One problem with our health care system is that many sick people who lose their health insurance find it impossible to purchase new coverage. Insurers may classify them as uninsurable, offer them a policy that excludes payment for medical services for their preexisting conditions or set their risk-rated premium so high they cannot afford it.

To solve this problem a number of states make subsidized insurance available through high-risk pools to people who can't purchase conventional coverage for a reasonable price. These states are directly solving the problems of the unfortunate few without imposing costly regulations on everyone else.

How big is the problem?

According to the Agency for Health Care Policy and Research, a branch of the Public Health Service, only 0.7 percent of the U.S. population (about 2 million people) has been denied health insurance due to a medical condition. And while we do not know how many people must pay excessively high health insurance premiums, it could not be very many. Only about 3 percent of the population say they are in fair or poor health.

Solving the problem with high-risk pools. Currently, 28 states have passed legislation creating high risk pools that sell health insurance to approximately 100,000 individuals. (see figure) However, very few people stay in risk pools for long periods of time, and the annual turnover rate of the pools is between 30 and 60 percent. People leave risk pools and obtain other health insurance in a variety of ways. For example, some turn 65 and qualify for Medicare; some get married and become insured under a spouse's policy; some have their medical conditions clear up and qualify for standard insurance again; and some change jobs and become insured by a new employer.

How do high-risk pools work?

In most states, the premium for risk pool insurance is between 25 and 50 percent higher than for comparable policies a healthy person can buy. However, some states could require people to pay more if the program's losses warrant it. Risk pool premiums are two and a half times as high in Florida, for example. And while Montana is legally permitted to charge as high as 400 percent of the standard premium, currently no one pays more than 250 percent. In Minnesota, one of the most generous states, risk pool insurance is less than 25 percent more expensive.

Most risk pool insurance provides benefits comparable to those offered by traditional health insurance policies within the state. Major insurers, such as Blue Cross, usually manage and underwrite the risk pool. Almost all pools offer fee-for-service insurance, which gives people free choice of doctors, rather than managed care or health maintenance organizations.

To join a risk pool in most states, individuals must prove they have been rejected by at least one of the state's insurers. Moreover, to discourage people from waiting until they are sick to get insurance, most of the pools can impose a preexisting condition exclusion period on individuals who enter the pool.

How are high-risk pools funded? Risk pools are funded largely by the people participating in the pool. However, even with higher premiums the pools usually lose money because their members are high health care users. States make up these shortfalls in different ways. In Maine, losses are covered by a tax on hospital revenues. In Illinois and California, the subsidies are funded by general tax revenues. In most states, insurers make up the deficit by paying assessments in proportion to their share of the market. In several of the states that assess insurers, companies are allowed to subtract most or all of their assessments from the premium taxes they pay to the state. To the extent this occurs, the burden falls on general taxpayers.

Case Study: Nebraska.

Nebraska instituted its risk pool, the Comprehensive Health Insurance Pool, in 1985. Any resident who has been denied health insurance within the last six months can join the program for 135 percent of the cost of a standard major medical policy (based on the average cost of the state's five most popular plans). Currently:

• There are 3,309 people in the state's risk pool, about 0.2 percent of the state's population.

• A family of four can join the pool for about $400 a month.

• Partly because of other reforms implemented by the state, a family risk-pool policy in Omaha costs about the same as or less than a standard health insurance policy in many comparable cities,$532 per month in Miami, $403 in Dallas and $376 in Boston.

Individuals who have lost their insurance and cannot obtain coverage elsewhere can join the pool and be covered immediately. To stop people from signing up for the pool only when they get sick, those who have let their insurance lapse or were not previously covered may have to wait six months before coverage begins.

Making risk pools work better.

The biggest problem with risk pools is that they are sometimes underfunded. Texas, an extreme case, has had a risk pool on the books since 1989 but has never approved funding. At least one state excludes certain medical conditions from coverage. And some states exclude people from coverage if they have reached the lifetime benefit provided by the plan.

Yet the amount of money needed to fully fund state risk pools is almost trivial in the context of a one trillion dollar health care system. In 1992, for example, risk pool subsidies nationwide totaled only $170 million.

Other changes are also needed. While increases may be small, the practice of subsidizing risk pools with a tax on other premiums drives up the cost of insurance for healthy people and could encourage them to become uninsured. Similarly, subsidizing risk pools with a tax on hospital revenues imposes a tax on the general public only to the degree they get sick. A better solution would be to follow the example of California, Illinois and Utah, fund risk pool subsidies from general revenues and keep hospital fees and other health insurance premiums as low as possible.

Sources: Communicating for Agriculture, Inc.,"Comprehensive Health Insurance for High-Risk Individuals: A State-by-State Analysis;"and Karl J. Knable, Morris Melloy and C. Keith Powell,"State Health Insurance Risk Pools," Health Section News, April 1991.

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