[Co-authored with Thomas Miller of the American Enterprise Institute] 

Earlier this month, the Obama administration launched the latest version of high-risk pools, as authorized by the Patient Protection and Affordable Care Act (PPACA). The new pools are off to a stumbling start – behind schedule, facing resistance (or indifference) from many state governments, structurally flawed, and substantially underfunded. In other words, “Close enough for government work.”

But if you can’t solve a problem by first overstating it, and then underfunding it, you can at least change its name – to the “Pre-Existing Condition Insurance Plan,” increase the gaping chasm between its overreaching promises and likely results, and provide an emblematic preview of larger problems ahead in the rest of ObamaCare.

A better solution would begin with redefining the problem to avoid the temptations of trying to achieve multiple policy objectives with a single tool, which results in mission creep and failure to target scarce resources more effectively and sustainably. True high-risk pools should be limited to covering the most likely, highest-risk individuals, as identified before the fact. They don’t work as well as a mechanism for subsidizing the health care costs of low-income individuals more broadly, or for covering the uninsured in general.

The Medically Uninsurable Are Less Numerous Than Sometimes Claimed …

The plight of “medically uninsurable” Americans is serious and substantial, though frequently prone to exaggeration (and occasionally minimization) for political purposes. If defined as those who report being denied access to health insurance due to a serious medical condition, it’s closer to two to three million people. If the definition is expanded also to include those who face significant coverage exclusions, or much higher premiums, due to pre-existing medical conditions, this estimated population probably ranges closer to four to five million. The problem is essentially limited to potential customers in the individual insurance market, given both longstanding insurer practices and more recent HIPAA rules for portability and against health status discrimination in the group market. Guaranteed renewability for those already insured in the individual market further reduces the actual size of those at risk.

More spectacular numbers sometimes are tossed around far too indiscriminately, based on mixing and matching overinflated estimates of Americans with at least some sort of chronic medical condition (as high as 72 million working-age adults; or 45 percent of the non-elderly adult uninsured) with high-end estimates of those lacking insurance at some point in time, rather than persistently. But those loose extrapolations confuse, or fail to link, cause (health status) with effect (denial of coverage).       

… But PPACA’s High-Risk Pools Are Still Underfunded 

Even though the actual size of the medically uninsurable population is much smaller than the Obama administration once estimated last year, in trying to oversell its proposals for tighter regulation of private insurers, Congress and the White House still managed to substantially underfund their interim solution to the problem. The PPACA enacted last March included only $5 billion in federal taxpayer funds to finance a more generous version of state-based high-risk pools (HRPs). More likely annual costs to do the job adequately are closer to two or three times that amount.

The design for shallow pools represented an unconvincing ploy to distract voters from the unpleasant fact that all but a tiny portion of the new law’s provisions to increase coverage (through Medicaid expansion and subsidized policies in new health exchanges) will not go into effect until 2014. The higher private premiums, new taxes, increased regulatory burdens, and formulaic spending cuts it triggers will kick in well before then. 

Standard health care politics tends to tempt legislators to use regulatory cross-subsidies (community rating, guaranteed issue, standardized benefits, etc.) to hide the cost of covering the most expensive risks within “private” coverage instead of using public funds and government budgets to do so more directly and transparently. But in this case, the Obama White House and congressional leaders discovered not only that the full budgetary price tag for their ambitious near-universal coverage goals through direct subsidies remained out of reach. Even delivering a menu of mandated coverage, required benefits, and risk-insensitive premiums through a new regulatory infrastructure would take nearly another four years after passage of an initial legislative framework. 

The Provisions For High-Risk Pools In The Senate Bill, Which Democratic Leaders Had To Adopt, Are Particularly Troublesome

So the short-term gambit of inserting a new version of underfunded, state-level HRPs into the final law provided an opportunity both to overpromise deliverable benefits and fast forward assumptions of the long-term architecture of Washington-directed health insurance on a more limited basis. However, the final legislation made the goal of providing access to coverage for those with high-cost/high-risk medical conditions even harder because, for procedural and political reasons, Democratic congressional leaders had to adopt the Senate’s sketchy version of HRPs included within a bill originally passed in December 2009. The new HRPs will operate very differently from the high-risk pools already established in 35 states that are designed to match even more limited resources. The new state pools under PPACA rules cannot allow any exclusions or waiting periods for coverage of pre-existing conditions, age-based premium variation must be compressed, cost-sharing is restricted, and (most importantly) enrollees can only be charged standard rates. Even the House version of HRPs passed in November 2009 (HR 3952) allowed premiums to be as high as 125 percent of the prevailing standard rate in a state’s individual market (still the low end of what most existing state HRPs charge). 

Both the earlier Senate and House versions of the health reform law apparently tried to limit HRP eligibility to those already uninsured for at least six months. The House bill also established somewhat better-defined “medically eligible” categories for such HRP coverage (previously denied coverage, offered coverage with condition limits, or offered coverage at rates above those for HRP coverage – within the previous six months) than simply the Senate’s looser requirement in section 1101(d) of what became the final law’s language that an enrollee also must have a “pre-existing condition” as determined by the guidance of the HHS Secretary.

In any case, the final version of the PPACA ensures that operating costs for the new HRPs will be much higher per enrollee and the authorized funding for them will be exhausted ahead of schedule – perhaps as soon as next year. Even the most conservative estimates of the mismatch between likely HRP costs and PPACA funding for them have suggested that the latter would come up short well before 2014. The Office of the Actuary at the Centers for Medicare & Medicaid Services estimated that the initial $5 billion authorized for this program would be exhausted by 2011 and 2012. If the likely policy response was substantial premium increases to sustain the program, further participation beyond an initial 375,000 enrollees would be quite limited.  

The Congressional Budget Office relied on a more simplistic estimate. Although CBO suggested that the public funding available for HRP subsidies would not be sufficient to cover the costs of all applicants through 2013, it then assumed that HHS would use the authority given to it under the PPACA to limit enrollment in the program and spend no more than the capped amount of $5 billion, on an average of about 200,000 enrollees a year through 2013. CBO acknowledged that the actual number of people who may be eligible for the HRP program is much greater – in the millions – and if more people are allowed to sign up initially, the funds will be exhausted prior to 2013.      

One might ask whether this flawed set of design assumptions represented a half-hearted unwillingness to fully fund HRPs to handle the much larger pre-existing condition problem imagined by Obama administration policymakers. Such a robust solution would diminish the rationale for controlling even more of the private health insurance market through sweeping regulation, tight premium controls, and complex cross-subsidies. Or did it reflect the tacit acknowledgement that the actual pre-ex condition problem had been greatly exaggerated?  Most likely, it represented a combination of both, along with the budgetary imperative to suppress demand for such HRP coverage and stretch out the limited taxpayer funding at least until broader coverage expansions under Medicaid and the new exchanges kicked in after 2013. 

Subjecting Consumers To A Bait-And-Switch 

The new HRPs were designed to encourage the worst sort of boom-bust coverage cycle imaginable. On the one hand, the Obama administration would engage in a hurried political clearance sale this year, in which as much HRP enrollment as possible would be encouraged in order to demonstrate visible results before the November off-year elections. (Early evidence suggests that even this will be an uphill and slow-developing climb). But after boosting initial coverage expectations through the bait of seemingly generous promises, HRP administrators would have to pivot and switch to different set of appetite suppressants included in the PPACA language. The new law not only limited HRP enrollment to those already uninsured for at least six months; it also authorized the HHS secretary to close enrollment to comply with funding limitations and make other unspecified “adjustments” as needed to eliminate HRP program deficits in any fiscal year. Enrollees already “insured” in older versions of state-based high-risk pools must remain in their higher priced, less comprehensive coverage. Other individuals suffering from high-cost health conditions (but not yet uninsured for a full six months) must simply wait their turn. 

This two-tiered structure of coverage subsidies foreshadows the forthcoming disparate treatment of lower-income individuals expected to gain health insurance exchange subsidies versus otherwise-similar workers stuck in employer-sponsored group insurance plans, beginning in 2014. The political sustainability of such parallel health subsidy worlds is suspect, to put it mildly.

Proponents of PPACA have spent the better part of two years harping on the perceived deficiencies of private insurance arrangements, including after-the-fact benefit limits, waiting periods for coverage, and unaffordable premium increases, but those are exactly the kind of adjustments now prescribed to close the yawning gap between inadequate public funds, administrative feasibility, and exaggerated political gestures in the new HRPs. The PPACA first authorizes the HHS Secretary to determine which pre-existing conditions would make a potential enrollee eligible for federal HRP coverage, and then figure out how to spend less money actually to cover fewer of them, as budget funds run short.

The larger lesson is not to abandon the important concept of special subsidized coverage for those Americans facing the greatest health risks with the fewest personal resources, but rather to target HRP assistance more transparently and sustainably. Trying to spread such public subsidies as widely and thinly as politically possible leads to mission creep and broken promises.

A Better Way Forward

We have written elsewhere about a better vision of high-risk pools needed to protect the highest-risk uninsured that will not spring budgetary leaks. They certainly must be funded more generously, but other essential principles also need to be established first. For example, it’s appropriate for individuals anticipating more expensive health care needs to pay somewhat more than others to handle them (i.e., higher premiums and more cost sharing), but with some realistic and equitable ceilings on just how much is too much and guidelines for when public subsidies should step in. Adequately funded high-risk pools need to be augmented with broader remedies, such as:

  • supplemental income-based subsidies
  • stronger protection for those maintaining continuous insurance coverage against the risk of new insurance underwriting based on future changes in health status, and
  • more effective incentives and tools for both patients and providers to make higher-value health care decisions   

Unlike the approach used in a number of current state-run high-risk pools, the funds to subsidize coverage for high-risk individuals should come from general revenue instead of from higher premiums charged to other private insurance enrollees (such as through narrowly-based premium taxes). Making the full costs of adequate HRP financing more transparent will encounter criticism that this approach is simply unaffordable. However, the actual future costs of treating individuals with high-risk conditions will not disappear if we instead try to finance them less directly and effectively through higher insurance premiums for everyone else. They simply will appear in other forms (including reduced coverage and less adequate treatment).   

With state budgets overdrawn and overstretched for several years to come, the reality is that such initial funding will have to come from Washington in the form of a series of generous, but capped, appropriations. Capping the amounts would help head off the dangers of open-ended entitlement misincentives, and a switch to state matching funds should be reconsidered in later years. One overlooked way to find most of the funds needed — in places other than the emptying pockets of federal taxpayers – would be to redirect some of the hundreds of billions of dollars in new insurance subsidies scheduled for later years in other portions of the PPACA (for higher-income Medicaid expansions and health exchange coverage) and help those in the greatest need first. 

A more targeted approach to assisting those with high-risk/high-cost medical conditions offers several other advantages beyond fiscal ones. As suggested by health researchers John Cogan, Glenn Hubbard, and Dan Kessler, publicly subsidizing the most costly and risky “tail” of the health spending distribution can strengthen and expand the rest of the private insurance market. Properly structured HRPs also have the potential to concentrate resources and attention on the most important, highest-cost cases. They could identify and gather together exactly those individuals who need additional disease management, navigational assistance, and specialized care from centers of excellence. 

In addition, initial reliance on private insurance market screening and designation of “high-risk” applicants would retain risk-reduction incentives for both insurers and patients, while tempering the bureaucratic rigidities of complex risk-adjustment calculation. The less-likely danger of risk dumping by private insurers still could be discouraged at the state level by contracting out final HRP eligibility determinations to neutral third-parties with experience in medical insurance underwriting, and applying penalty fees to private insurers that repeatedly abuse objective, independent criteria.

The PPACA version of federally-guided HRPs represents a half-hearted and misguided attempt to help those who really need the most assistance. The new pools are off to a rocky start and remain destined to disappoint because, like many other provisions of the overall law, they promise far more than they can deliver. Critics of the HRPs should seize the opportunity to change the game, by replacing their flawed structure with one that actually could work, based on less federal regulation, more consumer choice, and better-targeted financing.  

The notion that the only way to solve the problem of covering Americans with pre-existing conditions is through a massive transformation of America’s health-care system — one that will increase costs, raise taxes, displace millions of the happily insured, create a new entitlement, and undermine our private insurance sector — is simply wrong.

[Cross-posted at HealthAffairs]