The Right Way—and the Wrong Way—to Reform Insurance Markets

The Right Way—and the Wrong Way—to Reform Insurance Markets

JANUARY 25, 2010



Background:
In light of Sen.-elect Scott Brown's special election win last week, some Democrats have begun discussions about passing a smaller health reform bill.  For instance, Rep. Bill Pascrell (D-NJ) issued a list of nearly two dozen potential ideas forming the basis of a "smaller" bill, including suggestions to "end denials [of health insurance applications] based on pre-existing conditions" and "medical loss ratio requirements."  While many may support the concept of providing increased access for individuals with pre-existing conditions, the approach Democrats have discussed would likely result in significantly higher premiums.

The Problem:
In its December 2008 analysis of key issues surrounding health reform, the Congressional Budget Office (CBO) found that tighter insurance restrictions would likely lead to higher premiums.  The paper notes that "proposals to require insurers to cover all applicants or to guarantee coverage of pre-existing health conditions would benefit people whose health care would not be covered otherwise, but insurers would generally raise premiums to reflect the added costs."  CBO also found that rating restrictions-which limit insurance companies' ability to charge sicker applicants more than healthy ones-"have been found to increase premiums for healthier enrollees, decrease them for sicker enrollees, and to raise average premiums" overall.

The CBO paper reflects real world experiences in States that implemented guaranteed issue and community rating restrictions, ostensibly to help individuals with pre-existing conditions, around the time of the "HillaryCare" debate in the early 1990s.  As one comprehensive analysis showed, these "reforms" resulted in dramatically higher premiums and insurance carriers exiting markets-so much so that States like Kentucky were forced to repeal their tighter insurance restrictions. 

While politically appealing, ending denials of applicants with pre-existing conditions would give individuals a perverse incentive to avoid purchasing coverage until they become sick-raising premiums overall, and leading to an insurance "death spiral" whereby rising premiums force healthy people to drop insurance coverage, leading to even higher premiums that compel more healthy individuals to exit the marketplace.  Ironically, restrictions on pre-existing conditions as part of a smaller health bill without an individual mandate would likely result in even higher premiums than the $2,100 increase projected for the Senate bill (H.R. 3590)-because the taxes associated with a mandate would provide at least some financial disincentive for healthy people to drop their coverage in the face of rising premiums.

Many Members may support reforms that build on existing State-based high-risk pools to provide access to individuals with pre-existing conditions.  These pools exist in 35 States, and are funded through a combination of insurance surcharges, State assessments or general fund revenues, and federal discretionary grants.  Due to their success in providing access for those with pre-existing conditions and stabilizing fluctuations in insurance premiums, the Republican alternative to the Pelosi health care bill (H.R. 4038) included $25 billion in fully offset, new risk pool funding; CBO also found that the legislation would reduce average insurance premiums in all markets by up to 10 percent.

High-risk pools enjoy bipartisan support.  President Obama endorsed the concept-a component of Sen. John McCain's presidential platform-in his September address to Congress, and both the Pelosi (Section 101 of H.R. 3962) and Reid (Section 1101 of H.R. 3590) bills include $5 billion in risk pool funding for the years before the bills' Exchanges, insurance subsidies, and mandates took effect.

Given the broad support for high-risk pools, many may view this alternative as far preferable to either a "small" bill that would likely lead to skyrocketing insurance premiums-or Democrats' full government takeover of health care, with its associated bureaucracies, mandates, and tax increases.