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The effect of community rating in health insurance markets
Maybe there's been enough discussion of Paul Krugman on health care but still this caught my eye. In a recent blog post Krugman wrote:
The reason we have restrictions on interstate sales of health insurance is that a number of states regulate insurers. In particular, some states have a form of community rating, which basically says that insurers can’t deny you coverage or charge extremely high premiums if you have a preexisting condition. And community rating will be unsustainable if individuals can buy insurance from out of state; insurance companies in states that don’t have community rating will cherry-pick the healthy, good risk people, leaving the community rating states with only the highest-cost people.
Krugman's post seems to be very approving of such community rating. When it comes to California, which has no community rating, "insurers compete by doing their best to deny coverage to anyone who might actually need medical care."
Based on a close look at the data, Herring and Pauly write (I can't find an ungated version can you?):
Some states have implemented community rating regulations to limit the extent to which premiums in the individual health insurance market can vary with a person's health status. Community rating and guaranteed issues laws were passed with hopes of increasing access to affordable insurance for people with high-risk health conditions, but there are concerns that these laws led to adverse selection. In some sense, the extent to which these regulations ultimately affected the individual market depends in large part on the degree of risk segmentation in unregulated states. In this paper, we examine the relationship between expected medical expenses, individual insurance premiums, and the likelihood of obtaining individual insurance using data from both the National Health Interview Survey and the Community Tracking Study Household Survey. We test for differences in these relationships between states with both community rating and guaranteed issue and states with no such regulations. While we find that people living in unregulated states with higher expected expense due to chronic health conditions pay modestly higher premiums and are somewhat less likely to obtain coverage, the variation between premiums and risk in unregulated individual insurance markets is far from proportional; there is considerable pooling. In regulated states, we find that there is no effect of having higher expected expense due to chronic health conditions on neither premiums nor coverage. Overall, our results suggest that the effect of regulation is to produce a slight increase in the proportion uninsured, as increases in low risk uninsureds more than offset decreases in high risk uninsureds [emphasis added by TC]. Community rating and guaranteed issue regulations produce only small changes in risk pooling because the extent of pooling in the absence of regulation is substantial.
You'll find some unadjusted raw data for states here.
Herring and Pauly, who wrote this paper in 2006, stress that what I am describing as the Krugman view is the "conventional wisdom" yet not supported by the facts. More generally, you can think of their excellent paper is a contribution to the ongoing debate over health insurance and adverse selection. As the authors say "there is considerable pooling."
I am not, by the way, suggesting that we should move everything to the individual insurance market or that Jim DeMint is an objective analyst of U.S. health care.
Posted by Tyler Cowen on July 28, 2009 at 06:36 AM in Medicine | Permalink
Comments
Earlier draft of the Herring_Pauly paper:
http://rwjf-eriu.org/pdf/conf2006_herring.pdf
Posted by: MT at Jul 28, 2009 6:58:06 AM
I wonder if the individual insurance market is large enough to be predictive of how it would operate if it were much larger. Those covered through employers must outnumber those buying insurance individually by something like 12 to 1, which allows for the possibility that those buying individually are collectively kind of unusual.
I bought individually in Massachusetts for a few years before I hit the medicare age. I had very good coverage and, being in excellent health, I initially didn't pay much - something between $2 and $3 thousand per year. When the newly passed community rating law (rates could vary only by age) caught up with me my premiums went to about $7K. There are a couple of obvious ways to reconcile these numbers: 1) Most people between 60 and 65, in good health, with individual policies, dropped out of the market when community rating took hold, leaving mainly me and a bunch of sick people. 2) There never were many people in good health in this age range in the individual market in the first place -- they were either working and covered by employers, or, if retired, covered by a good carry-over plan from their employer (think public employees). So the pool was mostly people too sick to work, and me. I exaggerate, but you get the picture. Presumably the story would be different for other age ranges, but what would it be?
Posted by: TA at Jul 28, 2009 7:46:08 AM
I'll add one comment to the post above. The second possibility above wouldn't need to be inconsistent with the Herring/Pauly findings. Since there weren't many healthy people in the pool in the first place, even if not many drop out, their increased premiums don't provide much subsidy to the unhealthy, so the community rated rate isn't much lower than what the unhealthy were paying previously -- so not many more of them sign up.
Posted by: TA at Jul 28, 2009 7:55:53 AM
When was the data collected? it would be interesting to see what it looks like now as private insurance premiums skyrocket due to the market crash.
I have been working with my insurance broker (I am president of a medical group) to get some information for some research. In Pennsylvania, it is difficult to get individual insurance if you have any pre-existing conditions. My broker claims he tries to get these people into pools if possible. This generally works if the conditions are fairly routine, such as hypertension or mild diabetes. However, if they have an expensive one, like a cancer or severe heart disease, even the pools do not want them.
TA- As part of my research, the cost for a healthy 60-64 y/o is almost exactly what it costs Medicare to insure a patient over the age of 64. The cost spikes if you have any diagnosis at all. Of course Medicare covers people who are sick also.
Steve
Posted by: steve at Jul 28, 2009 8:09:56 AM
Many analysts, Krugman in this case but certainly not only him, assume that individuals in a market economy actively seek out the skills and information needed to navigate complex transactions such as health care insurance decisions. However, the experts fail to account for the role of emotion and social facilitation in human decision making. The vast majority of Americans do not possess the skill or information to effectively utilize a health care marketplace, nor will they in the near future. Instead, most people feel completely overwhelmed by the system (as do many educated and skilled people by the way... just look at what happened with the medicare drug benefit when that was first open to enrollment). Under such conditions, and frankly even in less complex situations, humans seem to operate under a "behavioral willingness" model wherein rational information is only one of several components in a decision... social facilitation (friends, family, perceived social norms... e.g. advertising) and emotional preference are others. Thus, in the health care marketplace people are not going to make rational choices as much as they will make more "attractive" choices, a concept that incorporates other variables. Most people are not going to spend the vast amount of time it would take to build their skills as they have many other competing priorities. Thus, their decisions will be more governed by "willingness" considerations and not by pure economic logic. I would think that analysts would start to take these emotional and social factors into account after the repeated failure of their models to predict market behavior.
Posted by: MSmith at Jul 28, 2009 8:14:33 AM
In health care, adverse selection works both ways - insurers avoid sick patients, healthy patients don't pay for insurance. Fix one (community rating), worsen the other.
But that's what the employer mandate is for! The low-risk employees, who would see their costs go up by adverse selection in community rating, get insurance and minimize the cost effect. This is exactly why Krugman preferred Hilary's plan so strongly and has been so amused that Obama is now pushing for the mandate. By missing this the post is creating a real straw man.
Posted by: js at Jul 28, 2009 9:19:29 AM
As I understand it, in the auto-insurance market, where there is mandatory coverage, there is an assignment of very risky individuals to companies providing insurance. Could there be a similar program implemented in the health insurance market(s)?
Posted by: bastiat at Jul 28, 2009 9:19:49 AM
MSmith,
You are right, however, this does not follow that experts need to design better systems. Experts are as prone to irrationality as non-experts, and they are additionally prone to using non-expert irrationality for evil. What does follow is that the rational options should be available (and un-nudged) to those of us willing and able to use them.
Posted by: Andrew at Jul 28, 2009 9:22:07 AM
Here is an article that is illustrative: http://seattletimes.nwsource.com/html/health/2009393598_insuredandbroke28m.html
Posted by: Basho at Jul 28, 2009 9:41:10 AM
Community rating systems impose a tax in the form of the adverse selection costs borne by the healthy insureds. To make interstate insurance sales feasible, the Feds need to create a nationally uniform community ratings rule (not one pool, one rule), and then pick up the cost of adverse selection at the taxpayer leel rather than at the employer level. State community ratings laws would have to be preempted, but the national standard could be generous enough to make the preemption acceptable.
I wonder if that result could not be accomplished by the creation of a Federally funded reinsurance company, that provides virtually free reinsurance to health insurers for the cost of covering such pre-existing conditions as those companies are required to cover. The cost would then be borne by taxpayers as taxpayers, and not by conusmers. (This is an alternative to bastiat's assigned risk pool.)
In general, competitiveness consideraton suggest that the cost of healthcare needs to be moved to all taxpayers and away from American producers. This would be a step in that direction.
Posted by: Lawrence J. Kramer at Jul 28, 2009 10:03:04 AM
From PK's column:
"By regulation I mean the nationwide imposition of rules that would prevent insurance companies from denying coverage based on your medical history, or dropping your coverage when you get sick. This would stop insurers from gaming the system by covering only healthy people.
On the other side, individuals would also be prevented from gaming the system: Americans would be required to buy insurance even if they’re currently healthy, rather than signing up only when they need care."
So there wouldn't be a increases in low risk uninsureds.
Posted by: Anon at Jul 28, 2009 10:40:02 AM
bastiat: " in the auto-insurance market, where there is mandatory coverage, there is an assignment of very risky individuals to companies providing insurance. Could there be a similar program implemented in the health insurance market(s)?"
Thirty-five states currently require insurors to participate in high risk health insurance pools. Premiums range from 125% to 300% of standard risk rates. In a few states - including California and Pennsylvania - high risk insurees must contend with long waiting lists. But in most states coverage is available.
IMO, unavailability of insurance coverage does not cause many to be uninsured. Rather, it is the availability of free care - at non-profit hospitals and clinics - that enables Americans to avoid health insurance.
Posted by: John Dewey at Jul 28, 2009 11:02:39 AM
It can be simultaneously true that community rating causes a small increase in the uninsured (the Herring/Pauly contention which is supported by other research) and also that allowing the purchase across state lines of individual insurance would cause many unhealthy individuals in community rated states to lose their insurance (because less costly individuals jump ship to cheaper, less regulated, states). This posting sets up these two ideas as antithetical, which they are not, even if the ideologies of their authors are.
Some would claim that community rating provides a definitive societal good -- those who need insurance the most can obtain it at a price that does not vary with their individual health status. Of course, this comes at the cost of increasing premiums for the healthier of those among us. I would imagine that if many of us step back and consider from a veil of ignorance whether we might be sick one day, and how difficult it would be to obtain care in that situation in an unregulated state, perhaps a small increase in the number uninsured (this is what studies show) is worth the assurance that one can obtain access to health care when it is needed most.
Posted by: pj at Jul 28, 2009 11:06:51 AM
pj-
I think your second paragraph is dead on. But recognizing the societal benefit of adverse selection, shouldn't we go the next mile and use an actual tax to pay for it? After all, the opportunity to buy health insurance after one has become sick is tantamount to having health insurance all along at someone else's expense. Why should that "someone else" be American producers when, through income or sales taxes, it could be everyone, including, at least to some extent, our trading partners (who, not coincidentally, subsidize their workers' healthcare)?
Posted by: Lawrence J. Kramer at Jul 28, 2009 11:28:45 AM
Thanks for the post, it will be useful ammunition. I do find, as usual, the anti-GOP tone odd. You don't need to put it in to impress us, though many comments come from the right-leaning. DeMint shows a vastly superior understanding of economics, and we get a disclaimer on how he's "not objective." Obama, who you supported for President, by most accounts, pushes a program down our throats that flies in the face of even the most basic microeconomics -- and -- what...?
Posted by: Admiral at Jul 28, 2009 12:09:02 PM
My son recently moved back from California. While it is true that California doesn't have community rating, it does not allow insurance companies to test for HIV. The effect is that the cost of insurance for young, single men is prohibative and actuarily unfair to men without HIV. Most people are risk averse and will buy actuarily fair insurance. Community rating is a tax on the healthy and those people should eschew unfair insurance and they do. Of course the joke is that since healthy people don't buy insurance, the cost to the HIV folks is the same as if they had been appropriately rated. So much for community rating. Guaranteed issue? See the WSJ article last week. People wait until they are sick to buy insurance. So much for Mitt Romney.
Posted by: wsgrizzard at Jul 28, 2009 12:30:38 PM
I am not, by the way, suggesting that we should move everything to the individual insurance market or that
Jim DeMint is an objective analyst of U.S. health care.
Nor are the advocates of "herdcare" on the left. If everything Obama & his legions promise were true-
the bill sucks because of its rationing (aimed against the elderly, explicitly by the requirement to
undergo "counseling" on end of life issues. The damn thing is Logan's Run.
Posted by: Phil at Jul 28, 2009 12:50:39 PM
Is the issue really the number of uninsured people, though? It seems to me what we should be concerned about is the COST to uninsured people. Low-risk uninsured, who chose to be uninsured when their premiums rose, are in a much better position than high-risk uninsured who were denied insurance.
Posted by: Liz at Jul 28, 2009 1:31:29 PM
There is actually nothing wrong with unhealthy people footing their own bill when they take advantage of the information asymmetry of knowledge of their own health to try to screw the rest of us who planned ahead and chose not to be freeloaders. And there is nothing wrong with the insurance company attempting to weed out such people on our behalf under our voluntary system.
And the argument is not about community rating. It is about the limiting of people being able to buy across state lines because insurance companies will "cherry pick" the healthy. Now both Alex and Tyler have shown (at leas once each) that the cherry picking goes the other way. And, we know it goes the other way as it is the young and healthy that make up the majority of the number of uninsured (40 Million) that keeps getting cited by the reactionary left.
Krugman et. al. are just better at spinning it into a guilt trip by implying they are all poor children than I am at explaining the reality of it. Jim DeMint doesn't claim to be an economist, that I know of. Does Paul Krugman claim not to be a politician?
Posted by: Andrew at Jul 28, 2009 3:08:25 PM
Paul Krugman wants to put Jim DeMint in charge of your healthcare.
PK: "...bear in mind that this is what it would look like: an America in which nobody who has ever had a major health problem, or had a minor health problem that for some reason bothers the insurance company, can get coverage."
For real? Krugman cherry picks a bunch of nonsense from...CALIFORNIA, and really thinks that the California model would spread like wildfire until only immortals would ever get health insurance? Seriously?
Probably sick people probably end up requiring probably more medical services. What exactly is wrong with having their costs correlate with their costs?
Posted by: Andrew at Jul 28, 2009 4:11:15 PM
Let's be clear about what the debate is about.
The debate is what form of health service rationing is going to dominate the US market.
If you are middle class working for a small business and someone in the small business has been sick, then the odds are high that you will be rationed in your health services, with the services you can afford limited to what you can pay out of pocket. Maybe you will be healthy and not need care, as most people are. But if not, then because you didn't chose to work for, or are not allowed to work for, a big employer that is regulated by ERISA and large enough to negotiate real risk pooling with insurers (with the threat of a company run risk pool sort of like a public plan), your access to risk pooling will be severely rationed.
If you are unemployed and and older, then in most cases your access to risk pooling will be rationed, and even then, the access to preventative care will be rationed to the amount you can afford.
Unless you don't have nny assets or income, in which case you get free government run health insurance which rations your care less than for-profit insurers.
If you can survive to age 65, you are now freed from almost all rationing of health services, generally getting so many services your health often ends up worse. When 65, you get the services of several specialists, but the GP coordinating care is rationed, so he ends up merely referring and not managing.
So, the debate about community rating is a debate about only a small part of the health service rationing that takes place in the US.
Posted by: mulp at Jul 28, 2009 5:36:18 PM
Thirty-five states currently require insurors to participate in high risk health insurance pools. Premiums range from 125% to 300% of standard risk rates. In a few states - including California and Pennsylvania - high risk insurees must contend with long waiting lists. But in most states coverage is available.
The catch is that there is often a built-in exclusion for covering pre-existing conditions that lasts for 6-12 months. So if you are diabetic but want catastrophic insurance to protect you temporarily, you have to pay the outrageous premiums of the high risk pool insurer, plus cover all medical expenses out of your own pocket up to the deductible, plus all expenses relating to the diabetic condition will still be your own until the exclusion period elapses. The only people who would do this willingly are those with assets to protect.
The way to avoid this pre-existing exclusion is if you are on a COBRA plan and it is set to run out. You can enroll in a high risk insurance pool and they are not allowed to exclude the pre-existing condition under HIPAA.
IMO, unavailability of insurance coverage does not cause many to be uninsured. Rather, it is the availability of free care - at non-profit hospitals and clinics - that enables Americans to avoid health insurance.
No such thing as free. If you don't pay your hospital bill, they will send debt collectors after you. At that point you can either declare bankruptcy or negotiate a payment plan with the hospital. It is well-known that hospitals charge a huge markup on the uninsured compared to those with insurance. Example: a bill for $1317 from a hospital was settled in full by my insurance company for $769 -- a 42% discount off what an uninsured person would pay.
Posted by: Ricardo at Jul 29, 2009 2:59:27 AM
Ricardo: "The catch is that there is often a built-in exclusion for covering pre-existing conditions that lasts for 6-12 months."
I don't see this as a "catch". As you pointed out, COBRA benefits allow a bridge for those who lose their employer-provided insurance. The rest are simply gamblers who chose to accept the risk of being uninsured when they were healthy.
Ricardo: "No such thing as free. If you don't pay your hospital bill, they will send debt collectors after you."
According to a study by the IRS, U.S.non-profit hospitals provide, on average, 7% of their services as uncompensated care. You may argue this is insufficent to cover those uninsured due to insufficient income. But that uncompensated care was free to those patients.
Posted by: John Dewey at Jul 29, 2009 6:34:03 AM
Andrew said: "Probably sick people probably end up requiring probably more medical services. What exactly is wrong with having their costs correlate with their costs?"
If Americans agreed with you and we simply allowed people to pay amounts that correlated with their costs then the current system would work pretty well - technically while ignoring all moral considerations. When you consider the fact that people who are really sick tend to make less money than those who are healthy (at the limit of extreme illness you can't work at all) these people will just die off more quickly, saving us tons of money.
Or course, we don't and won't simply let people die because they can't afford to pay for their healthcare. We have all sorts of ways of making sure that people who can't afford the healthcare the need get it. The problem is that these ways are incredibly inefficient - like demanding that hospitals accept all comers at the emergency room and have the hospitals figure out how to pay for it.
Pretending that we are going to use a market driven system for healthcare is the root of most of our healthcare expense problems. It isn't market driven because there is no way we as Americans are going to be hard hearted enough to just let people die. The little fixes we provide to give those in need healthcare works as an artificial price support. Self-delusion is seldom helpful.
Posted by: Glenn at Jul 29, 2009 10:12:57 AM
Glenn: "It isn't market driven because there is no way we as Americans are going to be hard hearted enough to just let people die."
I think you are restricting the term "market driven" to mean "free market". Even with the government interevention currently in the health care industry, it is still driven by market forces.
Glenn: "Or course, we don't and won't simply let people die because they can't afford to pay for their healthcare. We have all sorts of ways of making sure that people who can't afford the healthcare the need get it."
True. But we have chosen inefficient means of providing health care to the poor. One way we could have provided health care for the poor is to give them vouchers with which to purchase health insurance. Then the government could have stepped aside and let free market forces find the most efficient solution. The problem is that Democrats and Republicans would almost certainly use a different definition for the word "poor". Democrats have no problem piling trillions of dollars in entitlements on the backs of the nation's most productive.
Posted by: John Dewey at Jul 29, 2009 10:25:11 AM
