The worst idea - community rating for health insurance - Right Data

National Review, Sept 12, 1994 by Ed Rubenstein

ON ANY GIVEN day 37 million Americans are without health insurance. They are generally young, with 64 per cent between the ages of 18 and 39. Because they tend to be healthy, many simply choose not to buy health insurance. Only a small minority--2 million, or 0.7 per cent of the population--cannot purchase insurance because of some medical condition.

Twenty-eight states have already solved the latter problem. They have established risk pools to sell insurance to those who cannot buy private policies. Although premiums are usually 25 to 50 per cent above the statewide average, they're a bargain for people with pre-existing conditions, the vast majority of whom can now purchase health insurance at competitive free-market rates.

Unfortunately, the Clinton/Mitchell bill's approach is quite different. Under the so-called "community rating" formula every person in a health alliance will pay the same premium regardless of age, sex, or medical condition. New York State implemented the same one-price-fits-all regime last year, with dismaying results.

In the first year of community rating 25-year-old males were hit with premium hikes of over $500, while 55-year-olds paid about $415 less than under the risk-rated system. Not surprisingly many young people decided to drop their coverage. With fewer young, healthy policyholders available to subsidize older ones, insurance premiums skyrocketed again this year. The upshot: Even older policyholders--who, in theory, should pay less under community rating--are paying slightly more.

Community rating together with universal coverage ensures a more regressive distribution of income. The median income of workers aged 25 or under, for example, is only $18,313, compared to $43,751 for those aged 45 to 54. Yet the Mitchell bill would force young people to pay $650 per year more than the real cost of their insurance and subsidize older people by about $2,000. The bottom line is a net transfer of $59 billion from people in their twenties and thirties to those 55 to 64.

Having created the problem, the House bill "solves" it by making federal subsidies available to families with incomes of up to 240 per cent of the poverty line--$38,400 for a family of four. This will be the largest federal entitlement ever, available to more than 80 million Americans, of whom 50 million already have health insurance.

Many will want to avoid such dependency. In rising above the subsidy level, however, they will incur enormous tax disincentives. Martin Feldstein, studying an earlier version of the House bill, concluded that a woman with one child who made $15,000 a year would lose 19 cents of federal subsidy for each additional dollar of earnings. When this loss is added to the income and payroll taxes she would now face, her total marginal tax rate balloons to 65 per cent--a good reason not to work harder.

Bad enough. But income is not the only factor used to determine subsidy payments in Mitchell's bill. Individuals and families would have to report pregnancies, the termination of pregnancies, children reaching their 19th birthday, and other personal information to their state government, which would recalculate subsidy payments every month. Employers would have to notify the government whenever an employee receives a raise or is fired. Personal privacy and financial independence are both victims of the Mitchell bill.

WAVE OF THE FUTURE?
Insurance Premiums in New York
            25-Year-   55-Year-
            Old Male   Old Male
1992         $773.40   $1,701.50
1993        1,288.00    1,288.00
1994        1,741.20    1,741.20
Increase,
1992-94       125.1%        2.3%
Source: National Center for Policy Analysis