Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.
For decades Americans have been served, in the print media and on television, with sorry vignettes of fellow Americans who have seen their health-insurance premiums increased or lost their insurance coverage altogether because illness struck or were denied coverage because of pre-existing medical conditions.
Perspectives from expert contributors.As a result, these Americans may find themselves hounded by bill collectors on behalf of the doctors and hospitals who treated them. One major illness can wipe out their lifetime savings, house included.
Sometime in 2012, probably just before its current term ends at the end of June, the Supreme Court will decide whether Americans will just have to live with that problem, or, alternatively, like citizens in virtually any other industrialized country, they will have the right to have this problem lifted off their shoulders.
On Nov. 14, the Supreme Court, in legal jargon, granted a writ of certiorari in response to a petition to review a decision by the United States Court of Appeals for the 11th Circuit that had struck down a mandate in the Affordable Care Act. That mandate requires that every person have at least a minimally adequate health insurance policy, with the aid of federal subsidies where needed.
Naturally, the justices will be making major health policy.
Over the last half-century, Congress has repeatedly tried to fix the problem described in the opening paragraph. The Affordable Care Act passed by Congress in March of 2010 is by no means the only attempt to fix this problem.
One earlier attempt, for example, was President Clinton’s ill-fated Clinton Health Security Act of 1993. Another was a Republican counterproposal, introduced in 1993 and also ill-fated.
More recently, in an interesting counterproposal to the Affordable Care Act, Senator Tom Coburn, Republican of Oklahoma, offered the Patients’ Choice Act of May 2009. It never reached the floor of the Senate.
Finally, we have the Affordable Care Act of March 2010, which did become law, although the fate of one of its centerpieces – the mandate to have insurance — now is in the minds and hands of the Supreme Court justices.
All of these proposals have in common that they sought to solve the problem with two major mandates on private health insurers: “community rated” health-insurance premiums and “guaranteed issue.”
Community-rated premiums are divorced from the individual applicant’s age, gender and health status and reflect only the average annual per-capita actuarial cost of entire communities. Guaranteed issue is a mandate upon health insurers to offer health insurance to anyone willing to pay the quoted premium.
As I have explained in detail in several earlier posts, forcing upon private insurers a mandate of community rating and guaranteed issue will not work, unless accompanied by a mandate upon all citizens to have at least a minimally adequate health insurance policy with specified benefit coverage.
To see why it is so, keep in mind what a combination of community rating, guaranteed issue and a mandate to be insured seeks to achieve. The aim is to create a risk pool in which younger and healthier enrollees subsidize through their community-rated premiums the health care of older or sicker individuals. It redistributes income, at any point in time, through the insurance premium.
Naturally, under a one-sided mandate of community rating and guaranteed issue, without a mandate to be insured, healthier and younger individuals will see advantage in gambling, remaining uninsured until illness strikes, at which time one can them throw oneself on the mercy of community rating and guaranteed issue.
Remarkably, younger and healthier individuals in other industrialized countries have long accepted the mandate to be insured in return for community-rated premiums and guaranteed issue. Perhaps they think of the arrangement as a distant cousin of a call option on a common stock.
In this case, the premium that younger and healthier individuals pay for the call option is the difference between the community-rated premiums and what a premium based on their health status (an “actuarially fair” premium) would be. The benefit of this call option is that later in life, or when illness strikes, the individual can obtain health insurance coverage at a premium much below the actuarially fair premium.
To my knowledge, President Obama has never explained the mandate in the Affordable Care Act to young people in this way. Perhaps he should.
New York and New Jersey have sought to override basic actuarial principles by mandating community rating and guaranteed issue on insurers without a mandate on individuals to be insured. It is about as sensible as the idea of manufacturing two-legged stools.
Alan Monheit and his colleagues have described with great clarity how that infelicitous legislation in New Jersey has resulted in shrunken risk pools of mainly sicker individuals and how as a result community-rated premiums for individual coverage has increased.
To get a feel for the impact of the one-sided mandate in New York, readers might look at the staggeringly high premiums quoted by United Healthcare Oxford for its “NY Personal Point of Service Liberty Network” insurance policy. For individual policies, the quoted premium is $1,855.97 a month; for families, $5,707.11. Premiums for the carrier’s “NY Personal HMO Plan-Liberty Network” are lower, but still high at $1,259.77 for the individual and $4,749.46 for families.
One must wonder whether the Supreme Court justices’ legal fortitude is such as to abstract from these facts the real world.
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