Baseline Information for Evaluating the Implementation of the Health Insurance Portability and Accountability Act of 1996: Final Report. Effects of Risk Pools


Twenty-two states and the District of Columbia have adopted state risk pools as an alternative mechanism. Many of these risk pools were in operation prior to HIPAA, though some characteristics of the pools have to be modified to meet the group-to-individual portability provisions. For example, eligibility needs to be extended to all HIPAA eligibles and waiting periods for pre-existing conditions need to be eliminated for those with 18 months of creditable prior coverage. Some pools also have to expand the choices available to serve as an alternative mechanism (Aston, 1997b).

State high risk pools for individuals who are unable to obtain insurance have been in existence since Connecticut and Minnesota introduced the first pools in 1976 (Bovberg and Koller, 1986). The experience of these pools suggests that they are unlikely to attract large numbers of new HIPAA individuals. We summarize the evidence on the effects of these pools on access below, and discuss some other potential effects for states that introduce new pools.

Access and Premiums

Existing high risk pools are a form of guaranteed issue to individuals (Blumberg and Nichols, 1996). They provide a source of coverage for individuals who wish to purchase individual insurance and are willing to pay for it, but are denied coverage or offered coverage that is prohibitively expensive or restrictive. However, the evidence suggests that most of these pools cover only a small share of the target population. In 25 of the states with pools, fewer than 5 percent of persons with individual insurance are enrolled in the pool (Gao, 1996). Assuming the uninsurable population is about 1 percent of the under 65 population in a state—a standard metric (Laudicina, 1988)—1994 enrollment data for the 25 state pools that were operational indicate that most of the pools reach only about 5 to 25 percent of the target population (enrollment data from Stearns et al., 1997). In contrast, about 40 to 50 percent of workers who do not have access to group coverage purchase individual insurance (Marquis and Long, 1995; Marquis and Buchanan, 1992). So, assuming preferences among workers lacking insurance are similar to preferences of persons unable to purchase individual insurance, the low rate of participation in risk pools suggests that there remain barriers to enrollment in risk pools.

The premiums in risk pools appear to be at least one such barrier. Table 1 shows premiums and enrollments in 8 risk pools studied by Stearns and Mroz (1995). Overall, enrollments appear to be inversely related to premium levels.

Table 1. Premiums and Enrollments in Eight State High Risk Pools



Premium, 1991a

Enrollment/Target Populationb


























Source: Stearns et al., 1997; Stearns and Mroz, 1995.

a. Quarterly premium for 50 year old male.

b Target set at 1 percent of the uninsured population under age 65

c 1992 premium

d 1990 premium

e 1989 premium

By their very nature, risk pools start out with adverse selection; persons who are able to purchase individual insurance at a lower rate than in the pool would choose to do so. The premiums in risk pools are subsidized—they are typically capped at a fixed percentage (usually about 150) of rates charged by private insurers for standard risks. Nonetheless, Table 1 suggests that high premiums in many plans are a barrier to participation and more rigorous analysis of disenrollments from risk plans also shows that price is a factor in participation (Stearns and Mroz, 1995). Thus, unless states subsidize risk pools more heavily than in the past or attract a broader risk pool to lower premiums, it is unlikely that many new HIPAA eligibles will enroll in such plans. Most risk pools allowed limited pre-existing condition exclusions, which will have to be waived for HIPAA eligibles if the risk pool is to serve as an alternative mechanism. This may increase the pool’s attractiveness to some individuals. However, in states with an existing risk pool, most HIPAA eligibles were previously eligible to participate in the pool, or were able to buy private insurance at a lower price than offered by the pool but were unwilling to pay the price. The experience of existing risk pools suggests that new pools will attract only a small share of the target population unless prices are lower.

States with existing risk pools will have to modify eligibility criteria for the pool to serve as an alternative mechanism. An unanswered question is whether broader eligibility rules will serve to attract a broader risk pool, thereby keeping premiums down and so increasing enrollments among those who might otherwise go uninsured. Without premium restrictions, private insurers will offer low prices to better risks, and so risk pools are likely to continue to attract the less healthy. However, risk pools have lower administrative costs than typical private insurance plans (Stearns et al., 1997), which may serve as a partial offset to private insurers’ ability to attract lower risks through lower premiums. The state risk pool in Connecticut provides an illustration of the experience of an open risk pool. Historically, the Connecticut risk pool was open to any resident. Yet it appeared to attract a less healthy population. The premiums in the pool were as high as or higher than premiums in other states, though it did not have lower loss ratios (Stearns et al., 1997 and Stearns and Mroz, 1995). In addition, the Connecticut pool attracted a disproportionate number of persons with severe mental health problems (Stearns and Slifkin, 1995). Thus, even with broad eligibility requirements, state risk pools appear to experience adverse selection. Premiums are thus likely to remain high, and so enrollments are likely to remain low.

Other Effects

Risk pool premiums are not designed to fully cover premium and administrative costs and so the pools realize losses. The most common way to finance these is by an assessment on insurers (Stearns et al., 1997; Sneider, 1991; Bell, 1997). Most of this cost is then passed on to businesses and individuals in the form of higher prices for insurance (Bell, 1997; Sneider, 1991). New assessments on commercial carriers to finance risk pools may also lead some of them to withdraw from the market (Blumberg and Nichols, 1996).

Some view pools as a major loophole in HIPAA (Lieberman, 1997). Critics point to their insolvency. Some also argue that they constrain choice, which was one of the intentions of the act (Atchinson and Fox, 1997). Some also fear that many self-employed will find their premiums raised because they will be forced to join risk pools of less healthy individuals (Atchinson and Fox, 1997).