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The Health Care Reform Mystery Deepens

27 Aug 2009
Posted by Andrew Samwick

At least for me, it does.  Earlier this month, I blogged about what I think is the key issue in the health care reform debate, pre-existing conditions, and why I think the Republicans' part in the debate should be to focus only on that issue.  (In a later post, I linked to some other ideas consistent with limited but purposeful government involvement in this market that address the same problem of pre-existing conditions.)  The Republicans should be the ones advocating for community rating plus a mechanism to adjust for differences in the risk pools selecting each health plan.  It turns out that the political strategy for the Republicans is even easier than I thought, because such mechanisms are part of the key bills that have been proposed already.

Take a look at HR 3200, Section 206(b), for example:

COORDINATION OF RISK POOLING.—The Commissioner shall establish a mechanism whereby there is an adjustment made of the premium amounts payable among QHBP offering entities offering Exchange-participating health benefits plans of premiums collected for such plans that takes into account (in a manner specified by the Commissioner) the differences in the risk characteristics of individuals and employers enrolled under the different Exchange-participating health benefits plans offered by such entities so as to minimize the impact of adverse selection of enrollees among the plans offered by such entities.

The idea in this section of the bill is essential, along with those underlying Section 111 (Prohibiting pre-existing condition exclusions) and Section 112 (Guaranteed issue and renewal for insured plans).  Those three elements constitute health insurance reform that should be acceptable across the political spectrum.  They improve fairness and promote competition (by lessening the threat of adverse selection against the insurance companies).  The latter should drive down costs without requiring additional public funds apart from the cost of administration.  If the Republicans proposed a reform that consisted only of that, we would eventually reach a reasonable compromise.

So why not do it?

Yes, but...

I agree this is the minimum baseline for the industry reforms, but I'm still concerned about the social injustice of the vast uninsured, and the hidden costs this imposes on everyone. Why should ability to pay -- with all the attendant societal structural constraints -- be the rationing mechanism, when it raises costs for everyone else? We've all read the stories of the uninsured being charged thousands for operations that are insurance-paid for hundreds. That hardly seems the most useful approach to the problem.

It's not clear why health care reform is such a theoretical debate. We have existence proofs in other countries of several different approaches to the core problems. Why just pick a starting point and work to modify from there? In a rational data-driven discussion it would be obvious America has a "okay" system with very high costs. Why not a better system with lower costs? Is it our aversion to experiment? The complexity and veto points of our political system? Our addiction to transferring costs to someone else (or hiding them completely)? Our general bias toward fear of the unknown over generative imagination?

In the current situation, I guess we're going to spend a week or two debunking the myth that there will be forced government circumcision. Whack-a-mole continues.

Why would anyone buy insurance under that reform?

Redirect your premium dollars to defray regular physician visits and drug costs. Wait until you have a critical illness to get your guaranteed policy. Ala what's going on in MA to Harvard Pilgrim. The average cost increases, just like it has everywhere else that this combo has been or is being tried. Risk-adjustment protects the insurance company from adverse selection's impact on profitability, but it doesn't protect the pool as a whole from the exit option.

The admin for risk adjustment is also a non-trivial concern, as is its accuracy in the under-65, lower claim level market.

With profit margins in the 1%-5% range, I also wonder how much you think you're going to win by improved competition.

Re. Why would anyone buy insurance under that reform?

Redirect your premium dollars to defray regular physician visits and drug costs. Wait until you have a critical illness to get your guaranteed policy. Ala what's going on in MA to Harvard Pilgrim.

The average cost increases, just like it has everywhere else that this combo has been or is being tried. Risk-adjustment protects the insurance company from adverse selection's impact on profitability, but it doesn't protect the pool as a whole from the exit option.

Someone agrees with you...
The irony is that private insurance works well where it's least regulated. To find the unaffordable disasters, you must head to states such as New York or New Jersey that have pioneered the reforms Obama is peddling for the entire country...

To discover this world of choice, just go to Pop in your state, age and gender, and then ponder a myriad of choices to secure protection from catastrophic health expenses, the proper function of insurance.

A 55-year-old man in Allentown, Pa., can choose from 99 plans starting as low as $141 a month for hospital coverage. A zero-deductible HMO plan costs $418 a month...

..[many products exist for] the young, such as Wellpoint's Tonik, which offers excellent protection, prescription drugs and preventive care for less than $100 a month for the under-30 set.

So if 50-somethings can get a plan at less than $200 a month and youngsters can sign up for less than $100 a month, where's the problem?

Why, it's in New York and New Jersey -- precisely the states that have adopted Obama-style reform -- restricting insurers from charging rates based on age and preventing them from saying no due to poor health.

Change the zip code from Pennsylvania to neighboring New Jersey, and choice plummets even as the cost per plan skyrockets. In New York, our 55-year-old has only 12 plans to choose from.

The reason is simple: When people can buy fire insurance after their houses are burning, only those with a fire in the attic apply for insurance. Soon, only those who expect a blaze can afford the high premiums.

Massachusetts enacted such a system in April 2006. A CEO of a major health network reports exactly this problem: Despite the state mandate that everyone buy and keep insurance, his company is experiencing a drastic increase in people who purchase new coverage, run up big bills that are fully covered and then drop the plan.

People are simply gaming the system. Since they can acquire insurance any time, regardless of health, why pay the premium in times of good health? ... [Sally Pipes]

Scope for gain from competition (re. Why would anyone buy...)

With profit margins in the 1%-5% range, I also wonder how much you think you're going to win by improved competition.

I believe that breaking up cartels is always beneficial. I'm not sure insurer profits are as low as you indicate; but in any event, cartels can charge above-market prices and report below-average profits because their protected position enables them to expense bloat.

As to that protection, remember the 99 policies available via to a 55-year old in Pennsylvania, versus only 12 in New York...

~~~ quote ~~~

The nation now has some 1,300 insurance companies, but most consumers actually have far fewer choices.

Though few realize it, it's illegal to purchase health insurance across state lines. This effectively creates insurance cartels in each state...

In New York, just two insurers, GHI and Empire Blue Cross, represent 47 percent of the market. In New Jersey, a single insurer, Horizon Blue Cross and Blue Shield, controls 43 percent of the market. And in Connecticut, Wellpoint holds an astounding 55 percent....

...the lack of significant competition helps contribute to higher insurance costs and poorer service ... this market concentration hasn't necessarily flowed from consumer preference in a free market, but results in good part from barriers to entry erected by state insurance regulation.

To truly create more choice and competition, Obama should tear down the regulatory barriers to choice by letting people buy insurance from states other than the one in which they live...

Tear down this barrier to interstate commerce, and you'd instantly increase competition. If someone in New York or New Jersey is unhappy with the insurance choices available in that state, he or she could buy a policy in Vermont, Pennsylvania or Delaware. For that matter, he or she could go online and purchase a policy anywhere in the country.

There'd be another benefit as well. Different states have different regulations and mandates that can dramatically affect insurance costs...

To buy a standard health-insurance policy, a healthy 25-year-old man must pay five times as much in New Jersey as in Kentucky, which has far fewer mandates.

Why shouldn't Jersey residents be free to decide whether those state mandates are worth the added cost, and buy a cheaper policy in Kentucky or elsewhere?... [Michael Tanner ]
If the true objective is to create more competition, then the answer is to open New York and other such states to competition from 1,000 more insurers by creating a national insurance market.

To do that repeal the McCarran-Ferguson Act -- thus killing state-sponsored cartels via making (1) the states subject to the Commerce Clause and (2) insurers subject to anti-trust rules.

(What other major product or service sold nationally would we ever exempt from both the Commerce Clause and anti-trust in this way??? And what results would we expect if we did?)

Creating one new "public option" hardly seems to match up to that, competition-wise. (Especially when one considers the amount of new competitive innovation that would come from 1,000 insurers versus one government program.)

Since Obama & the Democrats offer zero in this direction, I conclude they invoke "competition" as a poll-tested marketing word, not as any sort of genuine concern, cynic that I am.

Michael Tanner muses on the same mystery

~~ quote ~~

President Obama has stopped talking about "health-care reform." The new poll-tested phrase of the day is "health-insurance reform."

Specifically, the president says he wants to protect people with "pre-existing conditions." He would require insurance companies to accept anyone who applies for coverage, regardless of their current health (a rule known as "guaranteed issue") and prohibit them from charging higher premiums to people who are sick (called "community rating").

But if that's what the president wants, he could already have a bill through Congress, with significant Republican support. In fact, even the insurance companies have agreed to it.

Yet the 1,017-page bill making its way through the House devotes all of six pages to insurance reform ...

So why the bait and switch? [Continued...]

Individual/employer mandate


Seems to me the only way guaranteed issue (without exclusion or substantial waiting period for pre-existing conditions) combined with community rating can possibly work out without either destroying the insurance business model (due to increasingly adverse selection) and/or raising premiums greatly is to mandate individual (and thus universal) coverage -- i.e., no on can opt out: you must either pay for coverage or somehow the government extracts equivalent money from you or from your employer (or subsidizes your purchase or just provides the insurance to you).

Must carry is kind of like high-deductible

Wherein the patient covers most routine costs directly, and relies on insurance for disasters. Granted that "no premiums" is not the same as "low premiums", but large costs aren't going to be paid by the patient in either case. Premiums for low income folks will be subsidized under "must purchase", and low income folks are the ones most likely to be uninsured otherwise. The routing of subsidies from taxpayer to provider may be different, but the amount may be very similar.

If you want to reduce costs you have to make premiums depend on behavior, as Safeway has done so successfully. Otherwise your primary lever is price controls.

community rating

I made a feeble stab at this on my blog:

I think there are a couple of problems with community rating and Andrew's thinking on insurance in general. The reason someone with a pre-existing condition is typically denied coverage is that they are uninsurable. The risk that they will require a payout is simply too high. It's akin to insuring houses in floodzones. If an insurer didn't differentiate their premium prices then they would be failing the shareholders and their other policy holders (by having good risks subsidize bad risks). Instead of having community rating we should have a catastrophic reinsurance program so that the uninsurable become insurable and have an ex-post risk adjustment to ensure that insurers to further counteract the prospect of cherry picking.

The other thing though is the differential pricing on insurance premiums (perhaps best exemplified by safeway) provides incentives to policy holders to lead healthier lifestyles ultimately benefiting the policy holder directly but lowering costs systemwide over the long term.

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