Ezra Klein is right, the news this morning out of the insurance industry’s bunker is a big deal. They have offered a deal. They will agree to offer insurance to everyone, in exchange for a mandate forcing all to obtain coverage. Ezra explains the logic of current arrangements:
The individual health insurance market, fundamentally, is incoherent: Insurers try to deny coverage to those who want it and to sell to those who don’t. That’s because the most profitable customer for an insurer is one that never gets sick, and the least profitable is one who falls very ill. But that’s not how you want your health insurance market to work. We want sick people to get care. That’s the point.
But perhaps they see the writing on the wall, and know that at some point, they will face legislation enjoining them to adopt “guarantee issue.” Hell, even the vast majority of Republicans voted for a recent bill prohibiting insurance companies from “discriminating” against customers whose genetic tests indicate future health problems. But in order to cover the costs of insuring those who have been traditionally denied coverage precisely because covering them would be expensive, the insurers say they’ll need healthy people to buy insurance. That way when the risky get sick, the premiums of the healthy can be used to pay for their treatment. As Donald G. Hamm Jr., president of Assurant Health, puts it,
In the individual market, people can choose whether or not to apply for coverage,†Mr. Hamm said in an interview. “If they know they can obtain coverage at any time, many will wait until they get sick to apply for it. That increases the price for everyone.
But Ezra is on to Mr. Hamm:
The question is not whether they’ll offer to sell coverage at all, but at what price? Selling insurance products that no one can afford may mean you’re not technically denying people access to insurance, but it doesn’t guarantee accessibility, which is a necessary precondition for a universal system. For that, you need “community rating,” which would force insurers to offer coverage at the same price to everyone, spreading risk equally and ensuring that coverage is no less affordable for the sick than the well.
Actually, even community rating is insufficient. Community rated plans are designed to lower the insurance costs faced by high risk individuals by requiring that any particular health plan’s premium be priced to reflect the population’s average anticipated individual health care costs. While such regulations are well-meaning— high risk individuals will not be charged more than low risk individuals for the same level of coverage—adverse selection can remain a problem. Unless there are also government restrictions on the levels of coverage in the available plans, especially on whether there is a robust minimum that every plan must provide, low-risk individuals may choose bare bones plans that would benefit medium- and high-risk persons little. When this happens, plans providing a robust level of health care will attract only those individuals with higher risks, and this will drive up premiums and drive away healthier buyers interested in cheaper plans. So even if everyone is charged the same price for a community rated plan, the plans providing robust coverage will be avoided by the healthy, thus making them more expensive for those who will actually want them. This leads to premiums that still significantly reflect health status even when community rating regulations are in effect. Here’s one recent NBER working paper on the issue.
So what we need is a mandate, community rating, and legislation establishing a robust minimum that each health care plan must satisfy. Only then will low-risk individuals actually subsidize the care that high-risk individuals need.
Unfortunately, the problem is not solved even then, since general health costs are growing unsustainably. But that is a problem we can discuss another day.
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