• 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 — is 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.


    • I am a loser on my house fire insurance every year… also on my auto insurance and on my life insurance.
      This is insurance, not a stock investment… get over it.

      • Yep, i’m a loser on all of those, too. Also my taxes that go to the police and fire department and on top of it, I have way too much money to qualify for an ACA subsidy. Sucks to be me, doesn’t it? ;>)

      • And thank goodness you’re a “loser.” Because if you “won” it would mean you’re sick, dead, or your house burned down.

        Viewed year-to-year, the majority of insured are “losers.” That’s the nature of insurance, it couldn’t work any other way. Viewed over a lifetime? Different story . . . on average, we all more or less break even (except for insurance company admin costs, which is a different argument).

    • I think your assumption that there would be worker outrage in the labour market would have to assume a state of the economy at near full employment, with workers who have reasonably significant bargaining power.
      I don’t believe this is the case right now.

    • Yes, of course a person loses on the average for all kinds of insurance. But a great problem is that the press always reports whether or not a person who’s suffered a catastrophe like Sandy or Katrina had insurance.

      This is skewed evidence, seeing that the press never reports how much insurance a person had who did NOT suffer a catastrophe. I live the examined and uninsured life and my spreadsheet shows that I will be richer by $2,000,000 to $7,000,000 at 65, after paying cash for all my losses.

      Insurance is one of the stupidest things a person can do to himself or his family.

    • Community rating, as pointed out in the article, offers no advantages to anyone – in the beginning.
      That is why I am in favor of doing so for the new insurer we are forming.
      And, how does one address adverse selection, so that the healthy don’t flock to experience rating, and the sick don’t flock to community rating?
      For the healthy – offer discounts for no or low claims, each month.
      This will be funded by a separate rider. Discounts accumulate to 60% off of community rating in 36 months; 80% in 60 months.
      2. Continue to community rate the sick, so their premiums will remain “reasonable.”
      They also will pay the same price for the rider, which allows the healthy to receive monthly discounts.
      Don Levit

    • Jimbino — that works fine if everything works fine for you — but shit happens and shit happens early on in the investment cycle which kills the power of compound interest

      • Snarky Bastard,

        You have to admit that lots of folks who get hit early declare bankruptcy, and that a lot of them were insured!

        Furthermore, even granting your dedication to sacrifice of everything on the altar of risk-aversion, in reality you have to deal with the problem of deciding how much of insurance-premium theft a risk-averse person can stand.

        Otherwise your argument would work for insurance premiums of 99% of your income.

        Bulletin: Nothing happened in Peoria today, but unfortunately everyone there was fully insured.

    • “The instant the first employer did any such thing, I think the outrage would be deafening.”

      The frog was put into the pot of water which was gradually heated up to a boil. There is a type of risk rating that has always existed, but at first it wasn’t noticed.

      1) The sickest people cannot work and are not in the employment pool.
      2) Employer sponsored health care was always something of a sham for the insurer was off the hook with the most expensive group of insured. That group would lose their jobs and thus their insurance. In essence that is a mean type of risk adjustment that has been going on for decades.
      3) Think of the rise of defined contribution instead of defined benefit. (It is a movement towards normality. I am not creating an argument about normality.) (Walgreen’s, Darden restaurant group, Sears)
      4) Think of the fact that the employer hires employees so frequently risk adjustment is performed on the spot.

      This is the problem one gets with bad policy. This is fallout from the one-sided tax deduction given to the employer, but not the individual. This created third party payer which is one of the main problems of our healthcare system failures of today. Solving this problem would go a long way to improving our health care system.

      So far the most successful plan to date has been the HSA (MSA).

    • Ideally health insurance would be insurance against having significantly (say 30%) above median life time health expenses.

      • I should add that I believe that because my experience shows me that much less would be spent on healthcare if spending came directly out of consumers pockets. Nobody (MD’s included) cares about Government or Insurance company money and that is a big problem. IMO healthcare changes should be done with that in mind.

    • John Goodman posted this today.

      Fact is, “risk rating” is kind of what employer’s do when they adopt very high deductible health plans.

      And, no, employers cannot vary employee cost sharing due to existing medical conditions – however, that does not stop the insurance companies, of course.

      You nailed it, of course, that the employer has the short stick here. If the insurance company shoulder’s any risk, it is only the short term risk that after a very poor experience year, the employer will take their business elsewhere once there is a 20%, 30%, 50% or higher rate increase – leaving the insurance company with a loss that they will have to spread over remaining insurance contracts.

      In the future, once the public exchanges are stable and successful, expect those employers who suffer major losses in their health plans to take their rotten experience to the public exchanges – maybe for a year, maybe for a few.