Community Rating

If there is a single issue that most divides economists from non-economists, it’s the way they view prices. Economists view prices as creators of incentives for buyers and sellers. When prices change behavior changes. As a result, prices are mechanisms for determining the allocation of resources. If they are not allowed to perform this role bad things will typically happen on both sides of the market.

Non-economists too often ignore this very important social function. Many tend to view prices as merely reflective of power. A powerful buyer can push a price down. A powerful seller can push a price up. And since government is the most powerful entity of all, the non-economic way of thinking often looks to government to set prices. Many non-economists believe you can push a price up (such as a wage or the price of a farm commodity) or push a price down (such as the price of gasoline or housing rents) and nothing bad will happen. And of course the non-economist would be right, if prices didn’t influence behavior and if they didn’t allocate resources.

Everyone is aware that when government changes a price, there will be winners and losers. But many non-economists think this is all that happens. They think one man’s gain is another man’s loss and that there are no other social consequences of price changes.

Nowhere is this difference in thinking more apparent than with respect to community rating.

Can’t go on
Everything I had is gone.

It’s hard to think of a public policy that more completely ignores the lessons of economic theory than community rating. In a free market for health insurance, premiums will reflect risks. To join an insurance pool, a buyer will have to pay a premium equal to the expected costs he brings to the pool. Since everyone is different, in principle you could have a different premium for every enrollee. With community rating, however, everyone pays the same premium. That means that virtually every price is the wrong price. Every buyer is paying the wrong amount and every seller is receiving the wrong amount.

Before continuing, a word about health economics. I have said before that when people turn to health policy, their IQs tend to fall about 15 points. (To which Uwe Reinhardt always asks if I include myself in that generalization. Perhaps. But at least I’m aware of the problem.) What I haven’t said before is that when economists turn to health policy, not only does their IQ take an unfortunate dip, they tend to forget everything they learned in graduate school. No, make that, everything they learned in Econ 101. (And no, this generalization doesn’t apply to me.)

A case in point is Paul Krugman (Nobel laureate no less) who tells The New York Times readers week after week that community rating is one of three pillars of ObamaCare, that it is a good thing and that ObamaCare will work. But where in all of economics is there a single journal article or a paper at NBER or at any other reputable place that shows you can charge every buyer the wrong premium and end up with a system that works? There isn’t any.

Suppose we had community rating for life insurance. If I am on my death bed, what would I do? I would buy a lot of it. Actually, I would do something different. I would ask my heirs to invest in their inheritance by paying the premiums. Then I would ask the viatical companies what rate of return they need on their investment and sell them the right to buy even more insurance on my life. As I and other people do these things, the premium for healthy people would almost certainly soar, if the insurance companies are to stay afloat. As the premium rises, the healthy will drop out of the market and in no time at all we would be in a death spiral ― with life insurance market headed toward oblivion.

To avoid this eventuality, the insurers would try their best to avoid the old and the sick and sell only to the young and the healthy. Perhaps they would locate in a tree house that is accessible only by climbing a long rope. Only kidding about that. But not about the principle.

In health insurance, the perverse incentives created by community rating are just as bad or worse. As I wrote in a previous post:

  • On the buyer side, people who are under-charged will over-insure and people who are over-charged will under-insure. The sick will have too much insurance; the healthy, too little.
  • If you are sick and require a lot of medical care but can pay the premium ordinarily charged to a healthy enrollee, you will likely choose the richest plan you can find. If you are healthy, you will tend to buy the cheapest plan and perhaps no plan at all. (Remember, you can always switch plans if your health status changes ― with no penalty whatsoever.)
  • Insurers will try to attract the healthy (on whom they expect to make a profit) and avoid the sick (on whom they expect to incur losses). If healthy people tend to buy on price and sick people tend to buy on benefits and who is included in the provider network, the insurers will respond by scaling back their benefits and their provider networks (so as to discourage the sick) in order to lower their premiums (to appeal to the healthy). See our previous post on the race to the bottom with respect to access to care.
  • The insurers will also configure their plans so that there are low co-payments for the services healthy people are likely to obtain and high deductibles and large copayments for hospital care and other expensive procedures that will be required by the sick.
  • Finally, the perverse incentives do not end at the point of enrollment. They continue. The insurers will have perverse incentives to over-provide to the healthy (to keep the ones they have and attract more of them) and to under-provide to the sick (to avoid attracting more of them and encourage those they have to go elsewhere).

[BTW, risk adjustment in the ObamaCare exchanges ― taking money from some insurers and giving it to others ― may actually overpay for certain types of chronic illnesses, making them more attractive to insurers than healthy people. But any time there is non-market fixing of premiums and artificial risk adjustment, the total revenue for any particular enrollee is almost certain to be wrong ― in one direction or another.]

To anticipate an objection from people who are not regular visitors to this site, we do not need to destroy the price system in order to help people with pre-existing conditions ― the primary argument of ObamaCare proponents on the eve of its passage. About 107,000 people who were denied insurance because of a pre-existing condition were allowed to enroll in ObamaCare risk pools, paying roughly the same premium that would ordinarily be charged to healthy insurance buyers.

As public policies go, these risk pools are not a bad solution although a better idea is “change of health status” insurance, which we have described elsewhere. But the Obama administration insists that to help these people beginning next year, we need to muck up the market for everyone else.

But why? There are people who are too poor to afford the food they need. But would anyone think it reasonable to make 330 million Americans pay below-market prices in order to address that problem. There are people who can’t afford decent housing. But is anyone so foolish as to suggest that the government should regulate the price of everyone’s house in order to help the few who need assistance?

Yet this is what ObamaCare proposes to do with health insurance and Paul Krugman thinks this is just dandy. The law will impose price controls on the premiums faced by 10 million to 20 million people in the health insurance exchanges (no one knows exactly how many at this point) in order to help the 107,000. Go figure.

By the way, there is nothing new about community rating. More than 90% of people with private insurance obtained it from an entity that is not allowed to price premiums based on health status. Add to that the Medicare and Medicaid populations and you find that to the degree that people are charged any premium at all, almost everybody in the whole country is paying a community rated premium.

Far from being a solution to our problems, community rating is probably the single biggest cause of all the dysfunctions we are currently experiencing.

Comments (58)

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  1. JD says:

    “A case in point is Paul Krugman (Nobel laureate no less) who tells The New York Times readers week after week that community rating is one of three pillars of ObamaCare, that it is a good thing and that ObamaCare will work. But where in all of economics is there a single journal article or a paper at NBER or at any other reputable place that shows you can charge every buyer the wrong premium and end up with a system that works? There isn’t any.”

    This. If Krugman wants to take that position then fine, but back it up. It’s amazing that a “man of science” acts this way.

    • Dewaine says:

      It may be more amazing that he has a following. Unfortunately, people don’t verify what they read. Krugman should be out on the street.

      • JD says:

        Right, although we can’t all be experts in every field, we have to be able to trust other people. How do we get to a point where we can rely on the information of others? Maybe “accreditation” services?

        • Dewaine says:

          We should be able to trust the experts in a field, although it may take time to get a consensus. I think we just have to suffer through it and expect to not know everything.

      • Ray says:

        I agree Dewaine. Actuarily, Community Rating has failed throughout history in Association Health Plans that usually go broke. It just doesn’t add up. ACA will fail, because only the unhealthy and older individuals and low income that generate subsidies will seek it out and break the bank, as if it’s not already broke without ACA.

        • Centrist says:

          Ray, look long term. The ACA is just a half-step to Universal HC. The ACA was designed to … not fail … but to transform at a certain point into UHC, of which is alive and well in every other industrial nation on earth. Only self interest would engender actions which would preclude denying needed medical care to one’s fellow citizens. Every effort should be made to eliminate government dependence, but civility must prevail in the end.

          • Ray says:

            Whatever Centrist. Single Payer long term is dreamland for a utopia world, that only a Liberal minded, unrealistic blogger would accept. To give up your private information to the government, especially the IRS, that targets certain political affiliations and individuals who disagree with say the Democrat Party, would be discriminated against in endless ways. Where is our Long Term Liberties my Liberal Friend? Our Liberties to think and free speech and petition our government who is becoming more powerful every day. They are suppose to work for us when we vote them in. We are not suppose to be subservient to the government like we were with King George, when we declared our Independence, and adopted our own nation with our Constitution. I oppose anything our leaders force on us to purchase. This is not a Monarchy yet last time I checked. And don’t give me that crap about the Social Security System being so great. That system is broken too. I’m not in the mood to talk about 83 trillion dollars of unfunded liabilities so we can provide Utopia to everyone. Look at Detroit and Chicago and other broken states that provide all the undeserved benefits that become a lifestyle for many who don’t turn a tap. Peace my friend. OUT!!!!!!!!!!!!!

    • Billy says:

      Krugman is arrogant enough to refuse to admit he was ever wrong even when his columns disagree with one another.

      • Allan (formerly Al) says:

        Same is true when his column disagreed with the economics text he and his wife wrote.

  2. Dewaine says:

    “The sick will have too much insurance; the healthy, too little.”

    Meaning that one of the assumed benefits of ObamaCare is bunk. Young people will have less coverage than ever.

    • Stewart T. says:

      At least with Obamacare they will HAVE coverage.

      • Dewaine says:

        True, but what will they have foregone? You can’t tell me that a couple hundred bucks (at least) isn’t worth a lot to a young person.

        • Greg Scandlen says:

          Not true. They will not have coverage under Obamacare just as they do not have coverage today. In fact, with guaranteed issue fewer of them will have coverage a year from now than do today.

  3. Dewaine says:

    “and in no time at all we would be in a death spiral.”

    This is the bottom line. In the private sector this impact wouldn’t be so bad, but with the lumbering, unresponsive government latched on, the death spiral may last for years, costing us a fortune.

  4. Sean Parnell says:

    It is amazing how many people just seem to think that normal economic forces just don’t apply to healthcare. We may be on the cusp of a very large, very painful lesson in this regard thanks to Obamacare.

    • Dewaine says:

      My experience is that a lot people who understand the laws of economics don’t like the conclusions that they reach. Many turn a blind eye to the truth in favor of a comfortable fantasy.

  5. Vicki says:

    I like the Etta James version of Stormy Weather better.

  6. Don McCanne says:

    Each person paying an insurance premium based on the amount of health care expected to be consumed is nothing more than paying cash plus an extra fee for insurer administrative services – a fee which would have to reflect the costs of calculating each person’s anticipated expenses (an impossibility anyway since we can’t predict the future).

    To say that otherwise everyone pays the wrong price is the equivalent of saying that insurance should not be performing the function of distributing the high costs of a few individuals to the many who have fewer health care needs. But isn’t that what we are trying to do with insurance? That view seems to be especially true of those who support high-deductible health plans (whether or not they are linked to HSAs).

    Community rating ignores the lessons of economic theory? Are we choosing our lessons here?

    Going to the extreme of rating the entire nation as one community, in fact, provides the most effective and efficient transfer from the healthy to the sick. That’s the lesson of economic theory that we should be learning.

    • Greg Scandlen says:

      You are right, Don, we can’t predict the future. And that is the point of insurance. Risk-based rating is to cover known and expected expenses. This is “pre-paid health care.” You need “insurance” to cover the unknown and unexpected expenses. Unfortunately, we conflate the two and that causes all kinds of confusion.

  7. Allan (formerly Al) says:

    You might be just kidding, “Perhaps they would locate in a tree house that is accessible only by climbing a long rope.”, but I have heard of Medicare HMO’s having enrollment luncheons on the second floor of a walk up building.

    “over-provide to the healthy (to keep the ones they have and attract more of them) and to under-provide to the sick”

    One of our local physicians had extremely long waiting times for the sick that would then be seen by the PA while he would see the healthy patients to generate new business. Since most patients are healthy he was well liked, but other doctors that received and treated his sick patients had a few things to say about him. He always got his bonus from the HMO while the others that actually treated his sick patients lost theirs.

    The name of the programs may change from year to year, but the incentives don’t.

  8. John C. Goodman says:

    In an email I received from John Cochrane:

    Very good. In your second paragraph, I might add:

    Non-economists too often ignore this very important social function. Most view prices as means to transfer wealth – low prices make the buyer better off, high prices transfer wealth to the seller. As a result, many tend to view prices as merely reflective of power.

  9. H D Carroll says:

    “Change of health status insurance” would have to be required or you would end up with, guess what, another 107,000 people who are not insurable because they decided not to buy it. Oh, and then you would need to community rate that coverage, which would overcharge the healthier people, or it would cost too much for unhealthy people. With an open ended expense stream staring them in the face from a person who “changes status” from healthy to chronic/catastrophic claim status, insurers are simply not going to want to be in this line of business, at least not as a standalone “rider” or product. They might if it were a part of a “whole life” health policy such as they have in Germany – level premium (i.e., issue age based) coverage. However, that is pretty unlikely with Medicare hanging around, but perhaps we could design a product that is coverage up to whatever the starting age is for Medicare (because it is going to go up), and then it “converts” to a Medicare supplement type policy using the nonforfeiture value as the asset base to have it “paid up” at that point. The fact is, banking on a standalone “status change” product is merely hitting the insurability issue into another court – it doesn’t eliminate the problem.

  10. Uwe Reinhardt says:

    At the risk of seeking to be as smart as John is — heaven forfend — his colleagues are not as unaware of these issues as he may think. Here is what i tell my cclass about it:

    “In the absence of government regulation to the contrary, a price-competitive health insurance market will segment the market for insured by their risk class – that is, in terms of the probability density functions (PDFs) associated with each applicant’s set of personal characteristics (age, profession, health status, gender, etc). The premiums charged each risk class would then be actuarially fair.

    Note that ex post, within a given risk class of insured, those lucky enough to have remained healthy will have subsidized the care of those unlucky enough to have gotten sick through the same actuarially fair premiums everyone in that risk pool had paid into the pool. The important thing is that ex ante no one in the pool knew who would be subsidizing whom in this way. Ex ante they all had the identical PDF of future health-care spending.

    It is different when it can be known ex ante that the PDFs of different applicants for insurance are different – e.g., when one applicant is known to have a chronic illness while the other appears to be perfectly healthy. If the two are thrown into one risk pool and each is charged the identical premium that equals the average expected health spending per person in the pool, then it can be known ex ante who will be likely to be subsidizing whom in the pool. It is a form of income redistribution. It is called “community rating.”

    It turns out that citizens not schooled in actuarial methods or commercial health insurance practices have mixed feelings on actuarially fair premiums. One sees outrage over the practice in the media with some regularity. In response, most countries mandate insurers to charge all customers the same premium, regardless of health status or personal characteristics – i.e.., community-rated premiums.

    Switzerland, for example, does it that way. Germany does. The Netherlands do. American employers who sponsor health insurance for employees also invariably practice community rating. Only the tiny minority who traditionally had bought insurance on an individual basis from commercially insurers had been charged actuarially premiums. Starting in 2014, however, insurers selling to individuals or small groups in that market also must use community-rated premiums within age bands.

    Community rating, though well intentioned, brings out the worst in both buyers and sellers of insurance. For that reason community rating always must be accompanied by strict regulation if it is to work at all.

    You should be aware of the tradeoff here.

    Most economists probably would argue that ideally one should let competing insurers price actuarially fairly and then subsidize the individual insured to reach the degree of equity desired – measured, for example, by a maximum percentage of income a household will be asked to pay for its own health care. In practice, such a scheme would be administratively very complex, not even to mention the potential for cheating.”

    • John Goodman says:

      “Community rating, though well intentioned, brings out the worst in both buyers and sellers of insurance.”

      That’s very strange wording. If community rating creates perverse incentives, why isn’t it perversely intentioned? Are you telling us that the Obama folks went haplessly along without ever consulting you or Cutler or Gruber? And when people act in their own self interest (by responding to artificial prices) why is that bringing out the worst in them? Aren’t they supposed to maximize their utility? Isn’t that a good thing?

      Uwe, there is one more thing you should tell your class. When the government forces the insurers to compete vigorously in the face of community rating and imperfect regulation, the results are likely to be very bad.

      • Don McCanne says:

        The Affordable Care Act calls for actuarially fair pricing of insurance products and then uses premium and cost-sharing subsidies based on income, which seems to be the model that Dr. Reinhardt suggests in his last paragraph. It is indeed administratively complex and does little to correct one of the major deficiencies in our health care financing – the profound administrative waste of our system.

        Single payer greatly reduces this waste while establishing equity by using progressive taxes to fund a universal risk pool. It may not be the preferred model in this blog, but it certainly has validity.

        Regarding Dr. Goodman’s comment on bad outcomes when the government forces insurers to compete under community rating and regulation, the answer is simple – eliminate the superfluous private insurers.

        • H D Carroll says:

          Single payer will merely lead to the degradation in the provision of health services in a totally predictable race to the bottom, because there is no motivation for innovation, creativity, or opportunity to improve the situation and be rewarded for it. People who push single payer, being primarily statists in nature, seek to insure the principle of “share the pain,” whereas an all payer system, with non-discriminatory “mostly” free market (i.e., minimum regulation) provider pricing, would generate a flood of innovation and creativity in insurance and administrative efficiency, an environment based on “share the gain,” all of which is prohibited by the ACA, since it essentially takes away all actuarial license and replaces it with “we know best” forced plan designs, government goon (i.e., HHS secretary types) pressure on insurers to set rates lower than they should be, and the early stages of two or three tier medicine that will come from narrow networks. Price and supply setting (inevitable consequences of single payer) have never worked as planned in the history of human economic activity.

        • John Fembup says:

          Don McCanne says: “to correct one of the major deficiencies in our health care financing – the profound administrative waste of our system . . . the answer is simple – eliminate the superfluous private insurers.”

          These remarks got me to thinking.

          I propose a means of ending hunger in the U.S – a national, single-grocer plan.

          In America today, many people go hungry because wholesome groceries are not available, or cost too much.

          There are tens of thousands of grocery stores, each with their own ownership, staff, management, pricing, and operations. Clearly this results in profound administrative waste.

          Even worse, all neighborhoods don’t have an adequate number of groceries, and some grocers do not even offer fresh produce in low-income neighborhoods. Yet in the suburbs there are lots of grocery stores offering a vast supply of fresh and healthful food.

          How can the nation allow this unequal and unfair treatment of its citizens? This is why a national, single-grocer plan makes sense.

          This plan would provide pre-paid groceries to the lower 50% of taxpayers; they could go to any grocer they choose and bag up anything they want, at zero cost to them.

          A federal ID card would be issued to these citizens to certify their groceries are pre-paid by the U.S. Government Single-Grocer Plan.

          Taxpayers whose incomes are in the upper 50% would continue to pay for groceries as they do now.

          In a national single-grocer plan, a new federal agency, the Single-Grocer Administration (SGA) would take over the entire grocery business. This will eliminate the enormous overhead from the thousands of private grocers, and will produce huge savings. These savings will be enough to supply suburban-quality groceries to Americans who today cannot afford, or have no access to, such groceries.

          The SGA would exclusively manage the grocery business in all states, so that equal access to suburban-quality groceries will be guaranteed.

          SGA would use its market power to reduce the price of every kind of food.

          SGA would be empowered to work with the Department of Agriculture and to regulate food producers so as to optimize the production of all groceries within the U.S.

          The overall production of food will not be compromised, because that is not just economically but politically unacceptable. Thus the federal single-grocer plan will continue to ensure production of enough groceries to eliminate hunger in this country.

          It is unconscionable that a nation able to export food to all corners of the earth, not be able to feed 100% of its own population.

          I call on the Congress to adopt this national single-grocer plan as soon as they can pass a federal budget.

    • Allan (formerly Al) says:

      Uwe, I know a lot of veterinarians and physicians that live under this ‘employer community rating’. It works well until the employer is faced with bills from older and sicker employees. Their premiums shoot up and they stop offering health care or they reduce the benefits until they see a spiral that cannot be stopped. Then they hire only the young and healthy while terminating the older and more expensive ones. I guess that is one of the reasons it is so hard for certain older individuals to find a job in many areas.

      If we are dealing with trade-offs, why on each trade-off did the ACA mostly chose the worst deals.

      • Allan (formerly Al) says:

        Uwe, I should have also asked why, if we had such bright people advising the government even before Hillary Care, yourself included, did the government fall into such ill conceived traps where the trade offs weren’t appreciated?

  11. Billy says:

    Paul Krugman – former Enron advisor.

  12. Centrist says:

    If free market economics were to exist without community safeguards, what becomes of that portion of the community that cannot or will not purchase insurance–or is underinsured–and subsequently cannot pay for services rendered? What is the free market solution for bad debt?

    If I am not mistaken, it had traditionally fallen on the shoulders of the providers who in turn pass that cost on to their patrons, communities, and government. If memory serves, the public demand in 2008 was to address the runaway government and provider healthcare costs. It appears that the resultant ACA does shift risk to insurers and their larger risk pools and away from government and providers. Doesn’t the free market have to bend to customer demand?

    • John Fembup says:

      Centrist, you describe an insurance-related approach to a cost-related problem. That won’t succeed any more than similar approaches have, for 50 years now.

      The cost-shifting you allude to does not increase or reduce total costs; it only moves them around and changes who ends up paying for them. Passing the cost problem along to someone else is no solution. History and experience teach that approach does not work. Sadly, the U.S. has not learned from history and experience.

      Why does insurance costs so much? Because medical care costs so much. And as matters stand, most people believe we are not getting our money’s worth. It might be that if the American public were well-informed on the issue, we would decide higher medical costs are worth it if necessary for better access and outcomes. But at the moment I think most people believe we are paying much more for worse access and about the same outcomes that other countries enjoy.

      Our so-called leaders have not engaged the public on these issues. It’s been 50 years. Moses escaped his wilderness in 40 years. OK, medical costs are more difficult. But still . . . And now we have ACA which is just another insurance mechanism doing virtually nothing to engage on medical costs. Americans should be asking: Why?

      Meanwhile the cost of insurance continues to be the major, blinking-red symptom of the cost of medical care.

      Would you keep seeing a physician who treated your symptom but failed to treat the underlying condition? Why does America continue to do precisely that?

      Astonishing.

      • Centrist says:

        Might I suggest the ACA Mandate (in theory) means that 1) providers will receive payment for most all services rendered, in turn reducing provider chargers, and 2) insurer’s admin being capped and patron pools being larger should in turn moderate premium costs. Decrying ‘failure’ before the bird is served is impolite.

        • John Fembup says:

          “Decrying ‘failure’ before the bird is served is impolite.”

          Centrist, you somehow missed the entire point of my comment.

          You are still focused on payments and insurance admin and premium costs.

          I think I am very clearly talking about the cost to deliver modern medical care.

          (I don’t think I was impolite – my apologies if you took it that way.)

          • Centrist says:

            “That [ACA approach] won’t succeed any more than similar approaches have, for 50 years now.” Sorry, I thought you were suggesting the ACA will fail for some reason. I hope, for the sake of the country, that it’s main goals are successful.

            I would think that reducing medical procedural costs would stay within the purview of the providers. Legislation can only address certain aspects of health care (participation and risk), while only ‘encouraging’ reduction in areas beyond their control. What ‘do’ providers suggest to reduce their costs to their patients?

            • John Fembup says:

              “Sorry, I thought you were suggesting the ACA will fail for some reason.”

              It will fail – for the reason I clearly stated. But that was not the point of my post. You still miss the point.

              The point is that medical cost is the problem. Insurance is but a sypmtom. That explains why the problem won’t be solved by fiddling around with insurance. Call it ACA or ACC or CAA – or leave it to private insurance – doesn’t matter. Insurance is not the problem and won’t be the solution. Medical cost is the problem.

              You then add “I would think that reducing medical procedural costs would stay within the purview of the providers.”

              Do you also think that reducing insurance costs would stay within the purview of the insurers?

              I don’t believe you think the latter. Why should I believe you really think that about the former?

        • Greg Scandlen says:

          But this same bird has been served many times before. Mandates simply do not work. Whether is is seat belt laws, cellphones in cars, helmet laws, auto insurance, child support, or even taxes, about 15% of the population does not comply. Interestingly, that is about the same percentage that fails to acquire health insurance in the voluntary market.

          Regarding bad debts, it amounts to about 3% of total spending — not much of a burden on the system, and far less than retailers lose to shoplifters.

          • John Fembup says:

            “But this same bird has been served many times before.”

            Yes. And returned to the kitchen uneaten each time.

        • Allan (formerly Al) says:

          “Decrying ‘failure’ before the bird is served is impolite.”

          Force feeding the bird to recipients is more than impolite, its battery.

  13. Ron says:

    PRICE COMPRESSION under ObamaCare is just as bad and perverse An older person (e.g. age 60)can not be charged more than 3 times the premium as a younger person (e.g. age 20). (This called Price Compression)

    Actuarially, the ratio is more like 5 to 1. So, let’s say you are the insurer taking on the risk of a two person client base whose expected costs are $5000 (age 60 person) and $1,000 (age 20 person). These are your only customers. The government may be able by law to force the 3 to 1 pricing scheme, but they can not change the expected costs totalling $6,000. So, what is the insurer to do to avoid bankrupcy, penalties, or a government forced shut down?

    Here is the likely insurance response from their actuarial department: Lower the cost of the age 60 person to $4,500 and raise the price of the age 20 person to $1,500. Now the insurer can collect $6,000 and have a 3 to 1 ratio of costs. Sounds great at first.

    But then the “Goodman” reality sets in. The aged 20 complains that his cost was just increased by 50%! He drops coverage. Other young people were uninsured because they couldn’t or didn’t want to pay the orginal $1,000 completely refuse to pay the $1,500.

    We now have increased the number of uninsured with greater concentration of the young and healthy who ObamaCare is relying on to support its distorted economics.

    To compensate the Obama folks say, don’t worry we will provide subsides and force everyone to buy health insurance – that will keep everyone in the system and keep costs low. WRONG. The subsidies are not enough to overcome the cost increases. The young thought they were getting ObamaCare for nothing. The penalties and the collection processes are inadequate.

    But never worry, we will get more government police and force to make it happen in a couple of years and THEN —- Single Payor, because it didn’t work – blame the insurance companies, Congress for not funding enough subsidies and marketing support, and …. probably G.W. Bush.

    Oh, I as an actuary and math major, I never did like irrational numbers like Pi (3.14159….)that never end. Can we just get the “irrational” government to declare the value of Pi equal to 3.0?

  14. Wanda J. Jones says:

    All–while this is a very appropriate topic for debate, especially as it is usually discussed as an opinion piece, not as a product of a fact-based simulation, it still focuses on the price of insurance on day one. Here is another problem: insurance pricing is supposed to reflect the combined factors of numbers of enrollees, their risk status, their use rates and the cost of providing services. When the price is arbitrarily bracketed, there is no ability to judge whether costs of care are too high or too low, and the price trend in insurance does not mirror the cost trend in the actual care system.

    When the cost trend is invisible, and prices set either arbitrarily or by indexing to a non-health measure, such as changes in GDP, there is no chance of finding cost problems that could be the basis for significant redesign.

    Politically, there is a strong incentive on the part of the administration to not highlight the actual sources of high costs; The first place to look would be the cost of healthcare workers– number,staffing patterns, wages and benefits. A huge share of their time is spent on administrative tasks imposed by regulation.
    Another category of high costs is that of scientific innovation. But those costs need to be tracked along with the health improvements thus achieved. Much talk by economists stays away from the reality of operating a healthcare system.

    Price comparisons among providers and among insurers are futile if one cannot “drill down” to see the actual roots of prices. Without that ability, the arbitrary prices for insurance will trend down sufficiently to force weak providers out of business, and they will usually be the ones geographically located where there are a lot of low income people. Money spent on drugs was onece only 3% of a premium; now it is twelve percent. But drugs are the most effective form of treatment.

    “Field research” is a term I have applied to my recent admission for a chole-systectomy. The procedure was a laparoscopy–four puncture wounds, not an open field. Rapid recovery. High value, moderate price. As a patient, I knew not to ask for an open field procedure,

    Another barrier to accurate pricing is that most providers accept most insurance, so incentives built into each plan are blended with all other plan incentives until the provider cannot tell what standard of care to give. The ethos of the medical profession is to not determine the intensity of care based on costs. My impression of the decision-making for my own case is that by doing the most modern type of procedure, the costs were reduced.

    What I object to is the government’s assumption that it can regulate insurance pricing and it will have only salutary effects on the delivery of healthcare. There is a long-standing economic experiment of this type in the form of county hospitals, and their performance compared with civilian hospitals. Highland hospital, in Oakland, has not paid its suppliers in 5 months. People are leaving.
    The only reason it has doctors is that house staff trade their educational opportunities for giving care to the poor. As they have to take even more patients paid at MediCal prices, they will fall further behind.

    Only armchair economists will imagine that Obamacare will have only good effects.

    Wanda J. Jones
    President
    New Century Healthcare Institute
    San Francisco

  15. Deethorn says:

    “There are people who are too poor to afford the food they need. But would anyone think it reasonable to make 330 million Americans pay below-market prices in order to address that problem. There are people who can’t afford decent housing. But is anyone so foolish as to suggest that the government should regulate the price of everyone’s house in order to help the few who need assistance?”

    But John – many people DO think that food/housing should be regulated in just such a way!

  16. Rituparna Basu says:

    John, I think the reason Krugman and other economists support community rating goes beyond just forgetting Econ 101.

    Their moral views trump their economic understanding–they think it is morally wrong for insurers to charge people higher premiums if they are older or less healthy. Community rating corrects this alleged injustice, which is why they support it.

    The economic distortions community rating causes, which you describe at length, are a secondary concern (at best) to them. They address this by proposing further government controls, such as the individual mandate, in order to hide the destructive effects of community rating.

    I’ve published a response to your post, here: http://blog.aynrandcenter.org/paul-krugman-hasnt-forgotten-econ-101/

    • Allan (formerly Al) says:

      It seems then that their morality is in question. I don’t think it is moral for young families that in general have lower incomes to be forced to pay for older people that no longer have children, have money put away, and in general have higher incomes.

      • Al Baun says:

        Are you refering to the ACA, Social Security, Medicare, or seniors discounts at Dennys? Your condemnation fits all four.

        • Allan (formerly Al) says:

          Morality is in the eye of the beholder.

          If you think it moral that a young family with children should be supporting those that have higher incomes, more assets and no dependents then that is your problem.

          • Al Baun says:

            So in kind, it should be immoral for an older, financially better off, person to accept benefit from younger, less affluent families? If you think pay-go social systems in the U.S. are immoral, then I will assume that you will forego any Medicare or Social Security when you retire … which entails the young paying for the old. This is where moralism bumps up against hypocrisy.

            • Allan (formerly Al) says:

              I am not the immoral one that perpetrated the immorality.
              I am not the one that supports the immorality.
              I am not the one that believes in force to perpetuate the immorality.

              I didn’t design the laws that created the problem: Young families with children to support being forced to provide money to others without children that have more assets, and more income is immoral.

              Hypocrisy sits with the ones willing to use force to make others comply with this immorality.

              • Al Baun says:

                Hypocrisy is condemning something while participating in the thing that one in condemning. SS, Medicare, and the ACA all shuffle money from the young and give to the old or disabled.

                So, using your sentiment, Roosevelt’s SSA is immoral but you receive benefit from the program; Johnson’s CMA is immoral but you receive benefit from the Medicare program; Obama’s Treasury Dept. is immoral but you receive benefit from the ACA, by prolonging the solvency of Medicare.

                I always get a bit edgy when people start slinging ‘immoralities’ at things they simply don’t like but profit from. I personally see my civic duty to support you old SS/Medicare farts as well as the fiscally challenged wrt healthcare. (No, I am not on SS, Medicare, or ACA)

                • Allan (formerly Al) says:

                  What a bunch of bull and hypocrisy combined with ignorance of what was said, a dangerous combination.

                  I did not say I was against any of these programs. I said it is immoral through means of force to make the young with children pay for those that have more income, assets and don’t have dependents.

                  • Al Baun says:

                    If you assert that the ACA mandate program (forced participation tax) is somehow immoral and different in theory than the SS/Medicare programs (forced participation tax), then your operative of ‘ignorance’ is appropriate.

                    • Allan (formerly Al) says:

                      There is something wrong with your reading skills. I didn’t comment on programs. I commented on issues that may be contained in programs. The issue of my concern that I find immoral is when force is used to make “the young with children pay for those that have more income, assets and don’t have dependents.”

                      Why don’t you look at all the statements above and take note that what I am saying is different than what you wish I was saying. You appear unable to formulate an effective argument so you have created your own in order to argue with yourself.

                      You can keep doing that if that is how you get your jollies.

  17. Ron says:

    Think about it… 65% of uninsured are under age 35. Most work and pay Medicare taxes of 2.9% of their salary to fund the healthcare for those pover age 65. They are paying for those adults who also ran up a national debt of $17 trillion dollars and a=passed that onto the young workers and future generations.

    Now, ObamaCare wants the young and health to also enroll in a forced national health insurance scheme that will also use their income to pay for those under age 65 who can’t afford health insurance.

    When will the young in this country realize they are being ripped off for future government promises that they will get similar benefits when they get older or are in bad health?

    Without a growing population of workers this Ponzi scheme will collapse. We now have 90 million NOT working in the labor force, an all time high.

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