Health care reform shorts: Of "fairness" and community

With the Senate's passage of something or other on Dec. 24, it looks like Democrats will pass some kind of "reform" of the insurance non-system. It will make abortion less available to women in need and will line insurance executives' already bulging pockets, but just maybe, more people will at least be able to get in the door to see doctors. Or maybe not. We won't really know until 2013 or 2014 or so. It all seems like a lot of sound and fury with a very uncertain result.

But it also still seems worth understanding the terms in which the thing has gone down. And in that respect, Princeton economics professor Uwe E. Reinhardt's discussion of "community rating" in a New York Times blog post casts an interesting light on the premises behind the "reform."

Reinhardt defines "community rating" --the system of setting premiums that the coming law will order insurance companies to practice for persons mandated to buy insurance outside the employer-based system -- as

the practice of charging a common premium to all members of a heterogeneous risk pool who may have widely varied health spending for the year.

That is, if the insurance companies had their profit-driven drothers, they'd charge people who weren't likely to get sick a small enough premium that these folks would still bother to buy insurance and charge people who were likely to get sick a vastly higher premium that deterred them from getting insurance at all, or at least covered most of what the insurers would have to pay out for them. Or maybe they just would refuse to insure people who were likely to get sick. That's a fair description of where we are now. By forcing everyone to buy insurance and forcing insurers to sell to people they'd rather deny outright, the "reform" throws those two populations in together (at least in the individual markets to be called exchanges).

Reinhardt points out, realistically, that young healthy people may very well think the new system "unfair" because they'll be ordered to buy policies whose cost includes a portion of the costs for sick people who wouldn't have insurance at all if insurers were allowed (as they are now, without much limit) to set premiums based on the expected health care costs of individuals. He offers a simplified mathematical model to illustrate how things will work under community rating:

Would it be "fair" that the healthy individuals of cohort A pay a pure insurance premium of only $2,450 a year, while the sicker citizens in cohort B must pay $6,600? This is, after all, how health insurance now is priced in most states for individuals.

Or does "fairness" require that the two groups be merged into one large national risk pool A & B, whose risk profile is shown in the right-most column of the table. If each member of this merged pool is to pay the same pure premium, then the latter will have to be $4,525 to break even. Such a premium would be said to be "community rated" over these two distinct risk pools.

With a community-rated premium for the two risk pools, it would be predictable ex ante that, on average, members of cohort A would be subsidizing members in cohort B. We can infer the degree of subsidy from the premiums. Relative to their premium in a perfectly risk-segregated market, the community-rated premium of $4,525 will cost members of low-risk cohort A $2,075 more and the sicker members of cohort B $2,075 less than they would have paid in a risk-segregated market. Is that "fair"?

Reinhardt is wonderfully clear and I urge readers to look at his post.

But all this is not really a question of economics, but of politics and values. The enormously complicated "reform" is only complicated because, as a society, we have failed to answer the question: is it the duty of a rich nation to ensure that people within its borders have access to health care? If we answer that "yes," as every wealthy nation except the United States does, then of course all citizens share the risk of the costs of illnesses -- through taxes. Taxes are the price of community. Complicated calculations of premiums don't ever come into the discussion.

If we have to build complex contraptions that pay off the greedy who profit from human misery, the United States is a sorry excuse for a community. The health care reform process so far has made it clear that we are, indeed, a broken society which has lost touch with human beings' essential interdependence.