Last week, I blogged about the key policy challenge for Republicans in the health care reform debate: ensuring that those with pre-existing conditions can still purchase health insurance. Given problems of adverse selection, this cannot happen in a competitive insurance market without making it possible for insurers to be compensated for taking on higher-cost populations. My suggestion was community rating with an ex post transfer system.
A truly effective insurance policy would combine coverage for this year’s expenses with the right to buy insurance in the future at a set price. Today, employer-based group coverage provides the former but, crucially, not the latter. A “guaranteed renewable” individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker. Term life insurance, for example, is fully guaranteed renewable. Individual health insurance is mostly so. And insurers are getting more creative. UnitedHealth now lets you buy the right to future insurance—insurance against developing a pre-existing condition.
I am very curious to see how these contracts would operate on a large scale. Specifically, this guarantee is only as good as the financial condition of the company that writes the contract. And if that company fails, then policy holders who develop severe conditions are back to where they were before — uninsurable in some future spot market for health insurance. That would require careful regulation of the financial condition of firms writing unusual insurance contracts. Sound familiar? Feel optimistic about it?
Cochrane develops his ideas more fully in this recent Cato brief and this earlier, more technical article in the Journal of Political Economy ($). In the Cato brief, he discusses an alternative called “health status insurance,” which is designed to be coupled with more traditional health insurance purchased in a spot market in which insurers can charge more for those with pre-existing conditions. What the health status insurance does is pay a lump sum to a policy holder whose health conditions deteriorate over the year (or some slightly longer period). The amount of the lump sum would be sufficient to cover the expected increase in future health insurance premiums that results from the new condition.
Health status insurance protects the insurers against adverse selection — they can charge more for those with higher expected costs. If it is implemented as lump sum payouts, then the concern is that the lump sum has to accurately predict future health cost inflation, which is no easy feat. If it is implemented as the health status insurer paying over time based on the actual cost differentials that result from the pre-existing conditions, then the concern is again the ability of the insurer to remain financially viable.
I would view each of these proposals — community rating with ex post transfers, guaranteed renewable health insurance, and health status insurance — as having the same objective of overcoming the problem of adverse selection in competitive insurance markets but having different degrees of reliance on future spot markets versus long-term contracts to determine the relevant prices. Any one of them is a sensible starting point for the Republicans in this debate. Not only is it not possible in Washington to “beat something with nothing,” in this case it is not in the public interest to do so.