• “Individualized premiums” Let’s not go there

    Eight distinguished figures in health policy presented an ambitious health plan at the American Enterprise Institute this week. I suspect that you’ll be hearing more about this at TIE. I want to make one quick comment.

    Bullet-point slides present the central pillars of their plan. My friend Hank Aaron was brutal in his role as AEI discussant:

    I find it exceedingly difficult to discuss this proposal for three reasons. First, we are in the midst of a great national effort to implement systemic health reform. That is the business of the day. This proposal seems irrelevant to that debate as it has little in common with any proposal now under discussion by either the political left or the political right. Second, it has design features that I find unappealing but, more importantly, that I am sure would have little appeal to the general public. Third, it leaves unspecified so many essential program elements, that I find it hard to know just what we are talking about.

    And that was just the first paragraph! I share Hank’s basic perspective, though I’d be gentler. Political relevance is not the only lens through which such proposals should be viewed. It’s useful to see an imaginative alternative presented, from such accomplished figures. Even the flaws and the details left unspecified are helpful. If nothing else, the gaps give us greater sympathy for congressional staffers tasked to write the hundreds of pages of junk DNA in health reform bills.

    It’s also useful to be reminded of the need to curb regressive tax expenditures for employer-provided coverage. The key obstacles here are interest-group politics and knotty transition problems, not lack of analytic clarity. ACA’s Cadillac tax was, in its way, a brave effort to bring greater efficiency to public policy.

    Table 3 of their paper presents the deductible structure of a basic, income-related high-deductible plan as they conceive it. I find it clarifying. I suspect many TIE readers who admire the incentive-structure of high-deductible policies would hesitate once they viewed the actual details of at least the most basic of such policies.

    Among families with no unusual health burdens, the AEI plan provides pretty full insurance for four-person families with incomes below $33,000.  Things get daunting when incomes get much higher. A healthy family with an income of $67,050 would face a deductible exceeding $20,000. At the $89,000 income level, deductibles exceed $35,000, and things escalate after that.  Presumably a supplemental market would layer something on top of this. Even so…

    The authors are particularly exorcised about preventing “the forced transfer of resources from healthy poor consumers to the sick rich.”

    To advance this principle, their basic high-deductible insurance plan provides protections on a sliding scale for “extremely burdened” families predicted to experience high medical costs. The plan would impose no deductible and low copayments up to 300% of the poverty line ($67,000), and then rapidly raising the deductible when incomes reach six-figure levels. An “extremely burdened” family at 700% of the poverty line (an income of $156,450) would face a deductible of about $55,000 with 20% copayments. An “extremely burdened” family with an income of $223,500 would face a deductible of $145,000.

    I’m not sure how these extreme expected medical burdens would be calculated, how intermediate burdens would be addressed. Many details remain to be specified. Yet the underlying principle is clarifying: Low-income sick people would receive large financial subsidies. These subsidies would be dramatically reduced as one moved up the economic scale.

    Eliminating community rating

    I believe their plan’s most troubling feature is noted in one bullet point, which would overturn a central pillar of the Affordable Care Act.

    Eliminate community-rating and allow individualized premiums to eliminate adverse selection and end the forced transfer of resources from healthy poor consumers to the sick rich.

    Despite the ostensibly progressive frame, this strikes me as a gigantic blunder .

    One of ACA’s signal accomplishments was to provide an emphatic statement that prevailing practices within the individual and small-group insurance market must change. It is no longer acceptable for firms to follow a business model which relies on individual-level risk-selection through explicit or implicit discrimination against the sick, injured, chronically disabled, or others with high expected costs. Such practices expose people to unacceptable classification risk. The underwriting process also exposes people to unwarranted indignities and implicit deterrents to seeking care.

    ACA sent a clear signal to insurers—and to regulators, too—that the legal framework has changed. It will now enforce different and better social values. ACA does not impose complete community rating. Premiums are allowed to vary by age and smoking status. Beyond that, though, insurers are not to go. ACA is designed to dismantle the basic structure of medical underwriting. It rejects the idea that people should be charged higher premiums based on higher expected medical costs.

    Whether health reform can fully deliver on this promise is another matter. Community rating requires an individual mandate and  perhaps other mechanisms to ensure an adequate risk pool. Depending upon the details, young and healthy people face some incentives to “go bare” rather than to pay community-rated premiums. Ironically, community rating brings its own self-sabotage. Uninformed healthy consumers might believe—incorrectly, in the case of ACA—that they go uncovered, simply waiting to “sign up” in the event of serious injury or illness.

    Community rating can fail in the absence of such effective mechanisms. New York and other states that implemented strong community rating in the absence of individual mandates have seen serious problems. ACA’s CLASS Act sadly imploded in the absence of such mandates, too, leaving a gaping hole in the areas of disability and long-term care.

    ACA’s most immediate challenge in this area concerns allowable age-gradients in premiums. ACA already includes substantial subsidies for young and healthy people who have modest incomes. Some of these subsidies improve the risk-pool within the new exchanges. Others do not. Age-related options to purchase catastrophic coverage brings people in. Allowing young adults to remain on their parents’ insurance plans is sound policy and politically wise. Yet as Adrianna has noted, this does not help health insurance exchanges with their risk-pool difficulties.

    It might be wise to allow greater age-gradients in premiums, with implicit or explicit general revenue subsidies into the new exchanges to make these arrangements work for older people.  Allowing the system to bend in these ways is quite different from allowing insurers to individualize premiums outside the generic characteristic of age, or to legitimate a medical underwriting process that most Americans rightly consider cruel and unfair. This strikes me as a natural compromise between the ACA and what these authors are trying to accomplish. This may be  the best remedy should too few young people respond to the mandate.

    Individualized premiums reduce some incentives for cream-skimming, but create or perpetuate others. As with the ACA, any real-world insurance system modeled on the AEI plan would require (as-yet hypothesized) risk-adjustment systems, essential benefit regulations, and daunting fine-print. There is no simple and elegant solution to these inherent complexities.

    References to “the wealthy sick” occur conspicuously often in the accompanying paper. I wonder how many such people there really are, and how many dollars we’re really talking about. Particularly if one considers things in a lifecycle perspective, there are plenty of other ways for the rich to help the poor, and plenty of ways to enact more progressive fiscal policies such as raising estate taxes on the more-than-sick rich to tightening the home mortgage deduction.

    To my knowledge, no wealthy democracy implements universal coverage through this sort of individualized premium. One might ask why. Most of our peer democracies provide universal coverage at reasonable cost without undue administrative complexity within community-rated systems.

    Maybe the “healthy poor” in France, Britain, and Canada unfairly subsidize the “sick rich” in the same pathological way these authors lament. Maybe some health policy experts visited the American Enterprise Institute lamenting the regressivity of these social-democratic arrangements. If so, I missed it.

    • I would expect that wealthy sick is mostly limited to the spouses of wealthy people. They should identify this group better. (Would it be snarky to point out that if you removed the words healthy and sick, they would be ok with those kinds of transfers?)


    • “It might be wise to allow greater age-gradients in premiums, with implicit or explicit general revenue subsidies into the new exchanges to make these arrangements work for older people.” I’m nearly old, and the decision not to adopt pure community rating was a big disappointment. After all, why choose the nearly old, as opposed to the already sick; I’m nearly old but otherwise in good health, and while I’m at greater risk of becoming sick than someone age 25 and healthy, I’m a lot less likely to become sick as compared to someone age 25 with leukemia. Age discrimination is simply a way to make subsidies for the young and healthy to cost less. It is considered fair only because the nearly old will soon become eligible for Medicare, so the lucky duckies shouldn’t complain. That’s ridiculous, as social policy and as health care policy.

    • I support ACA. Whether it survives is more a question of politics. And that depends on middle class acceptance, which is doubtful. Why? OOPEs, that’s why. OOPEs for poor people are a nuisance, one more debt collector harassing them. But for the middle class, it means the loss of a lifetime’s savings, the end of dignity. The framers of ACA had little understanding of what’s important to the middle class.

    • I give them credit for putting their plan into writing.

      I find it interesting that they are concerned about forced transfers of wealth from poor healthy to the rich sick but not so much about the transfer of wealth from single people to families.

      Frankly, I think I’d stick with my current health plan bought on the open market. Which will become much cheaper (or much better) in a few months. It suddenly doesn’t look so bad.

    • One reason that these well designed programs have little chance is that Democrats want a programs so strongly that they are willing to accept crap like ACA and Republicans just want very little change. So we get programs like SS and medicare, that spend most on the above average earners, and things like the ethanol that is now only supported by ethanol producers. Democrats want more Gov. help so much they allow politicians screw them over again and again.

    • This sounds like a policy proposal cooked up by cranks. I wonder:

      1) Does it make actuarial sense? What’s the actuarial cost of the insurance policies they are proposing for the rich? Unless the policies are aligned with actuarial cost, this is a different form of redistribution;

      2) Does it provide insurance? Are those families making $224K/year going to be able to pay their bills if they total $145K in a year? Who will cover the costs for the rich who can’t afford their bills?

      3) Does it meet consumer demand? I’d certainly pay for insurance that would cover the risk of an unanticipated $145,000 expense. It would hardly improve the US health industry to add another layer of insurance.

      4) What happens to the chronically ill? I suspect they would carefully figure out the cost/benefit and keep their income below whatever level meets the bill. Managing my handicapped brother’s finances includes making sure he never makes enough money to lose Medicaid and SSDI (this is something that has been an issue in about 2 of the 30 years he’s been employed/seeking employment).

      My guess is that the AEI proposal neither a grounding in the either the economics nor the ethics of insurance. Why is anyone taking it seriously?

    • Harold
      The authors make their position clear: they are playing fantasy baseball. You allude a bit to that sentiment above, but I saw the plan as an invitation to discuss and cogitate–which I/we are doing now.

      I expect more blogging on the the subject–and I hope to learn more, but rather than taut community rating and criticize individualized premiums, perhaps expanding upon why an aftermarket for supplemental coverage wont work? WIthout addressing the latter, the linchpin of achieving adequate risk protection in their plan at higher income levels, you pay the design short shrift.

      The same issues you raise–problems with risk adjustment, the political economy, “what is basic care,” exist regardless of and delivery paradigm. The policy debate however, surrounds why their structure wont match up or exceed the current one. You missed the boat on that count.

      Again, I am proposing a policy discussion. No one, I hope, including me, expects a plan such as theirs to go live or see the light of day in toto. However, elements of it deserve some flushing out so we can learn and decide how to tweak, when and if congress functions properly.

    • We have a health care cost crisis because we’ve been so successful, successful in turning death sentences into treatable chronic illnesses, cancer, heart disease, diabetes, and many other diseases. For the middle class, a chronic disease means OOPEs that exhaust savings, that deprive of dignity, that leave only charity for care. Pollack wants to rearrange the deck chairs by imposing higher costs on the nearly old to help subsidize insurance for the young and healthy. Good grief!

      • Many other countries have also “turned death sentences into
        chronic illnesses,” but do not face anything like the cost
        explosion we see in the US. Further, people in those countries are
        *happier* with their health care systems than Americans. There is a
        wide range of proven approaches to learn from.

    • Harold, Is the justification for community rating a moral
      argument or based on market failure? Also, why is it necessary to
      have community rating in health insurance but any other type of
      insurance? Thanks

    • My thoughts: the authors think that individual overuse of healthcare services is a big problem. Individualized premiums and high deductibles get at this problem.

      In Singapore, the government has not chosen to implement a national comprehensive insurance plan, like Canadian Medicare, for the reason above. They don’t want excessive use of healthcare to drive costs up for the whole country. They have a national catastrophic plan, and everyone relies on health savings accounts.

      In some way, Singapore’s framework is similar to AEI’s. However, Singapore also uses rate setting and has government-run primary care clinics, such that most primary care is very affordable. For example, a Singapore citizen would pay US$8 to 16 for a consultation at a government clinic (at a current exchange rate of about S$1.2 to the US dollar). My wife, who isn’t even a Singapore citizen or permanent resident, paid about US$75 for an ED visit.

      The AEI plan neglects the affordability side of the equation entirely. It relies entirely on consumer incentives to bring prices down. It forgets that the first order problem with our healthcare system is that the prices are too damn high.

      • Do Singaporeans enjoy exposing themselves to unnecessary medical procedures? As I’ve expressed here before, I try to minimize seeing my family doctor (“there are sick people in his office”), blood work (“please, stick me repeatedly with a sharp object”), invasive tests (“please sir, I want more biopsies”) and don’t enjoy the inconvenience of spending waiting time – or for those who are still working, getting time off work for medical appointments. Canadian Medicare has no user fees because they are regressive; a $5 charge for a poor person is not the same as a $5 charge for a rich person. There’s no question that there are a huge number of sick Americans who can’t access health care because they don’t have enough cash; this shouldn’t be confused with people – other than Munchausen patients – seeking unnecessary treatment.

        The rich and super-rich are made to pay more under the Canadian system(s) in that most provinces use general tax revenue – mainly from progressive income taxes – to fund government health care expenditures. In the year I cashed out my stock options, I didn’t swear under my breath and say “What a waste for the government to spend all those taxes on health care for “the little people”. First, most of us have been, are, or will be “little people”. Second, having a healthier population is a worthwhile barrier for my own selfish concern about my personal health.

        • What ^he^ said!

          I was just about to make the exact same post.

          But one additional thing…

          I can go to my family doctor/GP/gate keeper as often as I need to (or want, I suppose), but I cannot access the much more expensive specialists unless she (as the expert in such things) agrees that I need to.

          In actual fact, I never “ask” to see a specialist, I ask to see her. She evaluates my symptoms, and based on her expertise recommends a course of treatement that may or may not include a referral to a specialist or blood or other tests. This “gate keeper” function seems to work well at preventing individul overuse (or excessive use) of expensive medical care.

          • It works well until you meet a gate keeper that:

            1) has incentives not to provide specialist care
            2) has an ego that prevents the referral of a patient to another doctor
            3) has not been adequately educated to know all the alternatives in treatment
            4) This list can go on and on.

    • In a way the whole history of American health insurance has been the efforts of healthy persons to escape from paying for sick persons.

      The early Blue Cross plans had pure community rating. Commercial insurers were allowed to pick off the healthier employers

      Then the healthier large employers discovered self-funding…yet another reason to avoid paying for the sick.

      Many communities sold off their county hospitals, because taxpayers who had secure insurance themselves did not want to pay property taxes to care for the sick.

      Against all these trends, Medicare and Medicaid have been the only national counterforce.

      I would favor building onto Medicare. It could be stretched to persons under age 65 for catastrophic expenses.

      Here is what I propose:

      If you have medical debts that cannot be paid off in five years at 10 per cent of your after tax income, then Medicare pays the rest of your bill.


      An uninsured person gets a $40,000 hospital bill. Their after tax family income is $30,000. Ten per cent of that is $3000 a year.
      Over 5 years they could pay $15,000.

      The remaining $25,000 is paid by Medicare, of course at Medicare rates and not chargemaster rates.

      Instead of forcing 30-40 million people to buy insurance, we will help the 2 million (or less)of them who actually get sick.

      The cost of this catastrophic assistance would be met by a 1 per cent increase in the Medicare payroll tax.

      I admit that my proposal does not solve the ACA’s demographics problem. But it solves a lot of other things.

    • The primary purpose of the AEI proposal was to change the subject to moral hazard, not to present a realistic alternative to Obamacare. In a perfect world, all risks (to health, life, employment, etc.) would be shared so that the per capita cost would be very small. And risk sharing would be global so that the unique risks of those in Thailand would be shared with the unique risks of those in Iowa; indeed, the history of risk management is the history of larger and larger risk pools. AEI is a big promoter of using financial innovation (e.g., derivatives) to improve risk management (i.e., risk sharing). I don’t recall anybody at AEI suggesting that excessive risk and fat tails could produce a financial crisis. I appreciate that Pollack and Frakt enjoy this as an intellectual exercise, but don’t be fooled, and don’t let AEI change the subject.

      • ” I don’t recall anybody at AEI suggesting that excessive risk and fat tails could produce a financial crisis.”

        I believe Peter Wallison of the AEI voiced great concern over Fannie and Freddie at least as far back as the Reagan administration.

    • I will also observe that modifications to pure community rating jeopardize support for community rating. By suggesting even more modifications (based on age), Pollack is falling for the trap.

    • I think we are running up against an inherent weakness of private insurance, which is:

      it protects us rather cheaply against a more or less random risk, like lightning or a fatal car accident.

      but it is NOT always effective for events are already known about and likely to happen.

      The market for life insurance for 30 year olds is vigorous and competitive.

      But the market for life insurance for 90 year olds does not exist.

      There is no difficulty writing health insurance for 30 year old males with no medical history, The challenge is in writing health insurance for cancer survivors, et al.

      To use the language of home insurance, the cancer survivor’s house has already started burning down!! Of course no company wants to insure them.

      There is a socialist solution to this problem — i.e. open up Medicare or Medicaid to those with chronic illnesses. Of course the premiums they pay will not cover their costs, so you raise taxes in order to cover them.

      By contrast, community rating is like back-handed socialism. Young people are asked to pay higher insurance premiums instead of higher taxes.

      But this may not work, because it is easier right now to avoid insurance premiums than to avoid taxes. We’ll see.