Yesterday, the House of Representatives voted by a margin of 217-213 to pass the American Health Care Act (AHCA). Not surprisingly, their was jubilation from conservatives–who threw a celebration in the White House Rose Garden–and outrage from liberals–who immediately began making donations to support Democratic candidates in the 2018 midterm elections. As a supporter of Obamacare (albeit one who readily acknowledges its limitations and the need to make fixes to the law), I was not thrilled to see the AHCA passed, given both the content of the bill and the manner in which it was passed. However, this post is not about all of that. Instead, I just want to focus on one aspect in particular–high-risk pools.
In an attempt to lower the costs of insurance, the AHCA creates high-risk pools for individuals with health conditions that are costly to treat. Of course, this is not a new concept. States have operated their own high-risk pools for years, with little to no success. Leaving aside for a moment the fact that the AHCA does not provide enough federal subsidies for the high-risk pools to be functional, I’d like to explain the concept of risk pools altogether. That is, I am going to explain to you how insurance works. Because that’s all the insurance function does–it pools risk.
Think of it like this: As you may or may not know, I developed Guillain-Barré Syndrome in January. That’s an extremely rare condition, but it is also very expensive to treat. Six months ago, I had no idea that this would happen to me. However, I can tell you that this year there will be between 3,000 and 6,000 Americans who develop the condition. I can also tell you that there will probably be 30 to 60 cases in the state of Iowa (where I live) this year. Insurance works by pooling risk. No insurance company would want to cover just me in the event that I developed Guillain-Barré (or any other illness). However, if they were to enroll the entire state of Iowa, they would be very comfortable assuming that 30 to 60 individuals would develop the condition, and they would build this into the pricing of their product. The science behind crunching these numbers is what actuaries do for a living. As you can probably see, the law of large numbers is at work here: Namely, it is difficult to know with much certainty whether or not a given person will contract a particular illness, but it is relatively easy to know with certainty how many people in a given population will contract a particular illness–and the certainty increases as the population gets larger. The idea of insurance, then, is to spread this risk around evenly such that the people who do get sick are not bankrupted by their illness, and the people who don’t get sick are happy to have paid for the peace of mind that they would have been protected financially had they happened to have gotten sick. Make sense? Now go out and start an insurance company. Just kidding.
Historically, insurers have sought to offer coverage to low-risk individuals while avoiding high-risk individuals. Doing so meant that insurers could maximize their profits by collecting premiums while minimizing their medical losses (which is what they call it when they have to pay for someone’s health care claim). When Obamacare forced insurers to cover everyone (called “guaranteed issue”), it meant that insurers could no longer avoid the high-risk individuals. And, if you’re tracking with me, that meant that the high health care costs of these individuals got added into everybody’s premiums, which made them go up in some cases.
The rationale invoked by the AHCA is that we want to remove these high-risk individuals from the general risk pool and place them in their own high-risk pool. It follows that the general risk pool would then have generally healthier people in it, with lower costs to spread around, and the price of the insurance would come down for these people. Meanwhile, in the high-risk pool, there would be nothing but extremely sick people with high health care costs. Insuring them would be very expensive, because after all, it’s not a question of whether you might get sick, the insurers know that you are sick to begin with. Coverage in these high-risk pools would be so expensive in fact that people couldn’t afford it unless the federal government propped it up with enormous subsidies. And that’s where the AHCA falls woefully short.
But the point I want to leave you with is that, even if the AHCA provided adequate subsidies, high-risk pools would remain an awful idea in principle, because insurance is all about pooling risk, and it works best when you get everyone in the pool. To help that notion sink in, I want to use an actual pool as a metaphor. Well, two pools, actually. An olympic-sized swimming pool and a kiddie pool. We’ll use chlorine to represent high-risk individuals, and water to represent healthy individuals. As you know, chlorine is used to sanitize pool water, but direct contact with chlorine can cause chemical burns. So, in the swimming pool, we want to have lots of water, with just the unavoidably necessary amount of chlorine. Everything works out great for the most part. Still, some individuals may complain about the chlorine. They may suggest that all the chlorine from the olympic-sized pool should be isolated and placed in the kiddie pool, which has much less water in it. That creates all sorts of problems, because the concentration of chlorine is far too high in the kiddie pool. Granted, this is not a perfect analogy, but I’m sure you understand my point. And hopefully you now have a better understanding of why a high-risk pool is not the solution to dealing with sick individuals. The solution is to get everyone–the healthy and the sick–into the same pool. The healthy might not like paying a little bit more, but if they were being honest with themselves, they never know when they might become ill. Trust me, I’ve learned firsthand that expensive illness can be a sudden and unexpected guest in anyone’s home. It’s time we acknowledged that we’re all in this together, and share the burden, rather than ostracizing the sick so we can save a buck while they suffer.