COMMUNITY RATING, GUARANTEED ISSUE AND MANDATED BENEFITS SWELL COSTS

June 17, 2010

How did health care costs in Massachusetts get so big?  A major reason is the adoption of guaranteed issue and community rating in the mid-1990s.  The new federal bill would expand those rules to the entire nation, says Shawn Tully, a senior editor at large with CNN.money. 

Under guaranteed issue: 

  • Insurers must accept all enrollees regardless of their medical condition; under community rating, they must charge all customers similar premiums, even if their costs are far different.
  • The result is that prices rise steeply for young, healthy customers, who must pay far more than their actual costs.
  • It also gives them a strong incentive to drop insurance; then they can "game the system" by signing up any time they need surgery or get diabetes.  

Hence the pool of insured people gets older and sicker as the healthy drop out.  That's what happened in Massachusetts, and it contributed to soaring premiums.  The 2006 reform plan was supposed to solve the problem by requiring that everyone buy coverage or pay a fine of around $1,000.  It worked, but only in part, explains Tully: 

  • Of the 600,000 uninsured in 2005, around 450,000 are now covered.
  • But a large share of 150,000 who still lack coverage are young residents who choose to pay the fine instead of high premiums.
  • Insurers are also getting socked by people who sign up for insurance to get expensive care mandated under state law, including hospitalization for childbirth or hip replacements, and then depart once the procedure is completed. 

In the federal bill, the fines for going uninsured are even lower than in Massachusetts -- and anyone who can't find an inexpensive plan is exempted from all penalties.  Hence the "adverse selection" problem could prove far worse, says Tully. 

Source: Shawn Tully, "Five painful health care lessons from Massachusetts," Fortune, June 15, 2010. 

For text:

http://money.cnn.com/2010/06/15/news/economy/massachusetts_healthcare_reform.fortune/

 

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