Affordable Care Act Creating Dual Risk Pools

Insurance Costs & Networks
January 30, 2020

Affordable Care Act Creating Dual Risk Pools

This article was originally written in 2015.

In 2013, before the major parts of the ACA became law, there was a section in the law that said “self funded company health insurance plans can still require medical underwriting”. My immediate thought was, wow, I wish I could start an insurance company. All the “good risk” companies employing mostly young healthy people are going to go “self funded” instead of paying a lot more in the ACA exchanges and subsidizing everyone else. That’s an insurance death spiral waiting to happen.

In 2014, when the major parts of the ACA became law and young healthy people were forced to subsidize the rest of the people, insurance rates jumped. My insurance jumped up around 125%. Group health plans with less than 50 employees suffered increases in the 40-55% range… and that was with a DECREASE in plan benefits (here in Philadelphia). States that already banned medical underwriting didn’t get hit that bad (i.e. like New Jersey).

So fast forward to today. Companies employing a young healthy workforce are starting to self fund. Insurance companies are rolling out products that make sense for these companies with young healthy workforces. The logic is this, Company ABC had a young healthy workforce in 2013 and enjoyed excellent health insurance at low rates.

In 2014, because of the ACA, the fact that Company ABC had a young healthy workforce meant nothing. The rates were the rates, regardless of one’s health situation, and Company ABC’s insurance premiums rose 40% and they had to decrease the quality of their health insurance as well. It stands to reason that IF Company ABC’s young healthy workforce's health status could be a consideration when obtaining health insurance, they could enjoy the excellent health insurance at costs similar to 2013 (i.e. before that 40% increase in 2014).

An insurance company could even meet them halfway and make a profit hefty margin. Since Company ABC is paying 40% more than they should. The insurance company can offer a self funded plan and Company ABC would them pay 20% more for the same insurance they were previously paying 40% more for, and everyone comes out of the deal happy.

Insurance companies in 2014 could not execute though. The premiums were really high, and the plan choices really crappy. But now, after a year and a half, they are getting close. And more and more companies are popping up to try to execute on this idea.

Most of the self funded insurance plans that I’m seeing look and feel like your normal fully insured health insurance… but on the back end, it is “self funded”. Company ABC pays a fixed monthly premium, just like before, and they get an annual renewal / increase just like before. Company ABC doesn’t incur extreme amounts of risk, they just pay their monthly premium, that’s it. But since the insurance is “self funded” (legally speaking), medical histories can be considered when determining the rates.

So, this is starting to happen. Companies with a healthy workforce can fill out medical questionnaires and enjoy the lower rates as a result of being young and healthy, just like they could before 2014. Not quite as good as before 2013… but better than the alternative right now. I only expect this trend to continue and grow.

So where’s that leave us? Dual risk pools IMO. All the young healthy people will be in “self funded” plans, while the people who don’t have clean medical histories will seek the shelter of the fully insured plans that can’t ask or consider one’s health status. So in other words, the “good risk” is in one kind of insurance (i.e. self funded), while the “bad risk” is in another kind of insurance (i.e. fully insured).

This will lead to 2 segments: The “bad risk” fully insured plans will get more and more expensive because all the people who seek / receive a lot of medical services, will be in the fully insured plans; while the healthy young people will go to the self funded plans and won't be paying premiums to subsidize the folks who get more medical services.

Maybe this happens, maybe not, but that is the logical conclusion. A few legal tweaks could stop the trend, or eliminate it, but I don’t expect that to happen until this trend runs for a while.