This article will briefly explore the relationship between Utah's federal high risk pool, the Utah high risk pool, the Patient Protection and Affordable Care Act in general, and what it may portend for the health insurance market. On March 23, 2010 President Obama signed the Patient Protection and Affordable Care Act ("ACA").1 The ACA made fundamental changes to the health care system as a whole and specifically to health insurance. One of the immediate changes was the required creation of a federal high risk pool within 90 days of the effective date of the ACA.2 This high risk pool remains in place until January 1 of 2014. After that date, eligible individuals enrolled in the high risk pool may transition into qualified health plans offered through a state-based Health Benefits Exchange. In essence, the federal high risk "pool [is] a temporary insurance program designed to cover individuals with preexisting conditions and who have been uninsured for six months until 2014, when they can purchase coverage in the individual market without penalty for their high risk status."3
The requirements for this pool, found in 42 U.S.C. § 18001, require that the coverage be subsidized primarily through funds from the federal government.4 In addition to the creation of the federal high risk pool, section 1101, which went into effect in 2010, allowed states to either create and manage their own high risk insurance pools, or the federal government would create a high risk pool and manage it on the state's behalf.5
In order for states to be eligible to run their own federal high risk pool the ACA requires that a state not reduce the amount expended on its own high risk pool from the year preceding the enactment of the ACA.6 By forcing the states to maintain the same level of coverage for their own high risk pool the federal government could prevent states from intentionally moving the insureds from the state pool to the federal pool.
The State of Utah agreed to keep its own high risk pool in place with at least the same funding levels, and therefore was eligible to administer its own federal pool. Shortly after the ACA was enacted, the State of Utah contracted with the federal government and began administering the federal high risk pool ("Federal-HIPUtah") concurrently with the state high risk pool ("HIPUtah"). Utah's Governor opted to have the Federal-HIPUtah managed by the same administrator that oversees HIPUtah.7
In addition to the eligibility requirement above, the ACA imposes several conditions on Federal-HIPUtah in order for it to be considered a qualified plan. First, the plan may not exclude individuals from participation based on preexisting conditions.8 Second, the individual seeking insurance has to be without health insurance coverage for at least 6 consecutive months prior to applying for insurance through the high risk pool.9 Third, the federal government limited the maximum out of pocket, paid by insureds, to coincide with section 223 (c) (2) of the Internal Revenue Code based on the year the coverage was provided, and it mandated that a minimum of 65 percent of all costs be covered by the insurance pool.10 Fourth, the individual applying for coverage has to be a legal citizen of the United States or a legal resident.11 Finally, the ACA provides some rating requirements for the premiums.12
HIPUtah was created in 1991 for the same purpose as the federal plan; to help individuals that were unable to obtain health insurance in the private insurance market because they had serious medical conditions.13 However, HIPUtah differs from the Federal-HIPUtah in a couple of important ways. First, HIPUtah does exclude coverage for preexisting conditions when the individual has been without credible coverage for more than 62 days.14 If a condition is preexisting, then coverage for that condition is excluded for 6 months after the insurance is obtained. Second, Federal-HIPUtah subsidizes the premiums at a much higher rate than HIPUtah. Because of this subsidy difference, individuals in the federal pool are paying about 60 percent of what individuals in the state pool are paying for premiums.15 The other requirements are largely the same as those in Federal-HIPUtah.
While the differences between Federal-HIPUtah and HIPUtah pool do not seem dramatic, they have affected HIPUtah in a detrimental way. Before implementation of Federal-HIPUtah, Utah successfully ran HIPUtah for over 20 years, and HIPUtah has ensured that all legal residents of the state can acquire health insurance either through the private market or through HIPUtah. While the premiums are higher in HIPUtah, Utah has managed to subsidize at a level that the state can afford to maintain. This has been done even though Utah's budget and enrollment has decreased in recent years. In 2010, the year Federal-HIPUtah was implemented, HIPUtah's budget from subsidies was $8.5 million annually to care for over 4000 individuals.16 Since 2010, this budget has decreased by $500,000 annually, and enrollment has decreased to 3600 individuals.17
In contrast to HIPUtah, the federal government budgeted $40 million dollars to subsidize Federal-HIPUtah over a 3.25 year period.18 This averages out to over $12 million a year to care for just over 800 individuals. Initially, individuals applied at a slower than expected rate, but the claims for the individuals who were joining were much higher than the claims for the HIPUtah pool.19 After the first few months, the rate at which individuals were joining Federal-HIPUtah increased dramatically, and subsequently the insureds participating in HIPUtah began to decrease as individuals were dropping the state coverage, waiting 6 months, and then obtaining coverage through Federal-HIPUtah.20
After Federal-HIPUtah had been in place for several months, Utah concluded that the original $40 million would not be sufficient to cover the claims. Utah initially thought that the $43.7 million in federal funds it was allotted to run its pool would be enough to cover 2,400 Utahans.21 But there are currently just over 800 people now enrolled in the federal pool, a third of the projected enrollment, and they alone are costing more than the amount predicted for 2400 members. "We get very serious medical problems, people in renal failure and in need of transplants, and a ton of newborns because moms can come on, have their baby, and come off."22 In other words, because of the design of Federal- HIPUtah, it requires more of the plan to be subsidized than HIPUtah and the ACA's prevention on excluding pre-existing conditions, the incentive to remain insured and pay premiums has been greatly reduced. In fact, "For every $1 collected in premiums, the pool spends $7 to $8 in claims."23 "That translates to a projected operating loss of $62 million by 2013, costs that insurers will have to absorb or pass onto existing customers in the form of price increases."24 For just the calendar year 2013, the estimated net losses for Federal-HIPUtah are $67 million.25
The possible danger is that this might just be the tip of the iceberg. Because the U.S. Supreme Court upheld ACA, the high risk pools will expire at the beginning of 2014 and the new exchanges will take effect. These exchanges will likely function equivalently to the high risk pools in that they will be unable to deny coverage for preexisting conditions, or uninsurables. Based upon the experience of the last 2 years, these uninsurables will likely deplete the allotted budget much faster than predicted. This added cost will then have to be made up somewhere, and it will likely fall at the feet of tax payers. Some would argue that the controversial individual mandate of the ACA will take care of this shortfall. In essence, the individual mandate requires individuals who would not typically purchase health insurance to either begin purchasing it, or pay a penalty in the form of a tax.26 This additional revenue will then, hypothetically, help to offset the cost to high risk patients, because many of those who do not currently purchase insurance are typically those who perceive they have no need to, such as young, healthy individuals.
There are a couple of potential issues that could undermine the debatable wisdom of this individual mandate. First, the mandate requires an individual to pay only $95 annually as a penalty/tax to opt out of the requirement to obtain health insurance. This price is the required amount starting in 2014 and it gradually increases to a maximum of $695 annually in the years after.27 The disconnect is that it does not appear that this amount will be sufficient to overcome the shortfall, and many who are healthy, or wealthy, will be tempted to pay the $95 and remain uninsured until such time as they need medical care. Utah State Representative Jim Dunnigan stated "If you're a young invincible, why wouldn't you just pay that instead of forking over hundreds a month in premiums?"28
Second, as Utah's example teaches us, the potential for abuse is too high. As Utah's federal high risk pool executive director said above, many individuals who are being accepted into Federal-HIPUtah are then treated for several months, and once their medical issue has been resolved they cancel their coverage until the next emergency comes along. These actions come at a high price and one that might be unsustainable. Also, there will likely be a similar issue with the insurance exchange, because individuals will enroll when they need treatment and then terminate coverage when their medical conditions are resolved. What happens when the federal government is no longer able to subsidize the increasing cost? What happens is exactly what has happened with the shortfall in Utah with Federal-HIPUtah. If past experience holds true, Federal-HIPUtah will likely cost almost twice the amount of what was projected, and that is not sustainable. Utah has requested more funds to maintain the pool, and part of Utah's agreement to establish and manage the federal pool obligated the federal government to cover additional amounts. Yet, these funds have not arrived. This is equivalent to selling food over an extended period of time to individuals who are starving. The cost is subsidized through government spending and other citizens who pay into the system. If the individuals pay for a couple months and all the food is given to them, then they have little incentive to continue paying because they have received what they wanted. In essence, because the potential for abuse is so high, the sustainability of the program is highly questionable.
Because of the shortfall between the projected cost of Federal-HIPUtah and the actual cost, a similar difference will likely be realized between the projected cost of the ACA and the actual cost. Both federal and state governments will have to find ways to keep people insured and paying into the system, otherwise the ACA will likely prove unsustainable and may cause the collapse of the current health insurance system in Utah, and perhaps that of the United States as well.
1. 42 U.S.C. § 18001
3. Amy Monahan and Daniel Schwarcz, Will Employers Undermine Health Care Reform by Dumping Sick Employees?, 97 Va. L. Rev. 125, 152 (2011)
4. 42 U.S.C. § 18001
7. Gov. Herbert says state will manage new federal health care program, Deseret News, June 24, 2010
8. 42 U.S.C. § 18001
12. See Id.
13. Utah Code Ann. § 31A-29-102
15. See Id.
16. January 14, 2010 Minutes of the Utah Comprehensive Health Insurance Pool Board of Director's Meeting
17. HIPUtah Board Meeting - July 2012 Enrollment Activity Report
18. Federal-HIPUtah Actuarial Report - September 2010
19. January 20, 2011 Minutes of the Utah Comprehensive Health Insurance Pool Board of Director's Meeting
20. November 10, 2011 Minutes of the Utah Comprehensive Health Insurance Pool Board of Director's Meeting
21. Federal-HIPUtah Actuarial Report - September 2010
22. Utah's 'high risk' pools answer: What if court kills insurance mandate?, Salt Lake Tribune, June 25, 2012 (citing Tomi Ossana - Utah's federal high risk pool executive director)
25. Federal-HIPUtah Actuarial Report - May 2012
26. See, generally 42 U.S.C.A. § 18001
27. "Utah's 'high risk' pools, supra
28. Id. (citing State Representative Jim Dunnigan)