Friday, September 7, 2007

People Who Say Insurance Regulation Creates More Uninsured Are Missing the Forest for the Trees

The health insurance trade association, AHIP, just released a new study on the impact of state health insurance reforms on the market and argues that the "unintended consequences" of these reforms hasn't been good.

Here is an excerpt from their release:

“This report offers important lessons. It demonstrates that insurance reforms without universal access drives up health care costs for consumers and encourages individuals who have health insurance to drop insurance and take the financial risk of being uninsured,' said Karen Ignagni, President and CEO of AHIP.

"Guarantee issue requires insurers to sell an individual health insurance policy without regard to a person’s health and community rating requires that all consumers pay the same or similar premiums without regard to age or gender. According to the report, these initiatives have the potential to cause individuals to wait until they have health problems to buy insurance. This could cause premiums to increase for all policyholders, increasing the likelihood that lower-risk individuals leave the market, which could lead to further rate increases. If this continues, the pool or market could essentially collapse or shrink to include only the high risk population.

“While these reform goals were laudable, they frequently had unintended consequences that disrupted the individual marketplace,' said Leigh Wachenheim, FSA, MAAA, Principal and Consulting Actuary at Milliman, Inc.

"Overall, the report found that states that implemented guarantee issue and community rating saw a rise in insurance premiums, a reduction of individual insurance enrollment, and an exodus of health insurers from the individual insurance market. In addition, the report found no significant decrease in the uninsured population in states that implemented these initiatives, often a stated goal of legislators."

The report is very thorough and worth a read.

But I have to say I think it misses the forest for the trees.

As far as it goes the authors are right. Before health insurance reform in the mid-1990s, it was the carriers that were "selecting against" consumers. That is, "cherry picking" the best risks and discouraging everyone else through underwriting limitations or pricing.

After the reforms, the insurers had to basically take all comers under terms that vary by state but are generally good for the consumer.

So, with underwriting reforms, the balance of power in the market shifted--from the insurer to the consumer. As a result, consumers often wait to buy health insurance until they need it--now it was the insurer that's on the bad side of the deal. The authors are right to point out that has been problematic for the individual insurance market.

So, what should we do? Go back to the old days of carriers "cherry-picking"?

More often, health policy reformers are suggesting that we now need to mandate that everyone be in the pool. That way neither the insurer or the consumer has a chance to "select against" the other or "cherry pick."

That has a logic to it and it has become the big issue in California where the governor and the legislature are trying to find common ground on a major state reform. It also led to the individual mandate in the new Massachusetts health insurance law.

However, I will suggest that in our focus on the individual health insurance market we are missing the obvious in the parallel employer market. The employer market is an insurance system that is voluntary, community rated, and has little or no adverse selection.

Every worker is an individual that has the option of joining the pool or not. Every employer group is a mini health insurance market impacted by the same variables that impact the individual health insurance market.

No employer I know of mandates that everyone participate--employer systems are voluntary. Everyone pays the same price (very few plans have any age rating), and "adverse selection" and "cherry picking" are terms we never hear.



Employers typically pay 75% of the cost of health insurance. When a consumer is presented with a good health plan that costs them a relatively small contribution, more then enough of them buy it giving the plan a good "spread of risk" and that makes each employer pool work very well.

Here is the employer lesson: Make the cost affordable and adverse selection isn't an issue.

If the employee doesn't take the low cost employer insurance when it is offered, they have to pass "evidence of insurability" if they want coverage later.

This focus on the "unintended consequences" of state insurance regulation, and whether we need an individual mandate (which is not working in Massachusetts because the coverage is still unaffordable), misses the real problem--people don't buy if they can't afford it.

No health reform proposal will work--in Massachusetts or California or advanced by the libertarian notion that insurance market deregulation is the way to go--unless the insurance package has a price working families can reasonably afford!

The forest--cost. Not the trees--underwriting rules!

Earlier post: California Health Care Reform—An Individual Mandate is Nowhere Near as Important as Affordable Health Insurance
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