Rational Risk Pools

Today’s subject title is an oxymoron.

But before getting into that, note two things: (1) the Obama Administration’s approach to health reform envisions the creation of risk pools for otherwise uninsurable people — to bridge the gap from where we are now to 2014, when health plans will have to accept everyone, regardless of health condition; and (2) almost every feature of these risk pools defies rational explanation.

For starters, note that the Obama risk pools plan to charge people the same premiums that healthy people pay for insurance. This is in contrast to existing state risk pools which charge 125% or 200% of market rates. Also in contrast to existing risk pools, the new Obama risk pools will have no waiting period. You get full coverage from day one. As Grace-Marie Turner pointed out in The Wall Street Journal the other day, the new risk pools will be cheaper and more generous than what the states currently have.

So is that good news to the 199,000 people who are currently enrolled in a state risk pool? Actually, no. The new law is explicitly designed to keep that from happening. Specifically, you cannot enroll in an Obama risk pool unless you’ve been uninsured for at least six months.

So if you have a health problem and you have been “doing the right thing” and trying to stay in the insurance system — say, by making COBRA payments or paying premiums to a conventional risk pool — you are flat out of luck. But if you have been so antisocial as to have been willfully uninsured for a long period of time and suddenly discover you have a serious health problem, then the Obama pools are made-to-order for you.

There are other irrationalities. Although the newly enacted health reform legislation has allocated $5 billion for this project, the Medicare Chief Actuary says this is way too little money to meet the need. The Administration is asking the states to take their share of the money and operate the pools. Eighteen states are refusing the grant. They have decided the money is probably insufficient and that if they refuse the grant and do nothing the federal government itself will set up and fund the pools and inadequate financing will be a federal problem rather than the state’s problem.

I would argue that all of this is no more unfair or unjust or thoughtless or erratic than the rest of ObamaCare. But it raises this interesting question: Is there a role for risk pools in a rational health care system? If so, how would they function?

Here’s something you can take to the bank. Politicians are incapable of setting the right price for anything — whether it’s the price of wheat or corn or any other good or service. As Phil Porter and I have shown, there is no known political process (not democratic voting or any other mechanism) that even in theory can produce the right result.

Here’s something else you can take to the bank. Price setting errors that government makes in the market for risk will invariably be worse than in just about any other market.

With that unpleasant thought in mind, let’s think about what a risk pool would look like if politicians ever did manage to get it right. There are three characteristics.

First, risk pool insurance is needed in a job-based insurance system, where people with health conditions can lose coverage because of a job change that is no fault of their own. The social principle is one that has been enshrined in HIPAA: People who have been paying premiums into the system should not be forced out of it because of a change in employment.

What kind of insurance should they be able to get and what premium should they pay? Answer: Something similar to what they had before, but I’m going to skip over those problems.

Second, when people with expensive-to-treat health conditions move from one health plan to the other, there needs to be a payment from the exited plan to the entered plan. We do not want a system in which one plan collects all the premiums and leaves another plan to pay all the bills. I have hinted before about how this might work on a larger scale.

Third, risk pools could also be open to people who have been willfully uninsured. But in this case, there need to be waiting periods and (at a minimum) penalties. The penalty should be higher, (a) the longer the individual has been uninsured, (b) the greater the expected cost of care and (c) the greater the individual’s income and wealth.

Since all risk pools involve subsidies, the overriding question is: Who do we want to subsidize and why? Clearly, we do not want a system that encourages people to be free-riders at other people’s expense. This is why the main function of the pool is to enable people who have been continuously insured to continue in that condition.

It may also be socially desirable to subsidize insurance for people who have been willfully uninsured, as an alternative, say, to providing uncompensated care. (One consideration: People may pay more of their own money in the form of voluntary premium payments than it is possible to collect from them for unpaid medical bills.) But we do not want these subsidies to be overly attractive — lest we encourage free-ridership.

Comments (17)

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  1. Ken says:

    Good post. Makes sense.

  2. Joe S. says:

    Ken, it makes too much good sense to be adopted by politicians.

  3. Larry C. says:

    Gaming the system is what is causing havoc in Massachusetts.

  4. George says:

    It is obvious to me that Obamacare in its totality is designed to be such an unmanageable kludge that eventually the majority of people will be begging for a single-payer system just to escape the unfathomable complexity of Obamacare and all of its ramifications. All of your sensible analyzes and suggestions are being shouted into the hurricane, and only the choir listens.

  5. Beverly Gossage says:

    State risk pools are basically saying, “Step from group to group plans or buy a private policy while you are healthy enough to get one, OR you will be covered but must pay a higher price for waiting.” Most people that I work with daily understand that it will cost them more for this plan. To have the risk pool cost the same makes no sense, particularly considering that the mandate doesn’t kick in until 2014. Just wait until you are ill to buy insurance. No penalty for waiting for 4 years.

  6. Devon Herrick says:

    The amount of funds allocated for the risk pools is inadequate. The one-time allocation is five billion spread over 50 states intended to last for a period of nearly four years.

  7. Ernest Wilder says:

    Keep up this great work and you will be right behind FOX NEWS on the Hit List.

  8. Bart Ingles says:

    I still say that the smallest, most effective single change in this area would be to offer a partial premium subsidy for risk pool coverage comparable to the employer tax break. Preferably the subsidy would be more rational than the employer tax exclusion, e.g. not tied to the insured’s tax bracket.

    If risk pool premiums were 200% of the going market rate, then e.g. a fixed 25% tax credit for risk pool coverage would reduce the effective cost to 150% of market. This percentage is not so high as to encourage excessive consumption, but should be high enough to encourage many consumers to spend their own dollars for coverage.

    On John’s second point about transferring payment from exited to entered plans, what might be the conditions where this could be omitted? Covered employees can already switch plans when changing jobs or during open enrollment periods without payments between insurers; I’d always assumed that cost discrepancies were expected to cancel each other out. But obviously this leads to a sort of conformity between plans in order to avoid being excessively attractive to high-cost enrollees. But is this conformity necessarily a bad thing?

  9. patricia Smith says:

    The uninsured, whom you call “antisocial”, are NOT welfare recipients, or non-workers. They earn a living and have taxes taken from them to fund public purposes, including free health care for other people. If you have legitimate concern for an equitable solution to health care, it seems to me it would begin with formation of pools of those in need of coverage. The larger the pool, the more chance of lower premium/better care.
    Your comments begin by ostracizing working people, then immediately isolating them for punishment by higher cost and longer waits. I’ve paid for insurance my whole life, while buying used furniture and driving old cars. I did suffer four years uninsured before I reached 65 and medicare.
    The starting point should be: one identical price per any service. Imagine Big Macs ranging from free to $2 to $7 to $14. People would tear the place apart, and well they should. Yet we accept Blue Cross “negotiated” rates far below what one uninsured is charged. The corruption of the collective judgement and the absence of fundamental scruples is mindboggling. I am so disheartened as to shun the debate; who can bring back national character and pride?

  10. Charles Johnsen says:

    Patricia–Equality has nothing to do with it. Larger pools have nothing to do with it. It is all and only about political power replacing Patient Power, to quote a book title by somebody or other. We are all victims of the hoax that insurance should pay for hangnail removal instead of the heart operation that will bankrupt me. I need no pools or risk spreading for a yearly exam or a flu shot or a broken arm or even diabetes. I can pay for that stuff and I shop pretty good if I have time or if I can shop providers before I need care in anticipation of requiring it. I only need to spread risk for stuff like cancer. The gov does not want to mess with the bad stuff because it is too open ended, what with experimental care and all. All the gov wants is the routine stuff that goes on every day so even healthy people get a “benefit” from their silly ideology. Keeps them voting the right way, don’t you know. The same thing goes for employer benefits and Medicare.
    The other thing to remember is that the government does not like change, never mind the slogans. Stability is the first principle of socialism. Poor stay poor, rich stay…well, not poor…and innovation is risky. What if some doc invents a new, cheaper way to fix a skin rash? It throws their carefully balanced (political) prices up for grabs.
    I sympathize with you for having to prepay foolish prices for health care services for your whole life. Me too. After all, we both know the gov and the employer do not pay, as you say, we pay in taxes, inflation, lower wages, and higher prices for goods and services. But the answer is not to continue the scam with different payment schemes but to reform our national mindset about what “insurance” is and what “health care” is. Third party payments are down right evil. This is all about character, not accounting. As you say.

  11. kris says:

    Someone still has to pay for the very expensive treatments of certain pre-existing conditions! And that will be the policy holders. There is no other way, unless they use our taxes, all our money, to supplement these huge outlays. That has been the problem in the private sector, and will be the problem in the public sector. There is no getting away from it! And/or, there will be caps, as in Britain, where $47,000/year outlay is the value of a human life, their medical treatment.

  12. C. Lewis says:

    I agree with Charles. Imagine having insurance to pay for the Big Mac. Then the “prices” will vary from $2 to $14. However, since no one will ever see the price besides the insurer and the franchise, the individual will keep ordering the most expensive thing on the menu. Insurance for routine care is a terrible result of our antiquated job-based health system. For example: I’m probably in the minority of women on this one, but I don’t want insurance to cover a routine pregnancy. I want insurance to cover all the freakishly weird things that can go wrong in a pregnancy. Many of the women I talk to define good insurance by the existence of “great maternity benefits.” What I consider to be good health insurance–ie, real protection against low probability but high cost events–doesn’t exist. HSAs come close, but they still have many limitations, including the tie to HDHPs. Fortunately, dreaming about what might be is still legal.

  13. Virginia says:

    It seems to me that the only incentives that make any sense are paying for most of your health care out of pocket. And I think it will come down to that.

    I don’t think there’s any way to subsidize insurance, make it fair for healthy people, and avoid creating incentives for abuse. You’re going to have free loaders no matter what you do, and the freeloaders will create huge problems for the system’s solvency.

    If I had to pull out my crystal ball, I would guess that we’ll end up with some sort of hybrid: a single payer for those who don’t have money/have major health issues, and a private market for the rest of us that don’t want to deal with the state and don’t need care for a chronic illness. We might have really really high deductible plans, but most of our stuff will be private pay. At least that’s my hope.

    That’s a pessimistic assessment. Perhaps tomorrow I’ll feel more optimistic.

  14. Madeleine says:

    my husb and has union helath insurance,he had it for years and then he retired and his insurance only paid 20% instead of 80% because the Medicare automatically kicked in,m we didnt’ ask for it, we pay for that too, but since Ob ama is cutting off mos tpayments for medicare where does that leave us,? After 30 years of paying we will be with out health care, I have never , ever been sick, never took meds, but my husband needs care and no because he is over 60 he won’t get it and now he has a pre-existing condition we can’t get decent insurance, these companies won’t last taking all these people with pre-existing conditions. Our insurance company didnt’ give us the boot when my husbnd got sicj so why do we need his crappy insurance? He ruined lot of peoples lives and well being, if this was just to make sure that people were getting health care I would say OK, but its not, he is picking and choosing who is able to get it and when. That is called genocide. He is not taking cchildren with disabilities either, I ould guess because they might live oto long . Thsi is bad news for anyone who isn’t healthy and young , whcih is most people today.

  15. Danielle says:

    To call people antisocial who cannot afford insurance is disgusting! To assume that anyone goes without insurance purposfully makes me want to scream! What about people who have lost their, jobs their Cobra has run out and they have no choice but to turn to these high risk pools? Only 3-5% of people who qualify to recieve this insurance have it because it is so expensive. I have an uninsurable condition and I am in my early 30′s. If I want this insurance I will have to decide between defaulting on loans, food, clothing for my kids, etc. This insurance costs more than rent! I am not a dead beat there simply aren’t “great” jobs out there for every person. So you can act high and mighty about your current luck but let’s remember this economy is in the toilet and so many of us are struggling. Let’s also not forget we are all mortals and eventually a pricey medical procedure is in all of our futures. I am not saying this reform is the right answer but it gives hope to people in my situation who are suffering with no help in sight. Instead of belittling your fellow man why don’t you state your solutions. When you act hateful no one cares what you have to say. We are all brothers and sisters and we can find a better way.

  16. Gwen says:

    I agree with Charles Johnson. Most people could afford regular doctor visits, mammograms, even a broken arm. If you rack up a $10,000 hospital bill even, you can set up a payment program with the hospital and pay it off the same as you would a car. Heck, most of us can get a credit card with a $10,000 credit line and pay it off that way. I am one of those people with a pre-existing condition who can’t afford $500.00 a month for insurance that I’ll probably never use because the deductible is too high to ever be of use to me. All I really want is catastrophic insurance for cancer, diabetes, stroke, major accidents, etc. The government has prohibited insurance companies from offering catastrophic. They have all these mandates for preventative care in the insurance, probably because various medical special interest groups have lobbied for them. Alternative medicine groups like acupuncture are even trying to get themselves mandated. Do you want to pay for someones male enhancement drugs, for someones sex change, to have someone’s tattoo removed? The government is getting involved in the biggest racket ever to hit American citizens.

  17. Gwen says:

    If everyone in this country who doesn’t need to be sitting in a doctor’s office looking for cures for every little problem that besets them, would get out and reserve medical service for those who really need to be there, the prices would automatically go down due to less demand. Less demand and competition between medical providers is the way to control costs. I know hypochondriacs who run to the doctor two or three times a week every week. The doctors never cure them, they just keep ‘em comin’. When someone in my family gets a scrape or cold or earache, we treat with home remedies or over the counter remedies and wait a few days to see if it resolves itself. Then if the condition seems beyond the control of us or nature, we do relent and seek medical care. I think the barrage of pharmaceutical advertisements on TV may be one reason people think they have to have a doctor and a pill for everything.