Is There an Argument ― Any Argument ― for Community Rating?

I’ve never seen an intelligible argument for community rating.

I think I know why. I’m afraid there isn’t any.

Don’t believe me? I’ll tell you what I’ll do. I let you pick any recognized ethical system in the entire history of Western philosophy (Only Western? Yeah, we’re not cultural relativists here at the NCPA). Altruism, Egoism, Nietzschean ethics, Nicomachean (Aristotelian) ethics, Kantian ethics, Thomism (Christian ethics), Utilitarianism, Rawlsian ethics, etc. ― pick any one you like. Then at the other end, I won’t even confine you to health care. You can pick any good or service you like. Your task: to show how you can logically go from the chosen ethical system to the conclusion that the “just” amount a person should pay is the same for everybody, regardless of expected consumption.

While we’re waiting for that demonstration, let’s review the bidding. As everyone acknowledges, community rating creates horrible perverse incentives for everyone. On the buyer side, people have an incentive to refrain from insuring until they get sick. Once they do decide to buy, those who are charged an artificially low premium will over-insure. People who are over-charged will under-insure. Insurers will seek to attract the healthy and avoid the sick. After enrollment, their incentive will be to over-provide to the healthy and under-provide to the sick.

To put up with the bad outcomes of all those perversions, there must be some really compelling moral objective behind it. But I suspect that after it is examined closely most people will actually find community rating morally objectionable.

One of the worst aspects of community rating is that it generally takes from the young and gives to the old ― which is to say that it takes from those who have less and gives to those who have more. People in their fifties and sixties have higher incomes and more assets than people in their twenties and thirties. They are far more likely to have paid off their mortgage. They are more likely to have finished paying education expenses for their children. And with their greater disposable cash flow, they are in a much better position to pay actuarially fair premiums for health insurance than young people are prepared to pay for their higher community rated premiums.

Note: there is nothing progressive about community rating, even though such progressive health economists as Uwe Reinhardt and Jon Gruber are (inexplicably) out there defending the practice. Ditto for Paul Krugman.

I gotta be me

 Jon Gruber maintains that if you are healthy you are a “genetic lottery winner” who, in an unfettered market place, will face an “artificially low price.” But that’s not really an argument. It’s an epithet. It has hints of John Rawls. But you are never able to stretch Rawlsian logic far enough to explain why Sam Walton’s daughters should pay lower premiums (more on women below). Gruber doesn’t even try.

Paul Krugman, as we have repeatedly shown, doesn’t really know much about health economics. (See here, here and here.) But that doesn’t prevent him from morally castigating everyone who has an opinion different from his. In this case, he supports community rating because it is one of the three pillars of ObamaCare and he supports ObamaCare because…well…because his columns increasingly look like press releases put out by the Democratic National Committee. However, being a shill for the DNC doesn’t count as an argument either.

Uwe Reinhart doesn’t really take on the case for community rating as such. But he does argue for the idea that men and women should pay the same health insurance premium, even though women are expected to have higher medical expenses, other things equal. I was trying to grasp why Melinda Gates and I should pay the same premium the other day. Is it so that I can help subsidize health insurance for the woman who is married to the richest man in the world? (Or is he the second richest?) Of course that’s an extreme example, but it nicely illustrates an important point: community rating ignores all the factors most ethical systems would regard as important and strives to produce an outcome that most people would regard unimportant in any other context.

If community rating is good in health care, isn’t it equally good for life insurance, disability insurance or automobile liability insurance? Of course these are markets where men are charged more because their probability of filing a claim is higher. If, as Barack Obama claims, women are discriminated against in health insurance, aren’t men similarly discriminated against in these other insurance fields? And if so, why isn’t the president calling for an end to discrimination against men in the insurance markets where it is so rampant?

I believe I understand the president. He doesn’t care about discrimination. He wants to elect Democrats to Congress. Fair enough. But what about Reinhardt?

For Uwe, the case for gender neutrality begins with indebtedness:

Perhaps it is thought of as a small token of gratitude for the extraordinary contribution to humanity women make in this regard.

Then it advances to a claim about investing:

Besides, there is growing scientific evidence that the physical and intellectual development of humans into adulthood is strongly influenced by their experience and nutrition in utero and during early childhood. Thus, a nation does not even have to be particularly humane, but merely smart, to grant women of child-bearing age easy access to the best maternal and child care attainable, including good nutrition. It is a solid economic investment with high social returns over generations.

And winds up as a public good:

Yet as I have noted previously, many other Americans seem to view children more in the nature of lovable human pets ― that is, more in the nature of a private good than a precious social resource.

Hmmm. I’m sure alert readers will have noticed by this point we are nowhere near making a case for gender neutrality. Instead, a case is being made for preferential treatment for some (but not all) women of child bearing age. But, hey. Even if this case were valid, can’t we all think of ways of subsidizing children without screwing up the market for health insurance?

[Here is an aside: I suspect that if Professor Reinhart spent a little more time walking around campus and socializing he would discover that just about every left-wing environmentalist in Princeton, New Jersey, regards every newborn child as a potential threat to mother Gaia. Children are worse than pets. They're not a public good, they are a public bad ― whose production should be discouraged rather than encouraged. Do European leftist environmentalists really think differently?]

Bottom line: there is no case for community rating. The economics are irrational and it’s morally perverse. In fact, it’s an idea that is so strange that one wonders how anyone ever thought of it in the first place.

Comments (71)

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  1. Ken says:

    I think you’re right. Community rating is ultimately indefensible.

  2. Vicki says:

    So what’s wrong with being just like everybody else? Only kidding. :)

  3. Thomas says:

    “Insurers will seek to attract the healthy and avoid the sick. After enrollment, their incentive will be to over-provide to the healthy and under-provide to the sick.”

    There possibly cannot be any positives in community rating, as it brings out the worst in providers and consumers

    • Walter Q. says:

      Firms that are picking and choosing how they provide their services based on their own immoral incentives is corruption at its finest.

  4. Jay says:

    “If, as Barack Obama claims, women are discriminated against in health insurance, aren’t men similarly discriminated against in these other insurance fields?”

    Discrimination: Do it to both sides until it balances out.

  5. Mike Braun says:

    Just had a small business group get a 150% increase due to community rating.

  6. Charles M. says:

    One of the best signs that show that Obamacare is a faulty program is the fact that community rating is one of its main pillars. How can a governmental program, set to solve the issues in the healthcare system, is based on a theory with no economic ground. Community rating is harmful for the economy, it goes against the free market, it is unbelievable that some politicians (as some economists) state that it is beneficial.

  7. Bill B. says:

    “In this case, he supports community rating because it is one of the three pillars of ObamaCare and he supports ObamaCare.”

    Well, if you agree with one thing you have to agree with them all.

  8. c bohanon says:

    Gruber really bothers me as he states his opinion as if it is a fact — not even a hint that it is an unfalsifiable opinion-a purely normative proposition

  9. Earl Grinols says:

    Here is the ethical argument. Let Krugman be the hypothetical example.

    Krugman claims to want to do more to help the poor, yet does by his actions does not reduce his net worth even a penny below its current level, say $5 million. Instead he supports federal redistributive tax programs, community rating, and so on that force some other household to reduce ITS net worth to below $50 thousand.

    Before any other household is forced to reduce its net worth to below $50,000, Krugman should have done the same.

    This above conclusion is inescapable unless the federal tax system, or the community rating system, is a progressive as it can possibly be. This would mean that taxes are taken from the wealthiest household, reducing its wealth the level of the next, then taxes taken from the two until their wealth is reduced to the level of the third, and so on until the required tax total is collected.

    Only with such a system would Krugman be treated the same as he wants to treat others.

  10. Tom S. says:

    To what extent does one allow your beliefs to blind your judgment? How can a Nobel Laureate in economics argue in favor of a program that goes against economic theory? Hey, I agree that there should be some sacrifices in order to have a healthcare system that actually helped someone. But, basing a program that is not improving things in an economic atrocity is depressing. Is sad how the reputation of some economists is going down the drain with ACA. They are supporting the program hoping to get benefits, but in the end they are the ones who will lose. Time will show that the program is a failure and the biggest losers will be the economist that once defended Obamacare.

    • Peter B. says:

      I think that the biggest loser will be President Obama, having his name in a program that is doomed to fail. He will be remember as the President of broken promises, author of the biggest failure in US history, which bears his name.

  11. Earl Grinols says:

    Sorry about the typos in my previous post. Will do better next time.

  12. Yancey Ward says:

    Ethically, the argument can’t be made for community rating. The literal best argument a progressive could make is that everyone deserves to have their medical costs covered by assessment of progressive taxation across society.

  13. Mark Pauly says:

    You don’t need to go this far to show why community rating is the dumbest possible way even to do a good thing, something I argue at length in my Health Reform without Side Effects. Suppose we can agree that there are some groups who we want to help afford high risk based premiums. For my preferences that would be moderate to low income people who are high risk through no fault of their own, but if someone else wants to include everyone with genes to be obese, more susceptible to tempting foods, or the ability to bear children, that is fine. How should we make transfers to these deserving people? How about overcharging everybody else, even if young and poor, for their health insurance (a specific excise) versus a surcharge on the progressive income tax? Even those who hate the income tax (because they hate taxes) would I think opt for that tax in this Hobson’s choice. So in the short run let’s have high risk pools or risk adjusted subsidies financed by the most efficient and equitable general revenue taxes we can find. And longer term, as long as we are mandating people to do things, let’s mandate that they buy insurance when they are still healthy which not only pays their current health care costs but also covers the event that they are charged higher premiums if they become a lifetime high risk—the guaranteed renewability at class average rate solution from me and my colleagues and from John Cochrane.

    • John R. Graham says:

      I think I am having some kind of strange reaction to the discussion because I am softening on community rating!

      I am very interested to see Professor Pauly put risk-adjusted subsidies and high-risk pools in the same sentence. Of the two, I greatly favor subsidies. I’ve never been attracted by high-risk pools. It is another point of fragmentation in a system that already has too many. If a person can no longer afford premiums is it not simpler to give him a subsidy? (I ignore the problem of thereby creating an effectively very high marginal rate of income tax.)

      But I will go further:

      If a person can no longer afford premiums, he has to apply for the subsidy. This means navigating an administrative bureaucracy to prove need. This means a time lag, which means the patient might lapse in coverage and the insurer faces credit risk. (Not to mention the risk that the insurer might take the subsidy and spend it elsewhere.)

      On the other hand, if we have community rating and guaranteed issue with risk adjustment, the insurers bear no credit risk. This is surely why insurers have never got on board the idea of individual tax credits. And surely why the Obamacare exchanges are designed such that the tax credits go directly to insurers, not applicants.

  14. Blake Woodard says:

    John –

    An excellent editorial, especially with your allusions to life & auto insurance. Of course, since men pay more than women for these products, there never will be a political effort to make them gender neutral. You destroy community rating without getting bogged down in statistics.

    Now, let me re-work your e-mail subject line for another topic:

    Is There an Argument – Any Argument – for a Minimum Wage?

    I believe that the minimum wage is the single greatest of all liberal stupidities – it is the unholy of unholies. It separates the merely economically ignorant from the economic imbecile. Yet the liberals are winning the public battle on the minimum wage and inevitably will get it increased to $10+. How can this be, when the minimum wage is their Achilles Heel? Answer: The conservative response is inept. Conservatives spend all their energy bogged down in statistics, digging up studies trying to explain how many jobs an increased minimum wage might jeopardize. But once you go down that road, you are playing ball in the liberals’ stadium. The real argument is that there should be no minimum wage. The minimum wage does no good and very much bad. It’s not a matter of how high the minimum wage should be.

    John, you have done an outstanding job in destroying the false footing of so much of ObamaCare. I hope you will start to turn the conservative argument against the minimum wage so that we are fighting the battle in our stadium.

  15. Bob Hertz says:

    Well, it looks like I might be outlier on this issue, but that is OK as it makes for a livelier debate.

    Most Blue Cross plans offered community rating through the 1950’s. I know this was a very different era than today, but I have not read any accounts that this was a horrible era for those patients who subscribed to Blue Cross.

    Secondly:
    Well over 100 million Americans work for large private or government or university employers and are effectively covered by community rating within their firm.

    (including conservative scholars such as Richard Epstein and Mark Pauly, I suspect.)

    Once again I am not aware of any great calamities.

    Now….

    where Dr Goodman is correct is that community rating has worked badly when it was introduced into individual insurance markets in New York, New Jersey and several other states in the 1980’s. That is because healthier insureds could select against the state plans.

    This last item is not quite so dramatic a point, but it is all I will concede for the moment.

    • John Fembup says:

      “Well over 100 million Americans work for large private or government or university employers and are effectively covered by community rating within their firm.”

      I think that’s a hard statement to defend. How would you defend it?

      • Bob Hertz says:

        note to John Fembup:

        My statement that millions of Americans in the group market have a form of community rating
        can be backed up by Austin Frakt in The Incidental Economist, Oct 31 -2013, “Where is the outrage over employer-sponsored coverage in the rate shock debate?”

        Uwe Reinhardt had a series of posts on this subject in the NY Times Economix section on Jan 1 and Jan 8, 2010 also.

    • Greg Scandlen says:

      Bob, people in their mid-fifties are twice as likely to accept their company health plan as people in their mid-twenties. Maybe not a calamity, but entirely predictable as a result of community rating.

      You are right about the Blues, but of course the benefits were pretty skimpy compared to today and it lasted only 20 years or so. Fraternal organizations also used community rating for a while, but as their groups aged the younger members dropped out in favor of newer groups that had lower rates.

    • Underwriterguy says:

      Bob, commercial insurance companies seized on community rating by the Blues to create an industry – experience rated group insurance plans. If, as a business owner, you thought your employees were healthier than the population as a whole (and they probably were given younger average ages and the ability to hold down a full time job), you would welcome rates based on your group’s experience.
      Commercial carriers made great inroads in the large group business, leaving the Blues as the carrier of choice for individual and small group plans. Later BX/BS got into the ASO business as well.

      As alluded to above, “community rating” in a group is skewed by the average age of the workforce and the very fact that the policy holder is fit enough to work.

    • John R. Graham says:

      By the 1950s, we were a rich enough society that a large segment of it was demanding health insurance. The Internal Revenue Code provision that allowed employer-based benefits to be a non-taxable benefit was confirmed.

      If this had not happened, the big growth would have been in the individual market and underwriting would be understood and accepted.

      Because the major market was the group market, the Blues could community rate. However, (as noted elsewhere in this blog) the trade-off was that group contracts were re-underwritten annually, and this was done without restriction in most states until the 1990s.

      Perhaps the way to frame it is to look at it in terms of degrees of freedom. If you community rate cross-sectionally (via a group) you must re-underwrite longitudinally. If you underwrite cross-sectionally (when individuals enter the individual market), you can guarantee renewal longitudinally.

      But you cannot do both.

    • John Fembup says:

      Bob, I think when you cite the lack of complaints about community rating “through the 1950’s” you pick a timeframe that that is not relevant to our situation today. The timeframe you cite also lasted only about 25 years from the start-up of Blue Cross plans. More than 50 years have elapsed since the end of the 1950’s, and a lot has fundamentally changed. So I think the fact you cite “through the 1950’s” may be wistful, but it’s not useful.

      Neither Medicare nor Medicaid existed “thru the 1950’s” thus the ever-increasing oceans of federal money pouring into the medical economy did not yet exist.

      There has been an explosion of medical technology since the 1950’s. A great many of the medications and medical devices in common use today did not exist “through the 1950’s”. Nor did a surprising number of medical procedures exist that are in use today.

      Although technology advances tend to reduce costs in other sectors of the economy, medical technology famously tends to raise the cost of medical care.

      Perhaps not coincidentally, demand for medical care began to explode in the U.S. after the 1950’s.

      These changes help explain why medical care has become so much more costly, and why the cost of medical care has risen so much faster, after the 1950’s.

      Which in turn helps explain the high and rising cost of medical insurance, after the 1950’s.

      Through the 1950’s it mattered little whether insurance was experience rated or community rated – medical insurance remained inexpensive either way so long as medical care remained inexpensive.

      It therefore makes sense that there were few complaints about community rating “through the 1950’s” – either from subscribers or from Blue Cross – regardless whether you might have read them.

  16. Beverly Gossage says:

    Excellent post. An insurance policy that exchanges premium for risk at the time of purchase is how the individual marketplace functioned in KS and other states prior to Obamacare. Since 80% of claims are due to lifestyle choice, community rating has removed the incentive to maintain healthy habits.
    The health law has obliterated any “healthy” discount.We saw that happen first in the employer-sponsored model and now in the individual marketplace.

    • H D Carroll says:

      I should like you to come any where near justifying the claim that “80% of claims are due to lifestyle choice.” While the old actuarial truism that 80% of claims arise on 20% of the people is (amazingly consistently) pretty true, those claims probably have more to do with accidents, non-lung cancers, genetic conditions, heroic events such as keeping a neonate alive when they should be allowed to die, and provider caused errors and complications. Now, I suppose one might make the claim that heroic event claims are “life style choices,” I wouldn’t, but I would agree that I don’t want to pay the claims of all the health nuts generating billions of dollars in downhill skiing accidents, heart attacks while jogging, etc. – now, those are life style choices.

  17. Bruce W. Landes, MD says:

    The concept of insurance is one of shared risk against unpredictable events. It is still seen in life insurance and property and casualty insurance.

    Guaranteed issue and community rating transform health insurance into something else.

    Once your house is on fire, there is no uncertainty, the risk is 100%.

    If you can buy “insurance” at that point, you are only sharing costs, not risks.

    Sharing costs is just the flip side of sharing income or assets, the favorite pastime of socialists/progressives. So I find the position of well-known socialists/progressives in favor of community rating to be entirely consistent with their past positions on forced sharing of income and assets.

    • Bruce W. Landes, MD says:

      PS/OT: Does anyone want to bet that the enrollment period for Obamamcare WON’T be extended past March 31? I’m betting that it will.

  18. John Garen says:

    Great post. A good economic lesson and a good lesson in morality rolled into one.

  19. Jimbino says:

    Unappreciated differences between auto insurance and Obamacare are:

    1. You need no auto insurance if you don’t drive a car.
    2. Auto insurance carries no mandate. (The only mandate is proof of “financial responsibility.”)
    3. Auto insurers are not subject to “guaranteed issue.”
    4. You can stop paying auto insurance premiums when you’re out of the country.
    5. Auto insurance premiums are not heavily tax-favored.
    6. Auto insurance is not actuarially unsound.
    7. Auto insurance premium costs are widely published on the web, in newspapers, on the radio and on public signs.

  20. Linda Gorman says:

    An argument for community rating? Given the current craze for defining a good system as any system that eradicates all visible inequalities in outcomes, it is desirable simply because it equalizes the observable outcome–the visible price that everyone pays.

    It takes effort to think about the invisible inequities created by the efforts to eradicate visible ones, assuming that one is even equipped with the tools to do so.

    Plus, one shouldn’t underestimate the value of moral preening. Those who support systems that allow visible inequities can easily be dismissed as unfeeling, mean-spirited, ideologues of the sort who get their jollies by kicking puppies for fun. This eliminates the need to support one’s position with tedious reasoning and boring academic debate.

    • John R. Graham says:

      I will slide into Linda Gorman’s slip stream. Ethics is not what is driving behavior. Every industrial democracy in the world (including the U.S. as of this year) has a health plan that accepts everyone regardless of health status. It seems to be a characteristic of industrial democratic society. I’m not sure why, but if it is observed in 100% of cases, there is not much use trying to roll it over.

      Let’s put it another way: Medicare is community rated and has age bands of 1:1. The community rating is not as bad as Obamacare because you have to sign up pretty quickly once you turn 65.

      On the other hand, I pity the politician who campaigns on the “ethic” of making 75-year old Medicare beneficiaries pay higher premiums than 65-year old beneficiaries.

      • Jimbino says:

        Hong Kong, industrialized and the freest economy in the world, does not have anything like Obamacare or universal health care. Their public hospitals serve everyone on an emergency basis, but the gummint there recommends private insurance and private hospitals to those who can pay. There is no mandate, as far as I can tell.

        http://guides.wsj.com/hong-kong/guide-to-hong-kong/health-care/

        As for your false statement regarding Medicare: While Medicare Part A (hospital) is forced on everyone who qualifies, you do NOT have to sign up for Medicare Part B, Part C, or Part D. If you refuse to join, you save over $100 per month in premiums.

  21. Rituparna Basu says:

    I agree with you, John. There has never been a rational reason for sacrifice.

    Ayn Rand: “Now there is one word—a single word—which can blast the morality of altruism out of existence and which it cannot withstand—the word: ‘Why?’ Why must man live for the sake of others? Why must he be a sacrificial animal? Why is that the good? There is no earthly reason for it—and, ladies and gentlemen, in the whole history of philosophy no earthly reason has ever been given.

    It is only mysticism that can permit moralists to get away with it. It was mysticism, the unearthly, the supernatural, the irrational that has always been called upon to justify it—or, to be exact, to escape the necessity of justification. One does not justify the irrational, one just takes it on faith. What most moralists—and few of their victims—realize is that reason and altruism are incompatible.”

    http://aynrandlexicon.com/lexicon/altruism.html

    • Erik says:

      Who was sacrificing when Ann Rand was collecting Welfare?

      and

      “WHY” should they have to sacrifice because Ann got sick?

  22. Rituparna Basu says:

    What advocates of community rating count on is not rational thinking but guilt. For example, Gruber characterizes healthy people as “genetic lottery winners” because he wants them to feel guilty for being born healthy.

    What we need to do, if we want to fight CR and other such irrational regulations, is to demonstrate to people that this guilt is misplaced. Nobody should feel guilty (or proud) of something outside of their control. Guilt and pride, properly conceptualized, apply only to things we have control over (i.e., everything we do *after* we’re born).

  23. Bob Hertz says:

    Good for John Graham. He is absolutely right to say that those who benefit from community rating will be loath to give it up.

    Even now, the smaller companies who would like to send their employees to the Exchanges are struggling with how to move them from an environment with no age rating, to the Exchanges which have a 3:1 age ratio.

    Especially when the owner and his relatives might constitute most of the older employees!

  24. charlie bond says:

    Hi John,

    A bit of a rant from you on a day commemorating a great advocate for equality. Community rating, of course, is an effort to achieve equality. In health care, however, true equality can only be achieved when they standardize the human body and all the conditions, diseases and injuries that may befall it.

    That being said, a more nuanced approach might be agree that a social contract must be made to care for the sickest of the sick and the frailest of the frail. After all, that is a mark of humanity to which I believe all Americans are committed.

    Once that social contract is made, we then must create a cost shift. This subsidization is at the core of various public programs. The cost shift also perverts the pricing for private payors. This leads to the absence of cost-based pricing in health care, thereby creating the largest and potentially the most dangerous economic “bubble” in history.

    The fact is that if we were to remove from the insurance pool the 5% of the population that drives 90% of health care expenditures, the rest of us would be a pretty insurable lot. We do not need to reform 100% of our system to fix a 5% problem.

    As a country we are not going to abandon the 5%. We can, however, vigorously address the waste and inefficiency in the care they receive.

    For that reason, I am working with providers and communities to help build continuum-of-care organizations (COCO’s). Such organizations directly address the 5% of patients who are high utilizers to bring them more cost-effective care.

    The COCO typically includes doctors, hospital(s), nursing homes, home health agencies, social workers and volunteer organizations. It is amazing what cooperation and common sense can do. By reforming health care from the bottom up, not the top down, we can achieve better care at less cost.

    Because the 5% are also frequently in underserved communities, it is fitting to commit to the spread of organizations like COCO’s. These interdisciplinary organizations cut across lay and professional boundaries, mobilizing social workers and volunteers, alongside physicians and nurses to break down inefficient barriers to collaboration.

    COCO’s are a great example of how communities can work together and how communities can really RATE! Hence my comment on “community rating” and . . .

    Happy Birthday Dr. King.

    Charlie Bond

    • Jimbino says:

      While I’m no expert on the sayings of Dr King, I will note that “equality,” by itself, is ambiguous at best.

      It could mean equality of outcome, which is what the commies and socialists promote. Bad for tennis and bad for an economy.

      It could mean equality of opportunity, which is what libertarians and free-marketeers promote. Good for making Earth’s inhabitants rich.

      It could mean that for every dollar of my taxes that goes to support the brood of the breeders, a dollar of their taxes would go to support my travel and BMWs. Good for incentivizing my applying my weapons skills by moving to a country that really pays for them and leaving the USSA to cover the indolent breeders.

      Equality, in any case, is the poor stepchild of Liberty. I think that what Jesus, Gandhi and MLK promoted was NOT equality, but Liberty, same as Ayn Rand, Milton Friedman, Hayek, von Mises, Rothbard and John Stossel.

    • Wanda J. Jones says:

      John and all–

      Insurance rates should get our attention. But Charlie is right; if we don’t look at what insurance is buying, we are just playing with funds flow without a clear idea of the product.

      Charlie–by focusing on the 5%, it is not really possible to redesign the remainder of the health system. That 5% did not get to be expensive over-night. There was a period, perhaps years, when they were “at risk.” That is the time when “a stitch in time saves 9.” Chronic disease is our most prominent reason for seeking healthcare services. It has multiple precursors, and multi-year service needs. Instead of looking at people only as potential insureds, we could look at them by level of risk, but make sure that their payment arrangements are accompanied by a delivery system that is pertinent and adequate.

      I prefer a “membership” model in which the subscriber chooses the delivery system at the time of signing up for insurance, and immediately is evaluated for risk, then registered with the right clinical program. We are headed in that direction. One of the really good things about this approach is that the members registered in the same risk pool cohort can support each other in removing as many risk factors as possible.

      More about this if we meet.

      Wanda J. Jones, President
      New Century Healthcare Institute
      San Francisco

  25. Bob Hertz says:

    Perhaps I can paraphrase the last few posts as follows:

    When some entity with deep pockets is paying the premiums, (i.e. Medicare or a big company), then oommunity rating is practical and popular. The money for premiums comes from profits or taxes or shared savings.

    It is popular because the older and sicker employees love it, while the younger employees don’t care too much because the ultimate deductions from their pay are not obvious.

    When people have to pay premiums on their own, then they can see the problems with community rating, and they protest (and to some extent, this blog protests for them.)

    To complete what John G says, most nations other than America have very few people who buy health insurance on their own without subsidies. Thus the lack of international protest against community rating.

    • Jimbino says:

      The other differences between those who get their health insurance at work and those who pay through the nose for private insurance is that the latter can get the hell out, and move to a place like Hong Kong or Singapore that pays them for producing rather than breeding or getting sick.

  26. Don Levit says:

    As explained previously, community rating is the way large groups either self insure or fully insure their plans.
    This is a very equitable system, as long as the participation requirements are met.
    Individually, I agree this is not a viable system.
    At National Prosperity Life and Health, we will be community-rating large groups of 200 or more employees or more who self insure.
    So, their community rate will be their own experience rated amount.
    From a group perspective, a community-rate premium is more than equitable for those with chronic claims.
    For those with no or low claims, the community rate provides a good starting point, but is more equitable for all parties if monthly discounts are provided for those having low or no claims.
    While one must pay for this privilege, the fee is very fair.
    Premiums can reduce over a 36-60 month period by 60-80% for those who pay their small claims out of pocket, either through their own pockets or sharing with the employer.
    To have the ability to save $8,000 for a family plan every year can be quite the incentive.
    In addition, NPLH insures over time, the first $25,000-$50,000 of benefits for the self insured employer for employees with low or no claims, thus freeing up reserves from an insurance sinking fund for more appropriate business investment and expansion.
    Don Levit
    CFO
    National Prosperity Life and Health
    Tpabenefit.com

  27. John Goodman says:

    @ Earl Grinols

    Good point on Krugman.

    @ Mark Pauly

    Also, good points. I should have mentioned your book.

    @ Bon Hertz

    The reason Blue Cross community rated in the 1950’s is because it was created by the hospitals who wanted everyone covered — so their bills could be paid. Special privileges created by state governments allowed the Blues to dominate the market and that allowed hospitals to refuse to deal with other insurers who refused to do the same.

    Also, employers these days are required by law to ignore health status in setting employee premiums.

    @ Jimbino

    Grant all the differences. What is the point?

    @ Charlie Bond

    Sorry, but community rating does not create equality. It imposes arbitrary costs on some people in order to create arbitrary benefits for others.

    But I like your idea of segregating a solution for high costs enrollees and allowing the price system to work for everyone else.

    @ Wanda Jones

    Interesting idea.

    @ Don Levit

    Another interesting idea.

    • Jimbino says:

      The point about auto insurance is that folks could easily drop out if community rating were applied as it is in Obamacare, since there is no mandate to have auto insurance.

      • Greg Scandlen says:

        Jimbino,

        You have said this a couple of times now, but I did some research on this a few years ago and some 45 states do indeed mandate auto insurance coverage — in some cases with pretty severe penalties. But still some 14% of drivers are uninsured.

        • Jimbino says:

          Why don’t you cite one example of a state that requires auto insurance? California and Texas do not.

        • Jimbino says:

          The other point you don’t appreciate, Mr Scandlen, is that you don’t have to have auto insurance if you don’t drive a car.

          Obamacare is the ONLY insurance that subjects you to a mandate for merely existing!

          Germany, for example, has no mandate, as a person can opt to be “freiwillig unversichert.”

          • Greg Scandlen says:

            I do indeed appreciate that. My point is that mandates NEVER work. Here are a couple of links on state-by-state requirements —

            http://personalinsure.about.com/cs/vehicleratings/a/blautominimum.htm

            http://en.wikipedia.org/wiki/Vehicle_insurance_in_the_United_States#Requirements_by_state

            • Jimbino says:

              Greg Scandlen,

              Your citations deal with auto insurance. I maintain that auto insurance is not mandatory.

              Here is the rule in Texas Code, where you will see that there are FOUR alternatives to auto liability insurance:

              SUBCHAPTER C. FINANCIAL RESPONSIBILITY; REQUIREMENTS

              Sec. 601.051. REQUIREMENT OF FINANCIAL RESPONSIBILITY. A person may not operate a motor vehicle in this state unless financial responsibility is established for that vehicle through:
              (1) a motor vehicle liability insurance policy that complies with Subchapter D;
              (2) a surety bond filed under Section 601.121;
              (3) a deposit under Section 601.122;
              (4) a deposit under Section 601.123; or
              (5) self-insurance under Section 601.124.

  28. Bob Hertz says:

    Let’s build on what Dr Goodman said…..namely, that employers are prohibited from considering employee health when setting premiums.

    Which means that, until the ACA, you had a form of community rating for 85% of the population who get health insurance through work or government, versus medical rating for the other 15%.

    (and the other 15% in many cases want desperately to escape into the community rating of a large employer or Medicare.)

    I do not have the wisdom to say which is better.

    But is it at all surprising historically that this kind of stark
    division could not go on forever?

    I hate to give Nancy Pelosi the status of historical inevitability, or historical anything…but still, was a change inevitable?

  29. Paul Nelson says:

    As for the costly 10/70 rule, the problem of identifying reliably who is in the intense Complex Healthcare Needs group, in advance, is likely to be impossible. By the time they are recognized, the healthcare inertia created by their medical team has already taken on its own momentum. Controlling their costs would be like trying to slow down a coal train climbing down out of the mountains of Wyoming or Idaho. Rationing would be an alternative but, at this point, an unlikely possibility given its ethical demands.

    The economic mandate for healthcare will be rationally unsolvable without redressing the social mandate for healthcare. Would anyone really argue with me that the out of control healthcare cost is caused by our inability to arrange equitably available and culturally accessible Primary Health Care for each citizen? Unfortunately, the best evidence for this lies in the Maternal Mortality Ratio that varies from a low of 3.5 for Vermont, Maine, Indiana and ALASKA to a high of 20 or more for Oklahoma, Georgia, Michigan and the DISTRICT OF COLUMBIA (data 2001-2006, no other data are available from the CDC). An analysis of the data reveals a 0.876 (strong Pearson Correlation Coefficient) when connected with excess deaths from arteriosclerotic vascular disease (MMWR 9-2013, Vol 62 No 35). As affirmed by the Amnesty International USA 2010 study of our nation’s maternal mortality (now ranked 38th worst of the world’s developed nation), available and accessible Primary Health Care is the best solution for health conditions that can turn bad quickly, i.e., less than 4-6 hours. Findings: the lower a state maternal mortality ratio, the fewer ASVD related deaths that occur in the state. In a sense, if a state’s healthcare industry can minimize maternal mortality, it also means that it has promoted healthcare relationships as a basis to respond to any rapidly progress illness, such as a heart attack, early in its evolution to either prevent a hospitalization or at best keep it to 4-5 days instead of 7-10 days. Its the cart and horse dilemma. To pay the cost of the cart, you need a good horse. In short, solving the social mandate for Primary Health Care is the elephant in the closet. And so, what are the collaborative processes that will be necessary to achieve this mandate, community by community? That is the core issue for our nation’s healthcare reform. The economic mandate deserves the attention it receives here and elsewhere. However, without a good horse, the best cart will never be cost-effective.

    • Mark Kellen says:

      I would. First remember that health and life expectancy are primarily determined by ones personal actions and behaviors, not having a primary care doctor. There are also thousands of studies showing that most patients are non-compliant with their doctors recommendations even if you get them a primary care doctor. Thus “our inability to arrange equitably available and culturally accessible Primary Health Care for each citizen” has very little to do with our levels of medical spending. Our third party payment structure and unneeded government rules and regulations added to the poor behaviors and choices of a large segment of the population drive our medical costs.

  30. John Goodman says:

    @ Bob Hertz

    Everyone should understand that the effects of gender neutral premiums and age neutral premiums at work are off set by changes in wage rates. In general, health insurance benefits are substituting dollar for dollar for wages.

    • Bob Hertz says:

      I could be off the track here, but your statement implies that people who get community rated health care should on that account receive lower wages.

      But in most of America, the government employees and large-corp employees who get community rated health care ALSO get higher cash wages.

      Let me cite an example.

      A government records clerk gets a $40,000 salary plus an $8,000 health policy paid for by the school district, city, etc.

      A records clerk at Century 21 with identical skills does NOT usually get $48,000 to achieve something like parity.

      Instead the Century 21 might get a $35,000 salary and no company health insurance.

      Maybe I am not accounting for bargaining power.
      Still I have always been suspicious of the assertion that health insurance lowers wages.

      • Jimbino says:

        Bob Hertz,

        I have seen that effect in my own life, where, as a computer engineer, I have often had the option of working as a “captive” employee, or alternatively as a “shopper” under contract through a headhunter, independently under a 1099, or “corp-to-corp.”

        Only as a “captive” employee would I have been subjected to the insults of paid “benefits” including health insurance, paid vacation and holidays, paid sick leave, and FMLA. In exchange, I earned up to double the hourly wage of the “captive” stiff working beside me.

        I expect Obamacare to drive healthy, young, male computer engineers even more into the employ of headhunters or the embrace of independent contracting. I know that if I started a company, I would consider pay in stock options, forming a partnership, keeping the number of captive employees below the Obamacare limit, or simply moving overseas. All to avoid Obamacare at any cost.

  31. Todd Keefer says:

    Ok here is an argument FOR limited (by narrow age bands) community rating that may be a more efficient way to do what we would at greater cost through high risk pools:

    http://freemktmonkey.com/2012/09/04/restricted-community-rating-vs-high-risk-health-insurance-pools/

    • John R. Graham says:

      I think that argument is a bit of a red herring because it proposes “restricted community rating” by 5-year age bands.

      I am not quite sure how the author believes that this will solve the political problem. Perhaps he believes that if you only suffer a rate shock every five years you will forget about it?

      However, the reason I believe it is a red herring is that I understand that in an underwritten market, carriers do price policies within five-year age bands. It is not worth the effort to price in annual age bands. Actuaries: please correct me if I am wrong.

      If we did go back to an underwritten market, this might change, because data is so granular now that it may be cost-effective to underwrite annual aging.

      • Devon Herrick says:

        It will be hard to avoiding adverse selection in the exchanges considering that community rating is tied to 3:1 age bands. This makes health coverage a poor value for young people — who are already less likely to consider health coverage a good value. Age bands of 6:1 are probably more accurate with respect of actual costs differentials between young enrollees and old enrollees.

  32. Don Levit says:

    As a new partner in an insurer, the thought of enrolling people one at a time on the Exchanges terrifies me, due to the adverse selection.
    I wonder if individual policies could be written on the Exchange through an assocoation, with some minumum participation requirements to help ensure against adverse selection.
    Don Levit
    CFO
    National Prosperity Life and Health
    Tpabenefit.com

  33. Greg Scandlen says:

    What is missing in this discussion is the idea of prices as a measure of value. That is the magic of price — it balances the desires of both the buyer and the seller. Community rating interferes by arbitrarily telling the market how much it should value the product. For instance, people who are 55 place a MUCH higher value on coverage than do people who are 25 (with some exceptions). Older and sicker people are willing to pay more than younger and healthier ones. It is not arbitrary discrimination.

    One of the current themes is that it is unfair to charge women more than men. But despite that difference in price women of all ages are far more likely to be covered than their male counterparts — they VALUE it more, so paying more is not unfair.

  34. Bob Hertz says:

    Unless, Greg, you look on health care as to some extent a public good, to be paid for by taxes and not by actuarial premiums at all.

    Then those who have more money and income pay more, and those who have less money pay less. Gender, age,medical history and occupation are irrelevant.

    This is how Medicare and Medicaid are funded, essentially. It is how some entire nations fund their health care.

    I do not expect the USA to turn on a dime and start paying for all of our health care through taxes.

    But I wanted to kind of remind us all of something that Joseph White said in his book Competing Solutions.
    Namely, that Americans worry tremendously about the fairness of insurance premiums, and some other nations could not care less.

  35. Bruce W. Landes, MD says:

    The Administration can blow all the smoke they want but Moody’s knows an insurance death-spiral in the making when it sees it.

    “HHS officials said they saw an eight-fold increase in the numbers of young adults signing up for coverage, but the totals so far are well below the 40% threshold that Obama Administration officials had hoped for. With that in mind, Moody’s Investors Service said this week that the preliminary healthcare exchange demographics are a credit negative for health insurers.”

    “The bond rating agency noted that WellPoint, Inc. (Baa2 stable) and Health Net, Inc. (Ba3 positive), are particularly exposed to potential losses because they have aggressively taken part in the exchanges.”

    “Moody’s said health insurers mandated to provide coverage for a risk pool that is skewed towards older and less-healthy people would see higher medical costs and reduced earnings in 2014, and would find themselves pressed to raise premiums in 2015. “Neither outcome bodes well for a vibrant insurance exchange, which insurers had been counting on for increased revenues and income,” Moody’s said.”

    From an article published by Healthleader’s Media, January 21, 2014

  36. Underwriterguy says:

    We can speculate all we want about the nature of the risk pools, but the proof is not far in coming. Sometime this summer insurers will begin setting rates for the fall enrollment period.
    Without demographic data as a proxy for health status they will rely on incomplete claims to project 2015 costs.
    Some of the 2015 rate will be based on this experience, some will be based on anticipated costs of expanded enrollment. And in some ways 2015 rate setting will be more difficult than 2014 given all the 2014 assumptions that did not pan out.
    Insurers may get a bailout from the Feds for 2014 losses, but I doubt any carrier will price 2015 assuming continued Fed support. They will want self supporting rates.
    The sticker shock is going to be earth shaking. We can only hope all this is public prior to the election.

  37. Bruce W. Landes, MD says:

    We HAVE medical cost data data on about 100,000 people who enrolled in the Pre-Existing Condition Insurance Plan (PCIP) established in 2010 by PPACA.

    “Since its inception, PCIP has cumulatively helped 134,7081 people with medical conditions access the health care they need but have been unable to afford without health insurance. The average cost per enrollee in 2012 was $32,108 per year and varied widely by state, from a low of $4,276 per enrollee to a high of $171,909 per enrollee. Not only do costs vary by state they also vary per enrollee. In one year, 4.4 percent of PCIP enrollees accounted for over 50 percent of claims paid. This report documents the growth the program has experienced, the characteristics of people covered under the program, the measures CMS has taken to contain costs, and the challenges of covering people in high risk pools versus broader health insurance pools like those that begin in 2014 through new Marketplaces, or Exchanges.”
    http://www.cms.gov/CCIIO/Resources/Files/Downloads/pcip_annual_report_01312013.pdf

    “The federally-run Pre-Existing Condition Insurance Plan (PCIP) will offer the option of two additional months of PCIP coverage to people currently enrolled in PCIP who have not yet found new health insurance coverage. This transitional coverage through March 31, 2014, will allow PCIP enrollees more time to review Marketplace plan options and enroll in the coverage that best meets their needs before open enrollment closes in March.” https://pcip.gov/

    In November 2013, I had lunch with the president of the North Texas/Oklahoma region for a major national insurer that is selling products on the Marketplace. Not only was he not familiar with the above report, he was unaware of the existence of the PCIP itself.

    God help them.

  38. Studebaker says:

    I have an idea how to justify community rating and make it stable. Start by taking the average claim in a community. Divide the sum total of likely claims within the community by the number of likely enrollees in the community (plus administrative fees). Then, take those community members that bring down the average risk within the community and give them a discount. Then, take the people who are likely to boost the risk within the community, and charge them a higher premium.

    • John R. Graham says:

      Studebaker,

      Are you having fun with us?

      What you describe is community rating and then underwriting after community rating to counter the effect of community rating.

      Why bother to community rate in the first place?

  39. Bob Hertz says:

    Good points about the old Blue Cross, John.

    For what it’s worth, I do not favor community rating today.

    The real question to ask is this:

    if people over 50 and/or with bad health cannot afford free market insurance, how should we help them?

    (I am assuming that a combination of the Golden Rule plus a concern for hospital solvency would persuade us to help them get affordable insurance. Ron Paul, I am not.)

    The Obamacare method of helping the older group is to charge more to younger persons. The jury is out on this method but the early ‘returns’ are not promising.

    A better method in my view is the subsidize the older group from new tax dollars, rather than baking in higher premiums throughout the health insurance world.

    Let’s say it would take $50 billion a year to subsidize older insureds, so that their insurance cost did not exceed 10% of their incomes.

    This would be a payroll tax increase of 1% (if we chose to use the payroll tax — I am just grabbing an example here.)

    A 1% tax increase means that Warren Buffett pays an extra $1 million in taxes, and an assembly line worker making $40,000 pays an extra $400, and a well paid government worker with free health insurance pays an extra $1200 a year.

    This probably needs to be disguised in some way to get through Congress.

    However, I do hope that the opponents of community rating will deal with the numbers involved.

  40. John Fembup says:

    “Is There an Argument ― Any Argument ― for Community Rating?”

    Apparently not. Not in this comment string. Not anywhere else. Not in 2014. And not for “insurance.”

    On the other hand, perhaps what America really wants is universal welfare not universal insurance. In other words, not Medicare for all, but Medicaid for all. In that case wouldn’t the whole question of community rating simply disappear?