Rational Risk Pools

Written by John Goodman


Today's subject title is an oxymoron.

But before getting into that, note two things: (1) the Obama Administration's approach to health reform envisions the creation of risk pools for otherwise uninsurable people - to bridge the gap from where we are now to 2014, when health plans will have to accept everyone, regardless of health condition; and (2) almost every feature of these risk pools defies rational explanation.

For starters, note that the Obama risk pools plan to charge people the same premiums that healthy people pay for insurance. This is in contrast to existing state risk pools which charge 125% or 200% of market rates. Also in contrast to existing risk pools, the new Obama risk pools will have no waiting period. You get full coverage from day one. As Grace-Marie Turner pointed out in The Wall Street Journal the other day, the new risk pools will be cheaper and more generous than what the states currently have.

So is that good news to the 199,000 people who are currently enrolled in a state risk pool? Actually, no. The new law is explicitly designed to keep that from happening. Specifically, you cannot enroll in an Obama risk pool unless you've been uninsured for at least six months.

So if you have a health problem and you have been "doing the right thing" and trying to stay in the insurance system - say, by making COBRA payments or paying premiums to a conventional risk pool - you are flat out of luck. But if you have been so antisocial as to have been willfully uninsured for a long period of time and suddenly discover you have a serious health problem, then the Obama pools are made-to-order for you.

There are other irrationalities. Although the newly enacted health reform legislation has allocated $5 billion for this project, the Medicare Chief Actuary says this is way too little money to meet the need. The Administration is asking the states to take their share of the money and operate the pools. Eighteen states are refusing the grant. They have decided the money is probably insufficient and that if they refuse the grant and do nothing the federal government itself will set up and fund the pools and inadequate financing will be a federal problem rather than the state's problem.

I would argue that all of this is no more unfair or unjust or thoughtless or erratic than the rest of ObamaCare. But it raises this interesting question: Is there a role for risk pools in a rational health care system? If so, how would they function?

Here's something you can take to the bank. Politicians are incapable of setting the right price for anything - whether it's the price of wheat or corn or any other good or service. As Phil Porter and I have shown, there is no known political process (not democratic voting or any other mechanism) that even in theory can produce the right result.

Here's something else you can take to the bank. Price setting errors that government makes in the market for risk will invariably be worse than in just about any other market.

With that unpleasant thought in mind, let's think about what a risk pool would look like if politicians ever did manage to get it right. There are three characteristics.

First, risk pool insurance is needed in a job-based insurance system, where people with health conditions can lose coverage because of a job change that is no fault of their own. The social principle is one that has been enshrined in HIPAA: People who have been paying premiums into the system should not be forced out of it because of a change in employment.

What kind of insurance should they be able to get and what premium should they pay? Answer: Something similar to what they had before, but I'm going to skip over those problems.

Second, when people with expensive-to-treat health conditions move from one health plan to the other, there needs to be a payment from the exited plan to the entered plan. We do not want a system in which one plan collects all the premiums and leaves another plan to pay all the bills. I have hinted before about how this might work on a larger scale.

Third, risk pools could also be open to people who have been willfully uninsured. But in this case, there need to be waiting periods and (at a minimum) penalties. The penalty should be higher, (a) the longer the individual has been uninsured, (b) the greater the expected cost of care and (c) the greater the individual's income and wealth.

Since all risk pools involve subsidies, the overriding question is: Who do we want to subsidize and why? Clearly, we do not want a system that encourages people to be free-riders at other people's expense. This is why the main function of the pool is to enable people who have been continuously insured to continue in that condition.

It may also be socially desirable to subsidize insurance for people who have been willfully uninsured, as an alternative, say, to providing uncompensated care. (One consideration: People may pay more of their own money in the form of voluntary premium payments than it is possible to collect from them for unpaid medical bills.) But we do not want these subsidies to be overly attractive - lest we encourage free-ridership.

John_GoodmanJohn C. Goodman is president and CEO of the National Center for Policy Analysis. The Wall Street Journal and the National Journal, among other publications, have called him the "Father of Health Savings Accounts," and the Media Research Center credits him, along with former Sen. Phil Gramm and columnist Bill Kristol with playing the pivotal role in the defeat of the Clinton Administration's plan to overhaul the U.S.health care system. He is also the Kellye Wright Fellow in health care. The mission of the Wright Fellowship is to promote a more patient-centered, consumer-driven health care system.

Dr. Goodman's health policy blog is the only right-of-center health care blog on the Internet. It is the only place where pro-free enterprise, private sector solutions to health care problems are routinely examined and debated by top health policy experts throughout the country-conservative, moderate and liberal. 

You are now being logged in using your Facebook credentials