Here is still another element of the President’s health care pitch at the Portsmouth town hall:

THE PRESIDENT: Under the reform we’re proposing, insurance companies will be prohibited from denying coverage because of a person’s medical history. Period. (Applause.) They will not be able to drop your coverage if you get sick. (Applause.) They will not be able to water down your coverage when you need it. (Applause.) Your health insurance should be there for you when it counts … not just when you’re paying premiums, but when you actually get sick. And it will be when we pass this plan. (Applause.)

These are two separate issues. Guaranteed renewal is the ability to keep and renew your insurance coverage when you are diagnosed with a long-term medical condition that causes your risk of future medical costs to increase. This is “They will not be able to drop your coverage if you get sick,” and “Your health insurance should be there for you when it counts.”

Guaranteed issue combined with community rating is the ability to buy insurance that you do not already have and pay premiums that are independent of your health status.

These are very different concepts. The first is an attempt to address a market failure — nobody sells long-term health insurance contracts, and yet when we’re healthy we would like to insure against the risk that we are diagnosed with a long-term disease. I would like the market to be able to address this flaw, and am not sure why it hasn’t. As a matter of personal policy preference, I can live with the government mandating guaranteed renewal (until and unless someone shows me an effective market-based solution).

Guaranteed issue with community rating is more problematic, as was discussed in Wednesday’s Wall Street Journal editorial. If you allow people to buy insurance after they get sick, then many people will “free ride,” pay no premiums, and buy insurance only when they need the care. Imagine if you could buy fire insurance for your home while your home is on fire. Who would buy fire insurance in advance and pay the premiums?

Because of this perverse incentive, if you have guaranteed issue and community rating, and if insurance purchase is voluntary, then premiums jump up because only sick people are buying insurance. Everyone else is waiting until they get sick. This is what happened in New Jersey. The only way to mitigate this is to force everyone to buy insurance — an individual mandate. In doing so, people with predictably high expenses (e.g., those who already have cancer) will benefit. People who are healthy, or are only temporarily sick or injured, will pay higher premiums than they would without these policy changes. Oversimplifying as I am wont to do:

Guaranteed issue + community rating + individual mandate = hidden income/wealth redistribution from the generally healthy to the generally sick.

People will differ on whether this income/wealth distribution is a good or bad thing. Note that healthy/sick does not mean rich/poor. Most people are relatively healthy, and these policies would raise premiums for all people, including a lot of relatively healthy poor/middle class people. You decide whether you think it’s worth it.

An internal analysis done during the Bush Administration showed that, controlling for other factors, in New Jersey these policies in were associated with premiums that were more than 90% higher than in other states. Note that “were associated” is weaker than “were caused by.” Still, these policies would make insurance available and result in affordable premiums for those with persistent medical conditions and/or high risk of future high medical expenses, while also raising premiums significantly for those who have relatively low expected medical expenditures.

This is an incredibly important and underdiscussed element of the policy debate. There is no right or wrong answer — it’s a painful tradeoff. It appears I am somewhat of an outlier on this one, compared to many members of both parties. I oppose guaranteed issue, community rating, and an individual mandate. I am trying to understand whether this is because a policy consensus has developed on the difficult tradeoff and I’m just in a different place, or if instead Congress is just ignoring the tradeoff. I question whether support for guaranteed issue and community rating would be so high if Congress understood that it would mean large premium increases for the overwhelming majority of Americans with private insurance. The President certainly isn’t mentioning that cost as he pitches this policy change.

Continue reading the next post in this series…

Other posts in this series:

  1. The President’s overpromise that everyone can keep their health plan
  2. Putting the government in charge of your health insurance
  3. Waiting in line
  4. Government-mandated benefits
  5. Preventive care does not save money (in the aggregate)
  6. The House bill would increase short-term, 10th year, and long-term budget deficits
  7. The President was incorrect — AARP opposes the bill
  8. The bills would take Medicare savings needed for solvency and spend them on a new entitlement
  9. Medicare is not a good example of government-run health care because Medicare is fiscally unsustainable
  10. Even if the public option drops out of legislation, other parts of these bills would put private insurance under government control
  11. The President says the public option will keep private insurers honest at the same time he proposes cutting payments to private insurers competing with the Medicare public option
  12. The pending bills would move more cost-benefit decisions from insurers to people chosen by the government