Single Payer, No. “Single” Pool, Yes

The editorial page of today’s (Manchester) Union Leader had this to say about Senator Shaheen’s support for health care reform (my emphasis added):

In 1994, legislators passed Senate Bill 711, sponsored by state Sen. Jeanne Shaheen. The bill introduced what is called “community rating” to the state’s health insurance market. Insurers in the small-group market (businesses with fewer than 100 employees) were forbidden from denying coverage based on pre-existing conditions and certain demographic factors. They were allowed to charge the old only three times what they charged the young.

At the time the law passed, 26 insurers offered coverage in New Hampshire’s small-group market. Only eight years later, there were just five. Twelve years after the law passed, Rhode Island conducted a study of New Hampshire’s health insurance market to see what legislators there could learn. They found that Shaheen’s bill drove insurers out of the state and raised the cost of insurance for younger, healthier residents while lowering it for the old and sick.

The parts I have emphasized reveals what Republicans have gotten wrong about the health care reform debate that they should be getting right.  Raising costs to the healthy and lowering them for the sick are exactly what insurance reform is supposed to do.  (I do think that insurance premiums should be related to age, for reasons I make clear below.)  If having to cover pre-existing conditions is what drove insurers from the state, then there is very little loss for their going.

The ability to have competitive insurance markets depends on insurance companies being protected from adverse selection problems.  There are two ways to do this.  The first is to just have one pool of insureds in a given region.  This is what happens in a single-payer system by definition.  But this eliminates any benefit to competitive markets, and you get all of the baggage that comes with the way that system would operate in the U.S.  The second is to have a mechanism by which insurers who cover pools that have predictably lower-cost populations get compensated by insurers who cover pools that have predictably higher-cost populations.  (This is why age should be a factor that can affect premium levels.)  In some parts of the country, there are firms that do this type of risk adjustment for multiple insurers competing within a given pool.  If this transfer mechanism works properly, then we don’t have to give up the benefits of choice and competition in the delivery of health care services to correct obvious problems in the workings of health insurance markets.

I cannot figure out why more Republicans aren’t pushing for this outcome — more, not less, community rating as described by the Union Leader but with appropriate risk-adjustment procedures to ensure that the competition happens along dimensions we want, like quality of service, rather than dimensions that we don’t want, like the health of the insured population.  The core Republican voter is a middle-class guy with a decent job and a family living in suburbia.  He doesn’t have too much to worry about, but the one at the top of the list is that something happens to his family and he can’t protect them.  For example, his kid gets sick and his insurance drops him, or he loses his job, or anything else that causes the kid’s illness to become a pre-existing condition to a new insurance company.  All the Republicans have to do to score political points is make sure that guy is happy with reform.

I recognize that this is not all that should happen as part of health care reform, but this first step costs very little money, promotes competition in health insurance markets, and provides a good foundation for further reforms, like extending coverage to more populations that, even with community rating plus risk adjustment, won’t have insurance.

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