Most people are healthy most of the time, and as a consequence, health care expenditures are heavily concentrated in a small share of the population: about 50 percent of the health care spending in a given year by those below age 65 is attributable to just 5 percent of the nonelderly population. The lowest spending half of the population accounts for only about 3.5 percent of health care spending in a year.
Deciding how much of total health care expenditures should be shared across the population and how to share it is the fundamental conundrum of health care policy. There is more risk pooling the larger the share of health expenditures included in the insurance as covered expenses (i.e., the fewer benefits excluded and the lower the out-of-pocket cost requirements), the larger the number of both the healthy and the sick insured, and the lower the variation in premiums across different enrollees. Sharing the costs of the sick across the broader population (a.k.a., risk pooling) increases costs for the healthy to the benefit of those with health problems; this creates more financial losers than winners at a point in time, since there are many more healthy people than sick in a given year. Segmenting risk pools has the opposite effect, savings for the currently healthy while increasing costs for those with health problems.
The health policies of the two political parties and their presidential candidates differentiate themselves clearly along the lines of pooling philosophies: the Democrats generally advocate broad-based pooling of health care risk and the Republicans generally advocate more individual responsibility and are willing to accept much greater segmentation of health care risk. These positions have dramatically different implications for individuals when they experience significant health problems, and they also have very different implications for low- and middle-income populations as compared to those with high incomes. As a consequence, each health care policy proposal should be evaluated as to its ramifications for risk pooling.
Left unchecked, people who perceive themselves healthy will tend, if they are pursuing their own near-term financial self-interests, to separate themselves from sick people—either by avoiding health insurance entirely, purchasing insurance products sold predominantly to other healthy people, or purchasing insurance products offering limited benefits that likely are not attractive to those requiring significant medical care. Those supporting public policies that allow or encourage this type of separating of health care risks often argue that they are placing greater personal responsibility on each individual, who will in turn make better decisions about the use of medical services. However, the burden of that increased responsibility falls most heavily on those with health problems, since it places larger financial costs on those with medical care needs at the time those needs arise, reducing costs for individuals while they are healthy.
Depending upon the extent of the risk segmentation created, these policies can effectively deny care to those that need it. Those who are well off financially can finance a considerable amount of necessary care out-of-pocket; a low- or middle-income individual experiencing a health crisis cannot. Thus, policies that separate risks will not only harm the sick, they will decrease access to care most heavily for the non-wealthy with health problems. Therefore, the amount of risk pooling versus risk segmentation is a fundamental choice.
The Risk Pooling Continuum
Policies that Promote Greater Pooling of Risk
The degree of risk sharing under current law varies by the insurance market. Public insurance (e.g., Medicare, Medicaid) represents the most pooling of risk. All beneficiaries are eligible for the same health insurance benefits, and the cost of providing those benefits is largely financed by broad-based revenue sources (e.g., income or payroll taxes), completely separating enrollee health status from financing of the programs’ benefits. Public programs that include deductibles, co-insurance, or co-payments or limit covered benefits reduce the sharing of risk to some extent, as these provisions increase financial burdens directly with medical care use.
Employer based insurance, still the primary source of insurance for the non-elderly, promotes natural pooling of risk, since individuals generally choose employers for reasons unrelated to their health status, and participation in employer-offered plans tends to be high. Trends that are increasing cost-sharing requirements in employer-based coverage are, however, reducing risk pooling to some extent in these plans over time.
Prior to 2014 when the Affordable Care Act’s main coverage provisions were implemented, the nongroup and small employer insurance markets were characterized by very little risk pooling, with risk segmentation being the greatest for nongroup insurance. Individual purchasers could be denied coverage outright in the vast majority of states due to health care risk, they could be offered policies that permanently excluded care associated with particular health problems, they could be offered policies with higher cost-sharing requirements (deductibles, coinsurance) because of their health profile, and many policies excluded or severely limited benefits such as maternity care, prescription drugs, and mental health services. In both the small group and nongroup markets, minimum benefit standards were rare, higher premiums could be charged depending on the health care profiles of enrollees, and substantial pre-existing condition exclusion periods often applied.
An array of policies included in the Affordable Care Act increased risk pooling significantly in these markets, but by no means does the law pool all risk. Key risk pooling provisions include guaranteed issue, modified community rating, minimum benefit and cost-sharing standards, prohibitions on pre-existing condition exclusion periods, the individual mandate, and income-related financial assistance for the purchase of nongroup insurance coverage. By requiring insurers to “take all comers” regardless of their health status or health history (guaranteed issue and renewal) and once they are covered to reimburse them for expenses related to health conditions that began prior to purchasing insurance (prohibitions on pre-existing condition exclusions), the ACA ensures that all insured individuals share in each other’s health care costs, yielding a more diverse pool than would otherwise exist.
Minimum benefit and cost-sharing standards increase the share of total health expenditures that are financed through premiums, spreading health care costs more broadly and reducing the financial exposure for those with greater health care needs. Limiting variance in premiums due to the individual characteristics of the insured (modified community rating) increases pooling substantially compared to unregulated markets featuring different premiums for purchasers based upon their health status, health history, gender, and industry of employment, as well as much broader premium variation by age and other factors. Modified community rating is also critical to ensuring the effectiveness of guaranteed issue and guaranteed renewal; otherwise, insurers could charge unhealthy enrollees much higher premiums than their healthy counterparts, counteracting the intended effects of those rules.
By requiring all or most individuals to enroll in health insurance coverage, individual mandates increase the number of healthy and sick individuals in insurance pools by providing incentives for them to enroll in and retain insurance; such mandates have the largest behavioral effect on those with lower health care costs who would be less likely to enroll otherwise. The more people subject to the mandate and the stronger the enforcement mechanisms, the greater its effect in spreading health care risk. Importantly, without the individual mandate, the other consumer protections (rating rules, guaranteed issue, benefit standards, etc.) would allow individuals to remain uninsured until a health problem arose, leading to a costly and unstable insurance pool.
Significant income-related financial assistance for the purchase of private insurance coverage not only improves affordability for the sick, it also brings in low-income healthy individuals who otherwise could not enroll. This yields greater diversity in insurance pools and lowers the average health care costs of those enrolled; the greater the financial assistance provided, the broader the sharing of risk.
The ACA does not pool all risk even in the small group and nongroup markets; some enrollees have large cost-sharing requirements and certain benefits are not included in the essential benefit requirements, for example. Moreover, policy decisions that allowed for grandfathered and grandmothered plans in the small employer and nongroup insurance markets reduced risk pooling in the short-run, keeping the health care risk of people insured through those plans (who tended to be healthier on average) separate from the rest of those markets.
Policies that Decrease Risk Pooling, Separating the Risks
While the Affordable Care Act increased risk pooling, conservative members of Congress, presidential candidates, and policy analysts have proposed a number of health policies, many of which would work in combination to reverse that change. They would tend to isolate much larger shares of the health care costs of the sick from those that are healthy. This would reduce costs for the healthy and increase them for the sick. And because there are more healthy people than sick at a point in time, the savings engendered for each healthy person would be smaller than the increased costs created for each unhealthy person. These policies include:
Various Forms Of Experience Rating Of Insurance Premiums
Experience rating of premiums includes, e.g., health status/health history rating, gender rating, age rating, tobacco use rating, industry rating, and rating based on genetic information. Allowing insurers to vary health insurance premiums according to the characteristics of insured individuals and groups increasingly segments the healthy from the sick. Each factor on which premiums can vary allows insurers to effectively create separate health insurance pools—pools in which only the health care costs of those with similar characteristics are averaged together. Those not in “healthy” pools would have high average expected costs and could be charged enough that most or all of them simply cannot afford insurance coverage.
Incentives to Increase Use of Health Savings Accounts
Health Savings Accounts (HSAs) are investment accounts that allow individuals to deposit funds pre-tax and accrue tax free earnings on those funds; by current law, the accounts must be used in conjunction with high-deductible health plans, although some have proposed eliminating that requirement. Funds in the accounts can be used for medical purposes without incurring taxes or penalties and can be used for any purpose without penalty after age 65.
HSAs allow individuals to pull health care dollars that would otherwise be devoted to more comprehensive coverage out of the insurance pool and place them into accounts for the individual’s own use. As a result, they have very different implications for those who are healthy and those who are sick. With an HSA, those with low expected use of medical care can limit their sharing of risk with a high-deductible insurance plan and receive significant tax benefits from deposits into the HSA; the tax benefits are greatest for those in the highest tax brackets. If they do not need much medical care, they benefit from the equivalent of an additional IRA.
People with health problems and people without the financial resources to fund the individual accounts do not receive the tax benefits associated with the accounts’ growth and must face the financial burden of funding substantial portions of their care independently. Proposals designed to increase the numbers of people using HSAs by eliminating current restrictions on them will tend to decrease the number of healthy people enrolled in comprehensive insurance, reducing the sharing of their risk with those more likely to use medical care. (HSAs can be funded by employers, but a large percentage who offer HSA qualified high-deductible plans to their employees do not contribute to them; among those that do, the average contribution is small relative to the potential out-of-pocket liability faced by the worker.)
Allowing Unrestricted Sales of Insurance Across State Lines
Often mentioned by advocates as a way to increase competition across insurers, unrestricted sales of insurance across state lines would directly undermine state policies designed to broadly pool health care risk. Advocates for this policy consistently combine it with the elimination of the policies currently in place that encourage risk sharing in the private, individually purchased insurance market.
As a result, insurers domiciled in states with much more limited insurance market regulations (e.g., without guaranteed issue of insurance, as well as those permitting use of pre-existing condition exclusions, premium rating based on health status, and limited benefit plans) could sell low-cost coverage to healthy individuals living in a state with policies designed to share health care risk. These insurers could pull healthier consumers out of the insurance pools in their home states while leaving their sicker neighbors behind in higher-cost pools. Left with only those with health problems to enroll, insurance pools could not survive in those states attempting to share risk more broadly, ultimately leaving many of the sick with no insurance options at all.
Allowing Coverage Denials, Benefit Exclusions, Cost-Sharing Variations With Health Status
Allowing private insurers to deny coverage to those at risk for higher-than-average medical expenses, to offer plans that exclude particular benefits consumers are expected to use based on their health histories, and to offer only coverage with high-cost sharing requirements to those with higher expected use of medical services are all strategies that place greater financial burdens for health care on those who most need to use it. These approaches separate all or significant portions of the expenses of high-need consumers from the insurance risk pool. For example, excluding mental health services from a plan requires a person with mental health care needs to bear the cost of those services themselves. Advocates for eliminating guaranteed issue, the current minimum benefit requirements, and/or actuarial value standards in the individually purchased and small-group insurance markets would re-instate strategies used to segment health care risk prior to implementation of the Affordable Care Act.
Age-Related Tax Credits that Do Not Vary with Income
Some of those advocating a replacement of the ACA suggest eliminating income-related subsidization of health insurance, replacing it with fixed tax credits for all Americans that vary somewhat with age but which would be available in equal amounts regardless of income. Those in favor of these policies argue that administrative costs and marginal tax rates would be lower than under the income-related assistance in current law. In principle, one could provide tax credits to all irrespective of income of sufficient size to make adequate coverage affordable for those of all ages and financial means; however, such an approach would cost a fortune in government dollars. As such, proposals for this type of substitution are consistently associated with elimination of benefit and cost-sharing standards and significant loosening of limits on premium variations in the individually purchased insurance market.
The proposed age-related-only credits are much smaller than the ACA’s income-related credits for an obvious reason: spreading aggregate tax credit costs across a much larger number of people (an entire population versus the low-income) inevitably means that the size of the credit allocated to each person must be much smaller, unless much more public money is devoted to the program. With a reduction in individual financial assistance and deregulated insurance markets, insurers would offer narrower coverage or no coverage at all to those with significant expected health care needs, and the assistance available would be insufficient to make adequate coverage affordable to those with modest incomes. Considerable costs would fall upon those with health care needs themselves, and even healthy people of modest means would not be able to afford coverage that gave them effective access to necessary care.
High Risk Pools
High risk pools are insurance pools designed to cover individuals with significant expected medical needs; these are individuals who have been denied coverage in private health insurance plans or who have specified conditions that are extremely likely to lead to denials. In other words, these are mechanisms for explicitly separating the costs of those with high medical needs from others, and these pools only makes sense in a market that allows insurers to deny coverage outright based on individuals’ health status. A well-financed high risk pool that provided such high-need individuals with adequate, affordable coverage is in principal conceivable but would require very hefty public expenditures. As a result, customarily, states (and the federal government as transitional assistance between 2010 and 2013 prior to full ACA implementation) have provided only limited subsidization of insurance coverage through high risk pools.
Because the average health care costs of those eligible to enroll were high by design (they all had at least one high-cost medical condition) and because subsidies were limited, the high risk pools’ insurance premiums and cost-sharing requirements were large. Many such pools had pre-existing condition exclusion periods, limited benefits, and enrollment limits; all of these characteristics served to reduce the value of the coverage, creating high financial burdens for enrollees and limiting the number of people who could access the coverage. These problems could be addressed, but only with a much higher investment of tax dollars than any candidate proposing this approach has suggested.
“De-Linking” Insurance From Employment
The tax code provides strong incentives for individuals to obtain insurance for themselves and their family members through their employers, and this encourages risk spreading. The larger the employer, the greater the pooling of risk. Policy proposals to “de-link” insurance from employment, usually by eliminating the tax preference for employer-based insurance, would tend to reduce the provision of, and the participation in, those employer plans.
If the alternative is an individually purchased private insurance market that is built around policies that broadly pool health care risk (like those in the ACA), the effect on risk sharing of such a de-linking would be limited. However, those supporting these approaches consistently advocate for the deregulation of the individual insurance market, including eliminating minimum benefit requirements, premium rating rules, and other policies that operate to ensure access to adequate coverage for those with health problems. That combination would greatly reduce the sharing of health care risk; it would lower costs for those who are healthy at any point in time, but substantially increase costs and reduce access to coverage for those with current or past health problems. The currently healthy would be at similar risk if and when they develop health problems in the future.
The Competing Philosophies: Crystallizing The Difference
While those who are healthy at a given point in time may benefit financially from policies that separate their health care costs from those with health problems, health status is not a fixed state. As many of us know too well, the good fortune of a young, healthy 20- or 30-something can turn quickly with a single diagnosis of cancer, multiple sclerosis, or pulmonary emboli, or in the event of a serious motor vehicle accident. A perfectly healthy kindergartner can fall victim to leukemia without warning; a bright, active teenager can become severely depressed and require intensive psychiatric treatment.
Even the most fortunate among us must face increasing health care costs as we age, although we erroneously may discount the value of our future access to adequate and affordable health insurance coverage when we are young and feeling invincible. Meanwhile, once we experience health problems, the broad sharing of health care risk that provides us with affordable access to necessary care may be invaluable.
The health care policy proposals offered by the various political players emerge from two starkly different philosophies. Those proposed by Democrats are generally consistent with broad based sharing of health care risk across the healthy and the sick. Their approaches employ deductibles, co-payments, and co-insurance and limit benefits to a degree, so some risk is borne by individuals themselves. But, in general, they are designed to spread risk broadly, increasing financial burdens on the currently healthy to the benefit of those with current health care needs.
Republican proposals generally place health care costs much more heavily on non-healthy individuals through various approaches that segment risk pools. Some proposals would pool risk for high catastrophic expenses; others would not. The risk segmenting approach has real financial benefits for those who are healthy at a given time, and those who are healthy significantly outnumber the unhealthy—hence the short term appeal. But these approaches place heavy financial burdens on those with the most health care needs, and they discount the value to the currently healthy of having affordable access to adequate care when and if they develop health problems in the future.
Risk pooling approaches promote broad access to affordable medical care regardless of income or health status, while the risk segmenting approaches do not and would in fact reduce access relative to current law. Advocates of the latter generally employ terms such as individual responsibility, skin in the game, consumer choice, and market competition, but make no mistake about it: it is all about the risk pool.
 Even under the ACA which provides regulatory floors below which states may not go, state regulations differ. For example, New York’s nongroup and small group insurance markets comply with pure community rating; Massachusetts allows age rating in their markets to vary by a ratio of 2 to 1; and the ACA prohibits greater age variation than a ratio of 3 to 1.Therefore, unrestricted sales across state lines could undermine state decisions under the current system as well. That is why today the ACA restricts cross-state line sales of insurance to states that have mutually agreed to permit them through an interstate insurance compact.