Response to Leavitt et al and objections to community rating (WSJ)

Michael Leavitt, Al Hubbard and Keith Hennessy, all alums of the Bush administration, have an article on the Wall Street Journal arguing that guaranteed issue and community rating provision in the health reform bills are essentially a redistribution of income from the healthy to the sick. They object, arguing that this redistribution isn't transparent to the public (i.e. healthy folks won't know precisely how much they're subsidizing sicker folks).

On the first point, they are correct: the two insurance reforms they pointed two would result in a redistribution of economic resources from the healthy to the sick. However, they are wrong that this is objectionable.

From the consumer's perspective, an insurance contract means that you incur a small, certain and regular loss (your monthly premiums) in exchange for protection from a large loss that you can't predict (an illness or accident). From the insurer's perspective, they collect and pool claims. Insurers then use this money to pay off claims because when they consider the population in aggregate, they can use statistical methods to predict roughly how many people will be sick or injured. So, the healthy are subsidizing the sick.

The 80-20 rule, which applies to numerous industries, holds that about 20% of the population account for about 80% of the claims due to illness. However, you could easily go from the healthy 80% to the sick 20% without warning and through little or no fault of your own. The current system leaves many of the sick 20% with no easy way, or no way at all, to pay access medical treatment. In other words, the system isn't spreading risk effectively. If you spread their risk to the rest of the population, the increases in premiums will be manageable for the healthy folks. This already happens to a large extent in the employer-sponsored insurance market (mainly for larger employers).

Briefly, community rating means that insurers must charge all enrollees the same price (although they will be allowed to vary prices by age in health reform). Experience rating means that insurers may charge sick people more and healthy people less.

Leavitt et al argue for "wiser" and "more equitable" ways to make the subsidy to the sick explicit and to still get them healthcare - state subsidized high-risk pools and subsidized vouchers for people to buy health insurance. I find it bizarre how the authors can possibly think that either is wise or equitable when neither has really worked. The state high risk pools have low enrollment. They are small and expensive and offer poor coverage. My wife and I witnessed this first hand when we shopped for coverage with Maryland's high risk pool (she ended up getting employed temporarily with a company which offers insurance). There were more exclusions and higher deductibles than many similar individual insurance policies provided to healthy people. In principle, the high-risk pools could be expanded, but if you're segregating the sick people, they would still be more expensive. The insurer who is running the pool might not manage it very well, or might offer substantially poorer terms (higher cost sharing, more exclusions of services). And state subsidies to the pools would be vulnerable to cuts in poor economic times. It's not a workable plan.

Leavitt et al are also correct that some folks will pay more. Right now, I pay $52 a month for individual health insurance. I can get that rate because I'm a young, healthy man. Under health reform, I will have to pay more - and I will be subsidized if necessary, although the subsidies might not be sufficient. However, I will get a lot more. My deductible is $8,000 a month. The Finance Committee, for example, is now proposing that a rating band of 4:1 be used for age. This means that the oldest folks will pay 4 times the youngest folks. That is approximately how much the younger folks will be subsidizing the older folks. This is a little high, but it can, and probably should, be decreased over time as people adjust to the mandate. Other reform bills had no more than a 2:1 rating band. Age is the only factor on which rating is allowed in the current proposals.

If you do not require community rating and guaranteed issue, then all it will take is for one company to offer insurance to people based on their health status. The whole market will eventually have to follow. In the past, the Blue Cross Blue Shield insurers, all of whom were initially nonprofit, all offered community rated products. When for-profit insurers came along and offered experience-rated products, they skimmed off the younger and healthier folks. The Blues were left with the sicker ones and had to raise prices. This set off a spiral. Many of the Blues went for profit (usually under Wellpoint). Many of the remaining nonprofit Blues offer experience rated products just like everyone else. In some states, the nonprofit Blues are the insurer of last resort, meaning that they may offer insurance to people who would otherwise be excluded from the market due to pre-existing conditions. I don't know the specifics, but the Blues would either have to charge more to these people (possibly too much for them to afford insurance) and/or receive subsidies from the state.

The bottom line is that the insurance market is unworkable for people who have pre-existing conditions and can't get insurance through a large employer. Leavitt et al are wrong in that an expansion of the existing ad hoc solutions is workable.