Because a small fraction of individuals account for a large share of total health expenditures, insurers gain more by excluding high-cost people from coverage than by efficiently managing the care of enrollees. The incentives for insurers to avoid high-cost and high-risk enrollees affect not only the likelihood of health insurance coverage for the high-risk population, but also the cost and accessibility of coverage overall in the small-group and nongroup private health insurance markets. This paper identifies public policies that might address these problems in private health insurance markets more effectively and delineates the advantages and disadvantages of each.

From the report:

Public Program Buy-In: Recent reform proposals suggest allowing otherwise ineligible individuals to purchase Medicare or Medicaid coverage. This approach has the advantage of broad risk pools and pre-existing plan infrastructure. Subsidies for low-income individuals would likely be necessary, and the establishment of actuarially fair premiums would depend on whether participation was mandatory or voluntary. A Medicare buy-in program, which would be feasible only at the federal level, would have the advantage of broad access to providers. States could institute a Medicaid buy-in program, which offers a more comprehensive benefit package than Medicare but may restrict choice of providers.

Assigning Risk to Private Insurance Carriers: Under this approach, high-cost individuals could apply for random assignment to a private carrier operating in their area. Carriers would be assigned high-cost individuals in proportion to their share of the group and nongroup markets. The enrollees themselves would pay income-related premiums, with the government paying the difference between the individual's portion and the full standard risk premium. Creating incentives for carriers to effectively manage high-cost assignees, even with government subsidization, would be a critical design feature.

Full report: Increasing Health Insurance Coverage for High-Cost Older Adults (PDF | 615.47 KB)

The Urban Institute Health Policy Center. (2009). Increasing health insurance coverage for high-cost older adults. Blumberg, L. J. & Waidmann, T.