The promise and perils of ‘invisible’ risk pools

Photo: Mark Harkin via Flickr

Among the many items on Congress’s January to-do list is legislation to stabilize the Affordable Care Act markets, such as the bill Sens. Susan Collins (R-ME) and Bill Nelson (D-FL) introduced last fall.

It would provide $4.5 billion in federal reinsurance payments over two years, 2018 and 2019. The idea is to compensate insurers for taking on costly patients to prevent shifting all that cost to higher premiums for everyone in the exchanges. There are several ways for states to construct reinsurance. The idea is a bipartisan one, with both blue and red states looking at various mechanisms. Alaska, for example, already has begun one under an ACA waiver.

One of the models, from Collins’ own state of Maine, is known as an “invisible risk pool” and has been hailed by some as a huge success in ratcheting down premiums. According to a report in Maine’s Bangor Daily News when the bill was introduced, Collins touted Maine’s track record in 2012-13, noting that her state’s program covered about 3,600 insured people and brought down the individual rates for everyone in the pre-ACA market by 20 percent. (Others have made higher estimates.)

Part of the attraction of a so-called invisible pool is that people don’t know they are in it and don’t face higher costs than other people. They are in the regular insurance pool of the individual market, but the insurer gets a payment from the government if the person has a designated illness or is found to be at particularly high risk. The payment is made prospectively, because of the identified risk, not retrospectively after the person runs up a big bill.

It’s worth looking back to this Health Affairs post of a few months ago (when the House was considering something similar as part of repeal-and-replace legislation). The piece, written by Mark Hall, who directs the health law and policy program at Wake Forest Law School, and Nick Bagley, a health expert at the University of Michigan law school, looks at whether the Maine pool was as successful as its champion said. It also explores whether it could transfer well to the ACA, particularly once the individual mandate penalty repeal takes effect in 2019. (The post was written about a similar but not identical House proposal – it is not analyzing the Collins-Nelson idea, but it is still worth looking at the section on Maine’s record.)

Maine adopted its prospective reinsurance program in 2011. The state’s individual market at the time was struggling – it had introduced guaranteed issue (coverage for people with pre-existing conditions) and community rating. However, it did not have the subsidies that the ACA has, nor any mandate for people to get covered. It was funded with $21 million via a $4 per person per month levy on all health insurance in the state, including employer-sponsored plans.

But was that really why premiums fell, Hall and Bagley ask. Maybe not, they explain:

Two other changes happened at the same time. First, covered benefits became much less generous. For instance, the new, reinsured policies required 30 percent coinsurance and increased out-of-pocket maximums two-fold or more; also, maternity coverage was dropped entirely. Those changes contributed substantially to the price reduction. Second, Maine expanded its age-rating bands from 1.5-to-1 to 3-to-1, but only for the new policies and not for legacy subscribers who chose to keep their old policies. Predictably, older, sicker subscribers kept what they had because they continued to benefit from tighter community rating, while younger ones who benefited from broader age bands migrated to the new reinsurance policies.

In other words, premiums went down but benefits shrunk and out-of-pocket spending grew. The new plans were directed at younger and healthier people, and they cost less.

This isn’t to say the ACA doesn’t need an array of risk-adjustment and risk sharing mechanisms. Three were in the original law (though not all were permanent) and many experts believe they could use some adjustment. Nor do I mean to say that “invisible risk pools” are a bad idea – I have written before about how professional actuaries see them as having some advantages. But it is another reminder that, to paraphrase the president, risk pools are complicated. The Health Affairs post goes into more detail about prospective and retrospective adjustments, the pre-and post -ACA market, and what policymakers (and by extension journalists) need to keep in mind.

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