Regardless of whether you are a staunch Affordable Care Act (ACA) supporter or an ardent proponent of repeal, we should all agree that the individual health insurance market in this country is in need of reform. Unfortunately, it’s often easier to delineate the problems of the individual market than to develop workable and politically palatable solutions.
Today, the pool of individual enrollees doesn’t pass actuarial muster in many regions and health insurers. Insurers are exiting and retrenching across many markets.1 Product offerings often don’t meet consumer needs and preferences, are priced out of consumers’ affordability range, or both.2 Premiums across many states have risen at jaw-dropping rates, as have out-of-pocket costs (particularly deductibles).3 The entire health insurance shopping, selection, and enrollment process is still fraught with complexity and confusion for far too many consumers.4
Clearly, the individual market could use a better combination of positive and negative incentives—carrots and sticks—to encourage more and more healthy Americans to jump into the insurance pool. While the individual mandate, whose days appear numbered, has not worked as well as hoped, finding better alternatives is proving challenging.
Health insurers likely need to see paths to reasonable margins if we expect them to play in and stay in the individual market. The individual market has traditionally posed financial challenges for insurers, both for-profit and non-profit. But the tide of red ink that health insurers have weathered in recent years is not sustainable and should be stemmed.
It’s important to keep the individual market in perspective. Individual enrollees represent about 6 percent of the population with health insurance coverage.5 Individual product sales represent about 10 percent of health insurance industry revenue.6 The size of the entire individual market—about $74 billion in 2015—is less than Warren Buffett’s net worth.7
Market statistics aside, each of the roughly 17.5 million individual health policies represents a lifeline for a fellow citizen, or family member, or friend, or ourselves. ACA-spurred growth in individual coverage is (along with Medicaid expansion) a primary driver of the rapid decline in the number of Americans without health insurance.8
Put simply, the nation needs a healthy and sustainable individual health insurance market. High-risk pools are one of the ideas percolating on Capitol Hill and appearing in various ACA replacement proposals to help address a number of individual market problems. They are often mentioned as a mechanism to improve market stability by providing coverage for the highest-cost/highest-risk individuals, mitigating insurer risk of catastrophic financial experience, and enhancing the affordability of premiums for enrollees outside the high-risk pool. They are often presented as part of the answer to one of the central questions of this moment: “What can we do if we repeal the individual mandate, but want to maintain consumer protections regarding pre-existing conditions while keeping insurance companies solvent?”
At this point in the ACA replacement debate, we have only seen initial proposals addressing high-risk pool concepts. Regardless, we do know that the high-risk pools prevalent in many states in pre-ACA days were not successful.9 So at a minimum, we’ll need program designs and financing models to be markedly improved over the prior generation of state high-risk pools.
I think we also realize that if high-risk pools are to meet elevated expectations as part of the post-ACA market model, it’s not going to be cheap. I’ve been spending time with our actuaries working on high-level estimates of potential funding requirements for high-risk pools. At this stage—without legislative proposal specificity—our estimates are admittedly rudimentary. That said, they can be directionally informative and provide some indication of the funding levels that might be required to translate the promise of high-risk pools into a marketplace reality.
We analyzed 2015 claims experience to discern the dimensions of the potential national cost of covering the expenses of individuals with claims costs above a set of high dollar thresholds. As depicted in the chart below, we estimate that the funding needed to cover the costs of individuals with total medical claims exceeding $100,000 in a given year may be $15.9 billion. A tighter threshold, such as a $200,000 minimum total claims level, would require less funding—in this example, $8.4 billion.
My take: Many elements of current ACA replacement proposals have the potential to improve the individual health insurance market. But there is much detailed design work to do. If the ACA experience has taught us anything, it is that health insurance markets are complicated organisms, with many moving parts and intricately interconnected tissue. If we are to cure—or at least ameliorate—what ails the individual health insurance market, the funding required will likely be significant, as demonstrated by our estimates of potential costs associated with high-risk pools, which are but one component of certain ACA replacement proposals.
1 Kaiser Family Foundation, “2017 Premium Changes and Insurer Participation in the Affordable Care Act’s Health Insurance Marketplaces,” November 1, 2016
2 Deloitte Center for Health Solutions, 2016 Survey of US Health Care Consumers
3 Deloitte Analysis of Kaiser/HRET Survey of Employer Sponsored Health Benefits and Peterson-Kaiser Health System Tracker, and Truven Health Analytics Market Scan
4 Georgetown Public Policy Institute, “Understanding the Consumer Enrollment Experience in Federally Facilitated Marketplaces,” May 2016
5 Deloitte analysis of SNL data
6 Deloitte analysis of SNL data
7 Deloitte analysis of SNL data
8 The Commonwealth Fund, “How Much of a Factor Is the Affordable Care Act in the Declining Uninsured Rate?” December 19, 2016
9 Courtney Burke and Lynn Blewett, Health Affairs, “All High-Risk Pools Are Not Equal: Examining The Minnesota Model,” March 19, 2010