NCPA - National Center for Policy Analysis


June 29, 2009

An aversion to having health insurance rates and coverage linked to individual behavior may be on the verge of becoming national policy.  If that happens, the unintended consequences could be very costly, says Scott E. Harrington, a professor of health care management and insurance and risk management at the Wharton School of the University of Pennsylvania and an adjunct scholar at the American Enterprise Institute.

Both the House Democrat and Kennedy-Dodd proposals do all they can to prevent health-insurance premium rates and coverage terms from reflecting the health status -- and thus health-related behavior -- of any insured person, says Harrington:

  • Health status would not be permitted to affect coverage decisions, terms or pricing.
  • Age-related variation in premium rates would also be significantly constrained in relation to risk.
  • Benefit design and marketing of coverage would be regulated in an attempt to keep insurers from rewarding healthier people.
  • Retrospective "risk adjustment" would be employed to reallocate funds from insurers that experience lower medical costs to those with higher costs.
  • If an insurer were to attract relatively more healthy people -- or keep more people healthy -- it would run the risk of paying some or all of the gains to competitors.

The proposals' strong aversion to having insurance rates or coverage terms related to health status reflects the view that either the need for health care is immune from individual control, or that a person should not be financially responsible for behavior that contributes to poor health, or both, says Harrington:

  • These views are difficult to reconcile with the consensus that unhealthy behavior contributes significantly to obesity, diabetes, heart disease and cancer, and thus accounts for a substantial proportion of health care costs.
  • Regulation that seeks to divorce insurance rates and coverage terms from health status would deter potential innovation that might provide meaningful financial incentives for healthy behavior and lower costs.

Health care reform should seek to encourage rather than discourage private innovation to provide incentives for healthy behavior.  Safeway's program offering employee premium discounts related to tobacco use, weight control, blood pressure and cholesterol levels is a good example, says Harrington.

The Democratic proposals would retard or even strangle such innovation.  Rather than strengthening incentives to invest in the long-term health of policy holders, they would make it more difficult to earn a reasonable return on such investment.  They also send a message that a healthy lifestyle earns no financial reward for reducing medical expenses, says Harrington.

Source: Scott E. Harrington, "Reform Needs Healthy Life Incentives," Wall Street Journal, June 29, 2009.

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