Excerpted From: State Briefing Book on Health Care
September 23, 1994
W37
Community Rating
The concept of guaranteed issue is often combined with community rating. Under "pure" community rating, insurers would be forced to charge the same price to every policyholder, regardless of age, sex or any other indicator of health risk. Despite the fact that health costs for a 60-year-old male are typically three to four times as high as those for a 25-year-old male, both would pay the same premium. Under "modified" community rating, price differences could be based on age and sex. Other than that, however, sick people could buy health insurance for the same price as healthy people."Under community rating, a person with AIDS would be able to purchase insurance for the same price as a healthy person." Thus:
- A person who has AIDS would be able to purchase health insurance for the same price as someone who does not.
- People in hospital cancer wards would be able to buy health insurance for the same price as people who do not have cancer. [See below on charging healthy people more.]
Under community rating, healthy people must be charged more so that sick people can be charged less. Most people, therefore, would see their premiums rise. This would drive lower-income and healthy people out of the market, make the pool of insured people smaller and less healthy and drive up premiums even more.
Proponents of community rating agree that the result of permitting unhealthy people to purchase health insurance at the same price as healthy people would be to raise premiums for healthy people. But they argue those increases would be small when distributed over all of the insured. However, employees of companies that self-insure, HMOs, Medicare and Medicaid would be exempt from the price-increasing impact of community rating. The full burden of the price increases would fall on a very small number of the insured - those who participate in traditional risk insurance plans.
Case Study: New York.
In 1993, the state of New York implemented legislation requiring insurers to (1) accept all applicants regardless of health status and (2) charge everyone the same premium for health insurance. According to the New York Department of Insurance:
- In the first year of community rating, almost 30 percent of the insured experienced premium increases ranging from 20 percent to 59 percent.
- Rates for a 30-year-old single male increased by 170 percent.
In response to these premium increases, large numbers of New Yorkers have dropped their coverage and are going uninsured.
- The New York Department of Insurance estimates that about 44,000 individual policyholders have canceled their coverage since the law took effect, but this estimate ignores the people who dropped their coverage in anticipation of the imposition of community rating.
- A new study by the actuarial firm Milliman and Robertson, Inc. estimates that 500,000 New Yorkers with individual and small group policies canceled their policies, reducing the number of insured from 2.8 million to 2.3 million.
"An estimated 500,000 New Yorkers canceled their health insurance because of community rating."
If the Milliman and Robertson estimate is correct, community rating in New York has caused one out of every six people directly affected by the law to become uninsured.
Whatís Wrong With Charging Healthy
People More for Health Insurance?
When people who do not have health insurance generate large medical bills, they frequently cannot pay those bills from their own resources. Yet we generally require hospitals to provide care regardless of patientsí ability to pay. Who should pay for the uncompensated care?
The obvious answer is taxpayers, through the use of public funds. But rather than raise taxes to pay for what clearly is a social problem, many politicians want to raise the health insurance premiums of healthy people instead. Their proposals require insurers to charge the same price to all buyers - whether healthy or sick. The healthy would be overcharged so that the sick could be charged a premium much lower than their expected health care costs.
Imposing a Regressive, Hidden Tax.
By forcing insurance companies to pay the medical bills of people who are already sick, politicians would be indirectly shifting the cost (through premium increases) to healthy people who buy health insurance. In so doing, they would be imposing a hidden, highly regressive tax on unsuspecting families. Whereas the income tax system is designed so that higher-income families pay higher tax rates, many health insurance reform proposals would impose the highest hidden tax rates on the lowest-income families. For example, if health insurance reform causes the premiums for family policies to rise by $1,000, thatís a 10 percent tax on a family with a $10,000 annual income but only a 1 percent tax on a family with $100,000 in income. Thus the tax rate on a family with the lower annual income would be ten times as high.
Increasing the Number of People Without Health Insurance. Contrary to widespread impressions, most of the 39 million people who are currently uninsured are healthy, not sick. Sixty percent of the uninsured are under 30 years of age, in the healthiest population age groups. They have below-average incomes and few assets and tend to be very sensitive to premium prices.
Moreover, the primary reason why most of the uninsured lack health coverage is that they have judged the price too high relative to the benefits. Very few have been denied coverage. The artificial premium increases that would result from many health insurance reform proposals would substantially increase the number of employers who fail to provide coverage for their employees and the number of individuals who are uninsured by choice.
Subsidies vs. Price Controls. The worst feature of price control solutions is that they cause enormous harm in order to accomplish a little good. A much better approach would be to directly tackle the problems of the less than 1 percent of the population that is uninsurable - and allow the other 99 percent to buy real health insurance.
Source: John C. Goodman, "Should Healthy People Pay More for Health Insurance?" National Center for Policy Analysis, NCPA Policy Backgrounder No. 115, April 1, 1992.
UNINSURED INCREASE UNDER COMMUNITY RATING
The number of New York City residents without health insurance has risen
sharply due to New York's 1993 reforms requiring health insurers to accept
all applicants regardless of health status ("guaranteed issue")
and charge everyone the same premium for health insurance ("community
rating"), says health care expert Merrill Matthews.
- The uninsured population in New York City has grown from 20.9 percent
in 1990 to 24.8 percent in 1995, according to one report.
- Nationally, the uninsured rate has grown at a much slower rate, rising
from 15.8 percent to 17.4 percent.
To achieve a level premium for everyone, healthy people had to be charged
more so that sick people could be charged less. And, because most people
are healthy, most people saw their premiums rise.
- In the first year of community rating, almost 10 percent of the insured
people experienced premium increases ranging from 20 to 59 percent.
- Rates for a 30-year-old single male increased by 170 percent.
- According to an early report from the New York Insurance Department,
43,666 individual policyholders canceled their insurance after the first
year.
For example, before community rating Mutual of Omaha, one of the largest
sellers of individual health insurance policies in the state, charged a
25-year-old male on Long Island $81.64 a month. 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.
By 1994, however, both paid $183.79 -- more than the 55-year-old was
paying before community rating was implemented. This year that community-rated
premium will be $217.59 a month.
Other states have taken a similar path. For example, Kentucky passed
a similar reform in 1994, but 45 insurers that were selling policies in
the individual and small group markets no longer sell policies in the state.
And the number of uninsured Kentuckians is higher than before the reform.
Source: Merrill Matthews Jr. (National Center for Policy Analysis), Investor's
Business Daily, May 19, 1997.
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