By Uwe E. Reinhardt
The New York Times
January 8, 2010
In last week’s post I used a stylized illustration to throw into sharp relief the economic and ethical dimensions of community-rated premiums for health insurance.
I am gratified by the many comments that post drew, and even more so by their quality. (In fact, I have shared these comments with my students in a course on health policy.) The comments show that there is no consensus on the merits of community rating in this country.
Remarkably, in virtually all other industrialized nations, this issue is hardly ever raised. Community rating there has long been widely accepted and is unlikely to be abandoned in the foreseeable future.
The health systems of Switzerland, the Netherlands and Germany are frequently cited as potential models for a reformed American health system. All three countries offer their citizens a wide choice of health insurers — none of which is a government-run health plan. Yet in all three countries full community rating is de rigueur.
Swiss citizens, for example, are required to purchase insurance coverage for a comprehensive health-benefit package from a large menu of private health insurance companies that compete for customers on the basis of the premium they charge for that coverage.
Profits cannot be earned on insurance for the basic package. Premiums do vary among competing insurers, but for a given insurer they can vary only by the deductible and coinsurance rates of the different policies. Neither the individual’s health status nor age affects the premium charged the individual by a given insurer. Health insurers ending up with an older or sicker enrolled risk pool then receive compensation from a risk-equalization fund.
Similarly, Dutch citizens are mandated to purchase insurance coverage for a comprehensive benefit package from a menu of private for-profit or not-for-profit insurers.
Roughly half of the cost of this coverage is financed by a payroll tax — that is, it is based roughly on ability to pay. The other half comes from competitively set premiums collected directly from those enrolled.
The payroll taxes are paid into a national risk-equalization fund that then pays a risk-adjusted amount to the insurance carrier chosen by a particular individual. Among health services researchers, this risk-adjustment mechanism has long been viewed as one of the most sophisticated in the world.
The part of the premium collected by Dutch insurers directly from individuals is fully community-rated. Although these premiums vary among insurers, a given insurer must charge all comers, healthy or not, young or old, the same premium, which is community-rated over that insurer’s pool of those insured.
Germany’s statutory health insurance system, covering about 90 percent of the population, also has a national risk-equalization fund, which is fed by a flat payroll tax on gross income of about 14 percent paid by all employees insured by that system.
The risk-equalization fund makes a risk-adjusted payment to the health insurer (which is a nonprofit “sickness fund”) of the individual’s choice. That payment from the risk-equalization fund, of course, does reflect the individual’s health status and age. But the individual’s payroll-tax payment into the risk-equalization fund is completely independent of the individual’s age and health status. It is based strictly on ability to pay.
I could continue to describe the health insurance systems of other European countries, or Canada, Taiwan, Japan, Korea, Australia or New Zealand. We would find that in none of these health systems does the individual’s or family’s contribution to health insurance reflect that individual’s age or health status.
Community rating is so acceptable in these countries because citizens there view it not only as part of a larger social contract, but also as a vehicle for life-cycle economic planning.
The vast majority of citizens in these countries view health care as a so-called “social good” that is to be shared on the basis of need by all on roughly equal terms and is to be financed largely on the basis of ability to pay.
By contrast, Americans have never agreed on a shared social ethic that should govern their health system, as the current debate over health reform has made visibly and audibly clear.
Furthermore, younger and healthier people in these countries realize that, but for the grace of God, they might become chronically ill only a few years hence and that, in any event, one day they, too, will be older and sicker. By paying more than their actuarially expected cost for health insurance, young and healthy people in these countries join a club, so to speak, that offers them a valuable call option. That call option allows them to procure at age 55 health insurance at a premium much below their actuarially expected cost.
By contrast, Americans have been taught that health insurance is largely a private consumption item purchased year to year and customized to the individual’s circumstances. Indeed, the private health insurance industry in this country has never been able to offer individual Americans the kind of life-cycle health insurance citizens in virtually all other industrialized nations take for granted. With the exception of Medicare, all health insurance in the United States is basically temporary.
Curiously, however, although Americans often flatter themselves with the image of being self-reliant, rugged individualists, they actually tend to rely more than citizens in many other countries on government-run health insurance and pensions in their old age, or when they fall on hard times. It is what makes the creature called “American” so perplexing in the eyes of foreigners.
Furthermore, many Americans who oppose community-rated insurance in the current health-reform plan are themselves beneficiaries of community rating. I shall have something more to say about this oddity in my next post to this blog.
http://economix.blogs.nytimes.com/2010/01/08/how-the-world-balances-health-care-risk/
Posted response of Don McCanne, San Juan Capistrano, CA (response # 2):
Some of us were very disappointed when politicians rejected, up front, the administrative simplification of the single payer model of an improved Medicare for everyone. Nevertheless, in the decision to expand the role of private insurance, Congress still had the opportunity to create a rational system of social insurance which would have included important concepts such as community rating and risk equalization.
The concept of the insurance exchange provided that potential. Yet Congress erected firewalls which will prevent most individuals from purchasing plans within the exchange. They also delayed the initiation of the exchange for a few years, and it will require several more years after that to once again prove that our rejection of the concept of a truly effective social insurance program will perpetuate the inequities, inefficiencies and profound waste in our system.
Worse, in trying to patch together this dysfunctional system, Congress has decided that 20 million or so will be left out, a number destined to increase with continuing increases in health care costs. That’s roughly two-thirds the population of Canada, a country that we criticize merely because of its issues with queues for some elective services.
Proponents of this reform proposal say that we should pass it now, and we can fix it later. Unfortunately, this process almost assures that it will be at least another
decade before our nation takes another serious look at the policies required for an equitable and just health care financing system.
It’s too bad that we don’t have visionaries in power who can say that this isn’t going to work, and we have to move on with fixing it now. But then the citizens of the United States are used to living with our over-priced, dysfunctional system that accepts, as a given, financial hardship, physical suffering, and even death.
Further comment: Although my published response acknowledges that social insurance programs that depend on private health plans, such as the European programs that Professor Reinhardt describes, can achieve important policy goals such as community rating and risk equalization, I cannot overemphasize the fact that our goal for reform should remain the golden standard of a single payer national health program – an improved Medicare program that includes everyone.
The single payer model has unique features, not found in an exchange of private plans, that improve efficiency, effectiveness, and equity while insuring that absolutely everyone is included.
Private health plans, especially those in the United States that have evolved throughout the past three-quarters of a century, provide a negative value in administration of our health care funds because of their high costs, inefficiency, inequity, and their inability to improve the resource allocation that is needed for a high-performance health care system. They are not a suitable vehicle for a social insurance program.
Although some who read the letter from PNHP to our Senators fixated on the negative message of rejecting the flawed proposal before Congress, many seemed to miss our positive message which is reframed in my comment above: We need “visionaries in power who can say that this isn’t going to work, and we have to move on with fixing it now.” (The PNHP letter stated, “… immediately move to consider… “)
now: at the present time or moment (Merriam-Webster)
immediately: without interval of time (Merriam-Webster)
“Now” and “immediately” are terms that we used to communicate the fact that we need to avoid the decade or so of inevitable torture that so many will experience as we watch this experiment with reform fail us miserably. We need a bona fide program of social insurance now… immediately!