May 12, 2010 - 10:11 am

Thomas TobinBio

Tom Tobin has been a Healthcare Industry analyst since 2000.

One feature of the health overhaul that the President is touting as an immediate benefit is the expansion of so-called "high risk pools" for people who want to buy insurance but can't because of their poor health.

Right now in 34 states, 200,000 people are covered at a cost of $2B in these pools. Health Reform legislation requires Health and Human Services (HHS) to expand these pools and cover 2 million more people--creating a bridge between now and 2014 when the rest of the Health Reform legislation rules kicks in.

The problem is that there's no way that $5 billion, which is what's been budgeted, will cover the cost of covering 2 million people. The real cost will be more like $40 billion. The $5B allocation attached to the High Risk Pool initiative appears to represents a number dictated more by political feasibility than a fair assessment of true program cost.

According to the Kaiser Family Foundation, high risk-pools are currently in operation in 34 states and, in aggregate, cover approximately 200,000 individuals. Eligibility and benefit offerings vary by state with premiums costs generally ranging from 125% to 200% percent of standard rates charged to individuals without illness/pre-existing conditions.

The typical program structure ties premium costs for the enrollee to income as a percentage of the poverty level, which, in effect, creates a sliding subsidy scale offering more support to low income individuals. The percentage of total cost of coverage paid by premiums varies from a low of 26% in New Mexico to 106% in West Virginia, with the bulk of states clustered in the 50-75% range. Put differently, premiums paid by high risk individuals only cover about 50% of the actual cost of the medical care and services utilized - leaving the states to pick up the tab on the balance.

In 2008, according to Kaiser & the Government Accountability Office, claims per person averaged $9,437 annually with total claim outlays of $1.9B. The strategy proffered by Sebelius et al. is to operate the program through the existing state infrastructure. If the existing program costs ~$2B annually to cover only 200K individuals, Health Reform legislation proposing to use $5B over the balance of 3 years to cover a n estimated 2M eligible individuals, it is easy to wonder what will happen when the money runs out. The simple calculus using the 2008 average cost per enrollee & the directive to cover 65% of a participant's health costs puts the total potential expense at $12.3B per year. Multiply that by three years, and you get $37 billion.

To have the intended effect of providing meaningful and expansive coverage to the estimated 2M individuals eligible, Obama will have to increase funding substantially. While the potential for an additional $40B in stimulus is a welcome sight for health care stocks, the bigger question will be the consequences inflaming the political debate over costs.