Rate Reviews…

[This post is a joint effort of Bob Vineyard, CLU & Henry Stern, LUTCF]

As mentioned a few weeks ago, one of the key elements of Senator Wyden’s Healthy Americans Act is the implementation of community rating (CR) on a national basis.

There has been a lot of buzz in the medblogosphere about our, shall we say, less than enthusiastic support for this idea. A lot of folks whom we respect and admire have had favorable things to say about CR, but it’s clear that even the brightest among us don’t completely understand the dynamics of health insurance, and especially community rating (CR). Several debates, including some on this site, have focused on the merits of CR, which just goes to show how critical it is to the success (or lack of such) of the HAA.

Proponents of CR claim that it is a way to make health insurance affordable. To an extent this is true, but for whom is it more affordable? A true community-rated product is delivered without regard to the individual’s sex, age or health (or behaviors, for that matter). This means quite simply that everyone in the pool is charged the same rate.

Such an approach is favorable towards those who are older than the average age of the pool, or less healthy. Keep in mind that CR (as it exists now) does not mean that EVERYONE is offered a policy and admitted to the pool. Some with severe pre-ex conditions can still be excluded from coverage, which allows for some selection by the carrier to exist.

So even with community rating, some are able to obtain insurance, others are not. It’s one of the pieces of HAA which is most puzzling: if there is to be true community-based rating, and the coverage is to be mandatory and universal, then how could there be any kind of limitation on coverage, or exclusion of conditions? And if there are no such controls, why would its proponents believe that it will lead to lower costs?

As with almost anything having to do with health care and health insurance, there are exceptions (which often prove the rule). In this case, it’s that CR sometimes works in the small group market. It’s really not hard to see why: it’s the middle ground between the individual and the large group (generally self-insured) markets.

Let’s look at how well CR works in our current system. Currently, 4 states (NY, NH, VT and ME) mandate community rating; in those states, a carrier is prohibited from offering a policy based on age or health condition. If one looks at the insurance market in those states, one finds something else they have in common: few companies (less market choice) and higher than average rates.

There’s a very sound reason for this:

Community rated insurance premiums makes as much sense as community rated loans. That is, in a world of community rated lenders, everyone would pay the same rate when borrowing money. Those who are most credit worthy are lumped in with deadbeats who never pay their bills, and everyone is charged the same interest rate for the same kind of loan. One can easily imagine what those interest rates would be. Why anyone would envision this as fair is beyond our ken, but for some odd reason some believe charging everyone the same rate for health insurance, regardless of health or age, is a more equitable system than the one used in the other 46 states.

As we’ve discussed here at IB many times, risk (it’s assessment and management) is the underlying principle, the raison d’etre (literally: Deter’s raisin) of insurance. Take away that key component, and what we’re talking about is no longer insurance, but a shuffling of dollars from here to there and back again. We won’t argue the merits of such a scheme, but will argue that it is most emphatically not insurance, but rather (and at the risk of invoking Godwin’s Law) simply socialism.

(Pause for raspberries)

Okay, now that everyone’s thrown up their hands in disgust and/or pity, let’s examine why this is not merely name-calling, but sound economic and political reasoning:

Community rating is a method for pricing insurance. It simply says that everyone in a specific demographic cohort (i.e. geographic area, socio-economic class, race or sex) must be charged the same rate for insurance, regardless of health, habits or age. The term “community” simply acknowledges the commonality of that cohort. In the case of the HAA, that “community” becomes the population of the United States (or subsets of it). Fair enough; if that’s what the people really want, then that’s fine. But by prohibiting insurers from taking into account the fact that different people have different physical characteristics, health histories, and behaviors, the plan drastically devalues the element of risk. It is simply transferring money around, which is not insurance. By definition, socialism (whether as an economic or political system) is the forced redistribution of resources (in this case, money) without regard to merit.

In short, community rating encourages adverse selection more than the current system. The result is, the carrier gets more of the unhealthy risks and fewer of the healthy risks. (For a more detailed explication, see here and here)

Why does this matter?

Quite simply, because everywhere CR has been implemented, it has led almost immediately to increased insurance rates and decreased insurance availability. Why would this result not obtain if it is implemented on a (far) larger scale? The principle and the goal is the same, regardless of whether we’re talking one state or 50. It’s fashionable to discuss health insurance in terms of “fairness,” but it is silly to do so. A prevalent (though erroneous) school of thought conflates health insurance with health care; such folks have decided that it makes sense to look at health insurance not as a risk management vehicle, but some fundamental right, akin to voting and peaceful assembly.

It is not.

It is a mechanism for spreading risk. But if we remove (or substantially decrease) the risk, then it’s no longer insurance. Fine, let’s recast the debate, but let's at least be intellectually honest about it: it’s a national health plan, coupled with a nationalized health care system (can’t have one without the other). How about an honest discussion about that?