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Community rating

I’ve been virtually talking with other interested parties and staff from Sen. Ron Wyden’s (D OR) office about his Healthy Americans Act and how it deals with pricing. Here’s my preliminary take.
There are two core concepts central to HAA’s viability. First, universal coverage. If everyone has coverage, than there is no (or at least a lot less) need for providers to charge folks with insurance more to cover their losses incurred when they treat people without insurance. Cost-shifting drives up health insurance costs for those folks fortunate and employed enough to have coverage.

Those without insurance also don’t have the same access to nor do they receive preventive medicine as frequently as those with insurance.
These two problems make the un-insured a problem for the insureds; they end up paying a hidden tax approaching a thousand bucks per family in the form of higher premiums.
Second, community rating. This is a method of developing health insurance premium rates (or for any other type of insurance) wherein actuaries figure out what a population’s total costs will be, then estimate what portion is allocated to each individual, family, single+spouse, etc. The only means of altering or modifying the premium amount per insured is by geographic area; insurers are prohibited from factoring in age, sex, previous medical conditions or any other factor.
Community rating has been condemned because it has not “worked” in the past; this is true, as far as it goes. The problem with community rating is that if all health plans in an area don’t stick with it, it falls apart. Health plans that are seeking a competitive advantage in the market will try to charge lower prices. In order to do that, they have to ensure that their costs, specifically medical expenses, are lower than their competition. The best way to ensure that is to only sell health insurance to people who are not likely to need it.
So, the companies “underwriting” insurance skim off the healthy folks along with their premium dollars (which were going to subsidize the less healthy folks). Now, the plans that are still community rating find that their population is sicker, and therefore the plan has to charge higher premiums, which drives more healthy people into other plans…which produces the community rating death spiral.
Under Wyden’s plan, there is no medical underwriting, which means the death spiral isn’t started by risk selection.
But without universal coverage, community rating doesn’t work.

7 thoughts on “Community rating”

  1. I support both universal coverage and community rating. With total healthcare costs of $2 trillion (including out-of-pocket expenses) and a population of 300 million, it works out to almost $7,000 per capita. Even if we exclude the Medicare and Medicaid populations, costs for the rest of us average about $6,000 per year. While young, healthy people will pay more under community rating than they would if they were underwritten, there is no way that older and sicker people could afford health insurance (unless they are very wealthy) if they had to pay a premium that fully reflected their healthcare cost (as a group) risk during the contract period.
    As I’ve said elsewhere, if family healthcare coverage cost $1,000 per year or less, like, say, home or auto insurance, an underwriting model might work if the charge for the most risky individuals were capped at, perhaps, 3X standard rates. Even then, subsidies for the low income population would likely be required..
    It is useful to note, I think, that young people who attend public universities benefit from comparatively low tuition thanks to subsidies paid for mainly be middle aged and older taxpayers. Would the students prefer to take out enormous loans instead to cover the true cost of their education without that taxpayer support? I doubt it. Lots of things are cross-subsidized in our economy. Health insurance should be one of them.

  2. Good grief. This is in English and is understandable by ordinary mortals. And it makes sense.
    Yes, a fundamental problem with private health insurance is the drive to maximize profit instead of coverage. You’ve explained the runaway imbalance of one-charges-less-so-covers-fewer-so-others-have-to-charge-more. It is a classic prisoner’s dilemma, and everyone always choses selfishly in a “freely limited” market.
    Wanna run for Congress? Nah. You’d be wasted there.

  3. BC, as usual a fine job. I’d only point out that any insurance model that could cover virtually everyone, today, will only buy time. How much time do we have before continually rising health care costs make the new insurance model unaffordable?
    Insurance for everyone today, by whatever mechanism, won’t reduce the cost of health care, and can’t be expected to pay for the rising cost of health care forever – any more than our existing system was able to pay the rising costs of health care forever.
    The deeper problem that the nation must solve is the cost of health care. If health care were not expensive, health insurance would not be expensive. If the cost of health care were not rising, the cost of health insurance would not be rising.
    At present, about 15% of our population is without health insurance for at least some time during the year. This does not mean they have no access to health care (otherwise there would be no “cost shift”) but nevertheless it’s very important to figure out how they can secure insurance for their families. You’ve proposed a practical way to think about that.
    But. When we are finished with insurance, health care costs will continue to rise 10% a year. Why is that? What if anything can be done about it? How do other countries in the world provide health care arguably the equal to that in the U.S. at half the cost? What are the tradeoffs that would be necessary for the US to approximate the health care costs of e.g., Western Europe or Canada? Are we willing to make those tradeoffs? Where does the public turn for leadership on this issue?
    This nation absolutely need answers to these questions.
    The clock is running.

  4. John – I completely agree that we need to find ways to reduce healthcare costs. It is probably an issue that needs to be attacked from several angles including reforms that will allow or induce doctors to order fewer tests and procedures, price and quality transparency initiatives to makes consumers (and providers) aware of where to go for the most cost-effective care, and lower administrative costs, which the Wyden proposal could achieve, if passed. The aspect of the Wyden proposal I like the best is that it would make the full cost of health insurance much more visible to employees and other consumers which, by itself, could make people much more cost conscious in purchasing and utilizing healthcare services.

  5. “So, the companies underwriting insurance skim off the healthy folks”
    Mr Paduda,
    HIPAA requires guaranteed-issue for small groups nationally. In additiona, New York requires that all insurers community rate small groups (under 51 employees). So how do you envision small-group insurers are “skimming” in the New York market? How do you envision small-group insurers “skim” in ANY market?
    I think you have way overstated your case against community rating. Or, perhaps, there are facts you haven’t shared?

  6. Mr. F – huh? I haven’t stated any case against community rating. I have pointed out that it does not work unless it is combined with universal coverage.
    If your point is that HIPAA and other regulations somehow ensure that anyone who wants insurance can get it, that may be possible in some jurisdictions. But they won’t be able to afford the premiums – guaranteed issue or no.
    The practice of charging higher premiums to inferior risks is part and parcel of the practice of insurance today, and it has been for years.

  7. “I have pointed out that it does not work unless it is combined with universal coverage”
    Which overstates the case. Community rating does work in the absence of universal coverage – as in New York.
    “The practice of charging higher premiums to inferior risks is part and parcel of the practice of insurance today, and it has been for years.”
    But that does not answer the actual question I asked, which is: explain how insurers are “skimming” in the New York small-group market.

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Joe Paduda is the principal of Health Strategy Associates




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