Janet Trautwein, CEO of the National Association of Health Underwriters, explains why private insurers need a strong individual mandate in federal health care legislation.
The problem, as she sees it, is one of adverse selection: Only high-risk individuals will voluntarily purchase the insurance Congress proposes to require them to issue. That makes the insurance market fatally unstable.
She is correct that fatal adverse selection would arise if the bill lacks highly coercive employer and individual mandates. What she only alludes to, but is the crux of the problem, is the combination of guaranteed issue and community rating.
If the Senate fails to adopt a strong mandate as the House did, health-care costs will increase at a faster rate than they have in the past and as a result, vast numbers of Americans will remain uninsured.
Why will costs increase? Because in addition to the individual mandate, two provisions that have become part of every reform bill advancing in Congress require insurers to sell policies to anyone who wants it but without charging premiums based on a person’s health status. These provisions are aimed at making insurance affordable for anyone with chronic or other costly medical conditions.
The problem is that these provisions can make insurance a lot more expensive. Insurance is fundamentally a mechanism for spreading risk. If only high-risk people sign up, insurance will become very expensive for everyone who buys a policy.
The two provisions Trautwein is describing in English are called, in insurance-speak, “guaranteed issue” (the requirement to sell insurance to anyone regardless of health status or pre-existing conditions) and “community rating” (the prohibition against charging rates commensurate with risk). These provisions undermine the private insurance market.
Guaranteed issue invites people to wait until they are sick to buy insurance. Community rating ensures that when they do sign up, sick people pay a fraction of the cost of underwriting their risk. In combination, these two provisions drive up insurance rates and cause healthy people to drop out of the market. That raises the average risk of the pool, which requires rates to be increased again, which leads the next cohort of people with lower than average risks to bail out. The market stabilizes only when it vanishes.
Trautwein then admits that a coercive individual mandate “solves” the adverse selection problem caused by guaranteed issue and community rating, but it does so by forcing healthy people to subsidize sick people:
However, if a lot of low-risk people also pay into the system, there will be more money to take care of those who need expensive services than if fewer low-risk people pay in. If everyone carries insurance, in short, premiums will be a lot lower for everyone.
Premiums may be lower, but they still will be much higher for healthy people than justified by their health risks. They will pay more to subsidize those who are less healthy.
Politics making strange bedfellows, opposition to the individual mandate comes from both Right and Left. On the Right, government mandates are inherently undesirable because they sacrifice individual liberty. The protection of liberty motivates them to oppose mandates. On the Left, the fastest path to a single-payer system is one in which the private market crashes and burns. An insufficiently coercive individual mandate would ensure this result.