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Replacing Obamacare With High-Risk Pools

April 27, 2013

By Avik Roy

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As Ramesh notes below, many Republicans and conservative health wonks support using high-risk pools as a "transition to a freer health-care market." In theory, high-risk pools allow us to subsidize truly uninsurable people with pre-existing conditions in a separate, taxpayer-subsidized insurance pool, while leaving everyone else free to pursue the health insurance approach of one’s choice.

On balance, I agree that high-risk pools are a useful component of a "repeal and replace" strategy for Obamacare. If we were to repeal Obamacare, it would be necessary to ensure that uninsurable people with pre-existing conditions could get coverage. However, like any government-driven intervention into a private market, high-risk pools do come with several caveats, caveats that we should fully consider. In particular, high-risk pools still require government involvement in the pricing of risk, something that political entities tend to do poorly, opening up future fiscal liabilities. Here is something I wrote in June 2010 on the subject:

Another idea raised by [Paul] Howard and [Steve] Parente is assembling a system of high-risk pools as a way of improving access to health insurance for those with pre-existing conditions. James Capretta and Tom Miller take up the subject of high-risk pools in depth, in an original and provocative article. Capretta and Miller argue that a fully-funded system of high-risk pools would spend around $17 billion a year to cover the 4 million people who need them, and by isolating those people from the rest of the insurance pool, make insurance coverage far more affordable for everyone else. Their piece contains a number of thoughtful proposals for ensuring that the pools would function as intended.

Controversially, they argue that the federal government should directly fund these high-risk pools, since fiscally-constrained states have not been able to adequately do so thus far. My preference would be that high-risk pools remain the province of the states, so that states can experiment with their structure—something that can only happen if states are not constrained by the myriad distortions of federal policy.

There are two other large challenges with high-risk pools that merit further debate (though Capretta and Miller do address them). The first is: what sort of mechanism could be erected to ensure that high-risk pools don’t metastasize into moderate-and-high-risk pools, and eventually all-risk pools? That is to say, is it possible to define "high-risk" in such a way as to sufficiently constrain the political temptation to expand such risk pools to cover larger constituencies? Just as with pension packages for government employees, it would be easy for a politician to expand the size of a high-risk pool, knowing that the full costs of doing so would show up decades later, when the patients are older, and when that politician is off sipping piña coladas on some tropical island. Insurance lobbyists will fight hard for such risk pool expansions, knowing that their own businesses will prosper by dumping risky individuals onto the state.

Capretta and Miller suggest that capping federal expenditures at some dollar figure, such as $15 to $20 billion, might do the job. But there will always remain the risk that a more spendthrift Congress will blow through the cap. This is another reason why it might be better for the states to run these pools—states’ inability to sustain deficits will prevent the programs from getting out of hand.

There is a second, related problem, one that John Goodman has raised: that the government is fundamentally incompetent at pricing risk. "Price setting errors that government makes in the market for risk," writes Goodman, "will invariably be worse than in just about any other market." (Think of what the government has done to the housing market.) The potential is strong for such government intervention to significantly distort the conventional insurance market, as it has done with Medicare and Medicaid.

Progressives object that, while high-risk pools do a good job of insuring the uninsurable, they don’t necessarily address a far more common problem, which is people who have pre-existing conditions and can obtain insurance, but only at unaffordable prices.

And libertarians could make the converse objection: that high-risk pools, just like Obamacare, give people an incentive to go without insurance, knowing that if they fall ill or get injured, they can qualify for a high-risk pool. Indeed, in a lightly regulated insurance market, high-risk pools could give insurers greater incentive to refuse to offer coverage to the already sick, knowing that those considered uninsurable would gain taxpayer-subsidized coverage through the high-risk pools. Capretta and Miller, in the National Affairs article I cite above, acknowledge and confront these problems.

All this is to say that while high-risk pools ought well to be a part of the conservative health-policy menu, and would have certainly been a better approach to pre-existing conditions than passing Obamacare, they are themselves complex policy instruments that harbor risks, uncertainties, and imperfections.

This all relates to a broader point that we should all keep in mind. There’s a reason that conservatives have yet to coalesce around a health-policy strategy in the aftermath of the 2012 election: Any politically viable effort to reform our health-care system in a market-oriented direction will still require a substantial amount of government intervention (albeit less than Obamacare does). That fact, understandably, makes a lot of conservatives uncomfortable, particularly those who don’t specialize in this policy area, and aren’t aware of the full extent to which the government is already regulating and subsidizing American health care.

Our $1.5 trillion-a-year health-care leviathan was built over 70 years, and it won’t be fixed overnight.

Original Source: http://www.nationalreview.com/346789/replacing-obamacare-high-risk-pools

 

 
 
 

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