Wednesday, March 25, 2009

Little Ado About Nothing—Part Deux

Last November, the insurance industry offered to do away with pre-existing conditions limitations. This week the health insurance trade associations have also offered to phase-out the practice of varying premiums based on health status in the individual market.

From their letter to Congress this week:
Specifically, by enacting an effective, enforceable requirement that all Americans assume responsibility to obtain and maintain health insurance, we believe that we could guarantee issue coverage with no pre-existing condition exclusions and phase out the practice of varying premiums based on health status in the individual market.
A reporter called me to ask if I thought this latest offer was a big deal.

I asked her how many employees her news organization had. She said, “a few dozen.” I asked her if the sicker employees pay a higher rate than the healthier in the company health plan. She said, “No.”

I then suggested that if an employer with a few dozen people in their health insurance plan could create a large enough pool to have the same rates for everyone no matter their health status then why would it be a big deal to do the same for a pool with tens of millions of people in it?

The operative phrase in the industry letter is, “by enacting an effective, enforceable requirement that all Americans assume responsibility to obtain and maintain health insurance.” Translated, if the federal government mandates that all men, women, and children in America have to be in the risk pool we’ll take the underwriting risk.

If you have everyone in the pool, there is virtually no underwriting risk. You have underwriting rules in the first place to minimize the anti-selection risk. If everyone is mandated to have insurance—to be in the pool—they can’t select—they don’t have the option to select—to buy or not to buy.

Put in more laymen’s terms, underwriting rules are meant to protect against people, for example, buying insurance on the barn after it burns down. You don’t want people trying to sign up for insurance after they have a loss or after it is clear to them they are sick. But if everyone is required to buy the insurance from the start, you don’t have the problem of people putting off or buying insurance when it is advantageous for him or her and not for the insurer—anti-selection.

Therefore, you don’t need to exclude anyone nor do you need to charge the sick a different price than the healthy because you not only have all the sick folks covered but you also have all the healthy people covered to offset their costs—a mandate that everyone buy insurance automatically has a perfectly balanced universal risk pool.

It is possible that one insurance company, particularly a small one, could somehow get more of the sick people in their pool than another but if that occurred it could be relatively easily taken care of through reinsurance between players.

A few months ago, the industry offered to guarantee that everyone would be insured—guaranteed insurability—if there was an individual mandate. Now they have added the offer to charge the sick and the healthy the same rate—in the individual market.

At that time of the first offer, I called it, “Much Ado About Little.”

The latest offer is, "Much Ado About Little, Part Deux.”

Though, at a time liberal Democrats are pushing to put a government-run health plan in direct competition with the private sector it is good PR.
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