
The evidence of the past couple of days appears to be that Rep. Palmer is going all in with President Trump, the Liar-in-Chief to the American people about their health care. Watch the below video prepared by Shea Rives of Alabama Indivisible - District 6, and start to formulate your own conclusions about the situation. Rep Palmer will be offered an opportunity to reply and, if he replies, his reply will be posted beneath the video.
Is @USRepGaryPalmer going all in w/ Pres. Trump, the Liar-in-Chief about American peoples' health care? https://t.co/0vJjkqDNR2 #alpolitics
— Rob Shattuck (@RobShattuckAL06) April 23, 2017
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