House Speaker Paul Ryan’s recent proposal to shift sick people to their own health insurance could place a sizable financial burden on the government, but it also gets at a question that Obamacare supporters are contemplating: How to keep the cost of covering sick people from significantly increasing the cost of insurance for the healthy.
Ryan’s plan, which he floated to a student audience at Georgetown University last week, would separate people with preexisting conditions from the regularly insured market. His remarks offer a glimpse into one way Republicans would “repeal and replace Obamacare” under a Republican administration.
“Sick people as a group can’t afford to cover their own costs, so government funding has to make up the difference,” said Larry Levitt, senior vice president at the Kaiser Family Foundation. “High risk pools offer the potential to cover people who are sick without having to regulate the insurance market. …But that only works if the high risk pools have adequate funding.”
“Let’s fund risk pools at the state level to subsidize their coverage, so that [people with preexisting conditions] can get affordable coverage,” Ryan said.
A “risk pool” is the population of people enrolled in a particular insurance market. The sicker a person is, the more that person costs an insurer. In the past, insurers were allowed to refuse coverage to people with preexisting conditions and, thus, high risk. High risk pools existed before the Affordable Care Act, but were often prohibitively expensive for enrollees and offered skimpy coverage.
Obamacare changed this by prohibiting insurers from denying coverage based on preexisting conditions and requiring that they charge all enrollees the same amount for coverage. Now, insurers must balance out high-risk enrollees with those that are low risk. Premiums, if calculated correctly, are based on the cost of insuring an average risk person. In theory, this makes health insurance affordable for everyone.
Ryan hit on an important criticism of the ACA, which is that many Americans still find health insurance to be unaffordable even with the new pricing and nondiscrimination requirements. Insurers say the previously uninsured are sicker than they had originally estimated, which is driving up premiums for everyone.
“I think Ryan has identified a problem,” said Tim Jost, a law professor and healthcare expert at Washington and Lee University. The guaranteed nondiscrimination requirement “raises the cost of coverage for the healthy.“
Jost said it makes more sense to address this problem through a reinsurance program, which provides extra payments to insurers that enroll high risk people, rather than “shunting off high cost individuals to a separate risk pool.” Reinsurance has been part of the ACA since its inception, but it will be phased out at the end of the year.
One way to keep the high risk insurance affordable would be to cap the premiums. But even that could get expensive, and there are other questions. How much access to care would high risk enrollees have? How many insurers would participate in a high risk market? For participation to be worthwhile, premiums would have to be very high.
Many analysts think that 200 percent of the average premium would not be enough to cover the costs of insuring the sick. In that case, the insurance would likely have high deductibles or copays or not offer key services. (That last part is contingent on the repeal of the ACA’s requirement that insurers offer certain benefits.)
If the government were to offer financial incentives to insurers to participate in high risk pools, that further adds to the price tag. Under another scenario, the government could offer high subsidies to enrollees to get them to enroll in insurance with very high premiums. That would be problematic because it creates an unbalanced market for insurers.
“It’s generally not worth figuring out how to serve a specific population unless you can get enough enrollees to make it worth your while financially. That’s why high risk pools would need to be accompanied by very large subsidies to be successful,” said Loren Adler, an associate director for health policy at the Brookings Institution.
Government could end up being on the hook for both financial protection for insurers as well as subsidies for enrollees. A central question is whether this would end up costing the government more than the ACA. Budget analysts say it would.
“In general, it would be more expensive for the government and less expensive for healthier individuals because the government would be bearing the cost of excess health spending for sicker individuals,” said Edward Lorenzen, a senior advisor at the nonpartisan Committee for a Responsible Federal Budget.
But conservative economists argue that the entire health system could end up costing the government less than the ACA if cheaper markets for healthy people entice more of them to buy insurance. An increased customer base would bring down the average cost of premiums, the theory goes, meaning the government would pay less in subsidies for the healthy risk pool while paying more to high risk pools. Under the ACA, young healthy people have resisted joining the exchanges, mostly because of affordability issues, which has kept premiums higher than they would be otherwise.
“It is likely that properly funded high risk pools would cost a fraction of what the entirety of the ACA structure does,” said Lanhee Chen, a conservative health policy expert. “That’s because it targets financial relief and support at those who need it rather than the broad, and somewhat ineffective, approach that the ACA has taken.”
All of these estimates assume that a Republican plan to replace Obamacare would keep the coverage at current levels. The fewer sick people that are covered, the less insurance costs for everyone. But then the uninsured problem grows.
The Ryan proposal likely wouldn’t cover as many people as Obamacare, Adler posited. “Not unless you went a route very far away from how I imagine Ryan is envisioning it. Presumably, though, if you maintained subsidies for the rest of the individual market and significantly funded high risk pools for folks with preexisting conditions, you could at least get close.”