04/09/2017

Understanding High-Risk Pools As Part Of Obamacare Replacement

Edmund Haislmaier, The Daily Signal

As House Republicans try to negotiate an agreement on the design of Obamacare repeal and replace legislation, specific elements are often referenced using shorthand terminology.

While understandable, this can result in confusion if the same (or similar) term is applied to different concepts.

An example is the term “high-risk pool,” which has recently been used as a shorthand reference for what are really three different concepts, depending on who is using the term.

Traditionally, the term “high-risk pool” refers to a separate arrangement under which insurance companies operating in a given market collectively subsidize (that is, pool) the extra costs for providing coverage to individuals who, because they are poor risks, have been refused coverage under standard policies.

In this construct, those individuals are given coverage that is separate and different from that obtained by other people in the general market.

However, the term “high-risk pool” has also been sometimes used as shorthand for two other related, but different, concepts.

One concept can be more accurately described as a “risk transfer pool.” Under this design, for a given market, each insurer’s claims experience is compared to the collective (that is, pooled) experience of the whole market.

Then, based upon an agreed formula, a portion of premium revenues are transferred from the insurers whose experience was significantly better than the norm to the insurers whose experience was significantly worse than the norm.

The idea is to adjust for potential selection effects so that an insurer is compensated if it attracts a larger than normal share of costly enrollees.

Thus, as with a traditional high-risk pool, under a risk transfer pool the cost of expensive enrollees is spread across all insurers in the market. However, unlike in a traditional high-risk pool arrangement, costly individuals aren’t given separate coverage.

In sum, the difference is that the latter concept involves moving money, but without also moving people into different coverage.

Finally, the third concept basically consists of relabeling publicly funded “reinsurance” and calling it “high-risk pool funding.”

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