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Key Findings

1. The total number of people contributing money to a health insurance pool should be much larger than the number of people in the pool who actually need health care at any given time.
    
2. Unless the health coverage risk pool is quite large, a few high-cost users of health care can financially devastate a given group of insured people.
    
3. Research shows that a very small percentage of patients account for a very high percentage of total health care costs.
    
4. It is good public policy to financially protect high-users of health care and at the same time protect other members of their insurance pool.
    
5. High-risk pools work best with a stable and predictable funding source, one that is protected from politics.
    
6. If permitted by federal law and successfully operated by states, high-risk pools can be an effective alternative to forcing everyone to pay higher health insurance premiums because of a few people with costly pre-existing conditions.

Introduction

Health insurance should function like any other type of insurance. The total number of people contributing money to the insurance pool should be much larger than the number of people in the pool who actually need health care at any given time. In this way, the insurance company would have enough money in its reserve fund to cover the expenses of those enrollees who use medical services.

The health insurance market is different than home-owner or automobile insurance markets, however. There are many more insurance risk pools in the health care system. For example, the vast majority of large employers self-insure and have their own risk pool. Medicaid has a different risk pool for every state. The individual market is divided by multiple insurance carriers in each individual state. Unlike drivers and homeowners, there are many different ways people receive health coverage.

Unless the health coverage risk pool is quite large, a few high-cost users of health care can financially devastate a given group of insured people and cause financial destruction of that particular pool. For that reason, high-risk pools can be used to financially cover those individuals who consume an extremely large amount of health care.

In the past, individual states set up high-risk pools with varying degrees of success. Each state had its own enrollment criteria. Washington state’s program began in 1988 and was one of the better functioning programs. In 2010, the Affordable Care Act (ACA) essentially eliminated them because of the pre-existing insurance mandate and the elimination of life time limits on insurance payments.

Opponents of high-risk pools claim the pools are not effective insurance, do not hold medical costs down, and should not be reinstituted.

However, high-risk pools can offer a practical and compassionate alternative to the pre-existing condition mandate in the ACA. This Policy Note reviews the history of high-risk pools, examines what the successful ones had in common, and makes recommendations for the viability of creating future high-risk pools.