• If employers could risk-rate, would they?

    Last week, Adrianna asked why we don’t see many complaints about the fact that employer-sponsored health insurance is community rated even though there is great concern among some about the (modified) community rating in the ACA’s remade individual market.

    If one is concerned about the ACA’s community rating provisions, one might point to the recent, AEI-sponsored proposal for risk-rating as an alternative. (Read all about that in the exchanges between me and Harold, linked to here.) Is it really a viable alternative? Though I defended it, I have my doubts.

    Here’s my question for risk-rating advocates: if there were no constraints on employers’ ability to risk-rate, could you imagine them doing so? I can’t. The instant the first employer did any such thing, I think the outrage would be deafening. The bad press would be crippling. The media would easily find the sympathetic cases — the cancer patients now having to pay $35,000 premiums and the like — and that’d drown out all the economists claiming greater efficiency. The company would lose many valuable employees as competitors with community rated products would snatch them up.

    To be sure, some may also leave employers who offered community rated products and flock to the risk-rating company — those who would get a better deal. These would be the younger and healthier employees, with less experience and, therefore, less value to the company. I wonder if any company could survive this reshuffling (and bad press!).

    Now imagine the counterfactual world in which the individual market was already community rated. Imagine anyone proposing to change that to risk-rating or to returning it to the condition under which it exists today. Again, I think this would be a non-starter for the reasons cited above. Do you think I’m wrong?

    Status quo bias — Starr’s policy trap —┬áis real. It’s perpetuated by the ease with which we can find losers in any transition away from it, the appetite we have for their stories, the fear that we will someday be in their shoes. What’s interesting is that we have two insurance markets — group and individual — in which the status quo is different. One is community rated and one isn’t, but soon will be. If you agree with me that changing either is hard, then that can’t be because they both make sense. They’re totally different!

    No, it must be that the status quo is strong. It’d be just as strong running the other way. This is, by definition, irrational, except on an individual level (because there really are winners and losers, even if there are more of one than the other).

    Do we have the courage to do something broadly rational? Honestly, I don’t know. If we always identify or sympathize with the losers, probably not. But, yes, there are losers. There are losers today and losers under any reform. The argument to do anything has to be that creating new winners justifies creating new losers. No, we have not had that debate openly and honestly, though some of us have certainly thought it through for ourselves.


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