An Easy Way to Increase the Uninsured: The Problems with Community Rating

Commentary by Pete du Pont

Several states have figured out a way to increase the number of people without health insurance - and they are effectively putting that strategy into action, although that's not what they intended. Its called "community rating," and it always results in driving up the price of health insurance and pricing people out of the health insurance market.

Take New York, for example. In 1993 the state Assembly passed legislation that requires insurers to accept all applicants regardless of their health status ("guaranteed issue") and charge everyone the same premium for health insurance ("community rating").

Proponents claim that such legislation increases access to health insurance and makes it more affordable, especially for older and sicker people. That may be true initially, but within a few years premiums rise far above what elderly people had been paying before the law was implemented.

Consider Mutual of Omaha, one of the largest sellers of individual health insurance in the state. Before community rating in New York, Mutual of Omaha charged a 25-year-old male in Long Island $81.64 a month for insurance. By contrast, a 55-year-old paid $179.60. After community rating, both paid $135.95, a 67 percent increase for the 25-year-old and a 25 percent decrease for the 55-year-old. But the next year both paid $183.79 - more than the 55-year-old paid before community rating was implemented. This year that community-rated premium will be $217.59 a month.

Premiums are partly based on one's likelihood of becoming ill and needing treatment. Thus insurers charge older and sicker people more to reflect that risk. Under community rating, the insurance company must take on everyone's risk at the same price. Rates for the sick decrease and rates for the healthy increase. Since most people are healthy, most people's rates will rise. However, younger people, who tend to be healthier, also have lower incomes, on average, and are less able to afford an increase in premiums. Thus when premiums increase, they often cancel their policies and become uninsured.

Using an actuarial model (1993 figures), the Council for Affordable Health Insurance found that when a health insurance system covering 100,000 people at an average annual premium of $2,250 switched to community rating, the premium increased to $3,103 and 30,100 people lost their coverage. Such massive decreases in healthy policy holders leaves the pool smaller and sicker, which drives companies to increase rates even higher.

New York has not been the only state to implement community rating. Kentucky, New Jersey and Vermont are all experiencing problems with their community rating laws. As premiums rise, people cancel policies and insurers pull out of the state.

Kentucky passed a 1994 reform similar to New York's, but their experience has been somewhat different - health insurers have left. Following the 1994 reform plan, 45 insurers that were selling policies in the individual and small group markets no longer sold policies in Kentucky. The only remaining insurers are Anthem Blue Cross Blue Shield, which avoids writing new coverage, and KentuckyKare, a state run insurance agency.

The Council for Affordable Health Insurance also compared community-rated policies in New Jersey with those in neighboring Delaware and Pennsylvania. While a family policy in Wilmington with a 29 year old head of household cost $405 monthly and $445 in Reading, the same policy with the same company cost $667 in community-rated New Jersey.

Vermont has also entered the ranks of community rating. As a result, a family with a 27 year old head of household will pay about $5,000 a year more in premiums for a standard major medical policy from Blue Cross/Blue Shield of Vermont than he would have paid for a policy from a company that no longer sells in the state - it pulled out in part because of community rating. A family with a parent age 47 would pay about $3,600 more.

Lawmakers' intent in passing these laws was to make health insurance more accessible and affordable. Their good intentions have not turned into good results. Community rating drives up the cost of health insurance and drives people out of the market.

If the politicians really want to do something about the growing number of uninsured, the first thing they can do is stop what they're doing.