The proposed health care bills in both the Senate and House have several provisions that will potentially destroy the individual health insurance market. The 3 particular items that are of significant concern are: 1) the weak mandated penalty for people who choose not to buy health insurance, 2) the limited ability to change price based on age and 3) the lack of ability to adjust price based on health status. If individuals shopping for health insurance believe a plan is priced significantly higher than what the insurance should cost, they ultimately will not purchase the insurance, and, in effect, self-insure. So, for instance, if a 20 year old male believes that the price for his insurance reflects that of a sick, 50 year old male that smokes, the 20 year old will forgo the insurance. Instead, he will self-insure and pay the $750 penalty for not carrying insurance. As younger, healthier people start to exit the insurance pool, prices on policies will rise and cause even more people to exit the pool until everyone’s price, in fact, reflects older, sicker policy holders.
Congress has, in fact, created a catastrophic plan. It costs $750 dollars a year and all preexisting conditions will be waved.
We have run this experiment before. 20 years ago, New York State had an enormous individual marketplace and in 1993, “reform” of the individual marketplace, in an effort to bring “fairness” to pricing, completely tanked the individual market. New York State prohibited pricing based on age, gender, health status, and smoking, and only allowed for pricing based on geography. Almost every insurer exited the marketplace and the price for individual policies increased astronomically. An individual policy in New York City for a 10 year old boy is over $1,000 a month. In Connecticut, a similar policy would cost less than $100 a month. We’ve tried to standardize pricing across various ages and health statuses before. We should avoid rolling out a failed experiment to the entire country.
We have seen situations where age-banding works. Take group or employer health plans. These plans are age-rated, but those covered under an employer plan are typically happier with their premiums than those covered under an individual policy. Why is this? Since these plans are subsidized 50-80% by the company, the policy holder ends up paying only 20-50% of the actual premium.