“Individualized premiums.” We’re already part way there

I have been disappointed but not surprised by the response to the health reform proposal offered by health policy experts at the American Enterprise Institute (AEI) last week. Some conservatives, I am told, were irate that the plan bears some structural similarity to the Affordable Care Act (ACA). Some progressives, I have observed, seem irate on the grounds that offering something different from the ACA is itself an abandonment of the principles that motivate it.

There are other objections too, as expressed by Henry Aaron and echoed by Harold. Though Harold was “gentler,” he called the idea of experience rating a “gigantic blunder.” In many ways I agree with Henry and Harold (more on that below). But in one way, I think we’re all in danger of making a gigantic blunder.

I doubt many health policy experts would disagree with me that the politics of health care policy these days are dreadful or worse. There are few health policy ideas that can be openly discussed without attracting an angry swarm of charges and counter-charges of playing politics. Even when scholars aren’t directly making such accusations, I can’t help but feel that the high political tension has infected what might otherwise be more deliberative entertainment of ideas.

In a sense, this is entirely understandable. The stakes are very high. ACA implementation is important. It’s important to me, as I know it is to Henry and Harold, as well as for at least some of the authors of the new proposal. (I don’t know them all.) For reasons I do not fully understand, it is extremely important to others that the ACA not be implemented. In this context, any proposal that departs significantly from the ACA can be seen as a threat to the law’s supporters. Any proposal that doesn’t fully repeal it can be seen as a threat to the law’s opponents.

Enter the proposal offered by scholars at the AEI. Despite how it was received, there is a lot in it that is not controversial among health policy experts. For instance, most experts are open to eliminating the preferred tax treatment of employer-sponsored insurance. Many would support removing the two-tiered nature of health care that Medicaid promotes. Nobody proposes a health insurance plan that doesn’t include subsidies that vary by income and provisions that make care more affordable to those with higher health care expenses. Though the goal of universal coverage is not uniformly shared, few are willing to publicly and explicitly reject it.

So, what’s wrong with the new proposal? I was not alone in characterizing it as politically dead on arrival. Harold put his finger on the most challenging, substantive aspect of it: the call for an entirely experience-rated system. This is radical. Does that make it a “gigantic blunder”? Considering the plan also includes income- and health-based subsidies and multi-year contracts to guard against reclassification risk, I’m not so sure. I think it warrants consideration, discussion, and analysis.

I would like to see the scholarly community, myself included, calm down and undertake that work. Let us evaluate it on the merits. This cannot be done in a few days. Any full-throated rejection of the idea right now seems to me to be premature.

Indeed, it doesn’t take lengthy consideration for one to opine that the subsidies in the proposal are less generous than one may like, as Harold pointed out. But as the authors articulated at the AEI event, they are not wedded to them. They’re just a placeholder for whatever society finds more palatable. We shouldn’t attack the subsidy level. We should discuss what it should be.

But should we attack the plan’s structure? Is experience rating, in this context, so bad? I think Harold was right-on in writing that the “ACA’s most immediate challenge in this area concerns allowable age-gradients in premiums.” This alone admits at least the possibility that the ACA’s modified community rating structure may need to be reconsidered. It’s already impure community rating, allowing premiums to vary by age (up to a 3:1 ratio) and smoking status. Should there be a problem with the selection of risk into marketplace plans and to the extent that is due to too few young people enrolling, a natural solution would seem to be to reconsider the degree of age rating, along with subsidy levels. Perhaps instead of a 3:1 ratio, permitting premiums to vary by, say, 5:1 would be a helpful step.

Recognize that what is being considered here is a different degree of experience or community rating. Yet, Blumberg and Buettgens find that loosening the age bands would have very little effect on out-of-pocket premium costs for younger consumers. So, this may not, in fact, be a very productive direction. (H/t Adrianna for drawing my attention to this analysis.) Perhaps for this reason, Handel, Hendel, and Whinston find that even under full age-based pricing, about one-quarter of the population would not participate (ignoring the mandate), skewed heavily toward lower ages and leading to selection-based market unraveling. (H/t Aaron Shwartz for drawing my attention to this one. Also, caveat: It’s a working paper.) Not that we should take these two studies as definitive, but see what a little analysis can do?

Of course there are many other solutions to the problem of adverse selection into marketplace plans resulting from low take-up. We could make the mandate penalty more severe. We could impose delayed enrollment penalties. One could propose auto-enrollment with an opt-out. Etc. Not everyone would be happy with all elements of any additional reform. But the role of the scholar is not to be happy. It’s to analyze ideas dispassionately and to assess the extent to which they might address specific problems we may face.

What the new proposal encourages us to do is to think further beyond the current (modified) community rating structure of the ACA. A greater degree of experience rating, with subsidies and tied to multi-year contracts (as the proposal offers) are solutions to certain problems. If those problems arise, these solutions may be useful, though not unique. Today may not be the day to fully embrace such ideas. By the same token, it may not be the day to fully reject them either.


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