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Health Insurance Reforms: Unintended Consequences

With comprehensive health reform stalled, there is growing pressure to enact more modest health insurance reforms. These efforts have an understandable practical and political appeal. Denials of coverage, cancellations of policies, preexisting condition exclusions, lifetime caps on benefits, and other practices have the effect of denying coverage to many individuals who need health insurance. Legislation prohibiting these practices is a seemingly easy way to fix obvious injustices without tackling the entire range of contentious issues. Unfortunately, enacting “health insurance reform” is likely to lead to severe unintended consequences.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) makes it unlawful for an employer-sponsored group health plan to deny coverage, alter benefits, or charge different premiums based on the health condition of any individual member of the group. In 2008, 58.5 percent of Americans were covered through such plans. People with employer-sponsored group health insurance are not subject to the objectionable underwriting practices of individual health insurance, but the sponsoring employer could go out of business, drop its health plan, reduce benefits, or increase employee contributions.

Health insurance reform is about individual health insurance. Only 8.9 percent of Americans are covered by individual health insurance, but it is important for people who are self-employed, those who work for small employers not offering health insurance, and those who have lost their coverage. It is the private sector health insurance method of last resort.

Individual health insurance is individually sold and medically underwritten. An individual’s health status determines whether he or she is insurable and, if so, the rate charged. If a law were enacted to prohibit medical underwriting at the time of initial application and at annual renewal, these policies would be transformed into what the insurance industry calls “guaranteed issue” and “guaranteed renewal.” It would also be a guaranteed disaster.

To cover the people who previously would have been excluded – those less healthy and in need of more medical care – individual health insurers would need to charge substantially higher rates. Without higher rates, the companies would stop selling policies or go out of business. Higher rates would make the policies unaffordable to some individuals, and they would also encourage lower risk individuals (younger and healthier people) to drop their coverage. As a result, more of the covered individuals would be older and sicker, requiring additional premium increases by insurers.

With even higher rates, more healthy people would drop their coverage, and so on. This phenomenon is what actuaries call an “assessment spiral” or a “death spiral.” The inevitable result would be that individual health insurance would cease to be affordable or viable.

For any health insurance system to offer coverage at affordable rates to all applicants, participation must be mandatory. That is why the House and Senate bills are based on an “individual mandate.” Younger and healthier people need to subsidize the insurance policies and health care of older and sicker people. In the future, today’s younger individuals will be older and sicker, and they would be subsidized by the next generation. An affordable, premium-based system simply cannot exist without these intergenerational transfers, and yet, some state politicians already are proposing largely symbolic legislation opposing any individual mandate in their states.

The only alternative to mandatory participation would be substantial federal government subsidies to high-risk individuals. Some states already have high-risk pools for individuals unable to obtain individual health insurance, but the premiums are still well above standard rates and therefore health insurance remains unaffordable to many people with preexisting conditions. Federal subsidization, however, would raise numerous questions, such as who would qualify for a subsidy, for how much, and how would it be financed. Undoubtedly, the same political divides we have witnessed over the last year would emerge over this proposal.

America’s private health insurance system is highly complex and interconnected. There are no easy solutions to eliminate elements of unfairness in an inherently unfair system. If our elected leaders are committed to enacting effective measures, they need to “bite the bullet” and work for passage of comprehensive reform.

Mark A. Rothstein, JD, is the Herbert F. Boehl Chair of Law and Medicine and Director of the Institute for Bioethics, Health Policy and Law at the University of Louisville School of Medicine.

Published on: February 11, 2010
Published in: Health Care Reform & Policy

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