Those Unintended Consequences Again

I've previously blogged about health insurance mandates that force higher policyholder premiums. The most significant of these are "guaranteed issue" (required coverage of applicants with pre-existing conditions) and "community rating" (obliged rate averaging to make insurance affordable for those with such conditions). To be clear, I don't object to the first--but combining the two is economically illiterate: it demands massive cross-subsidies that increase consumer rates and deter universal coverage.

Obamacare adopts both guaranteed issue and substantial community rating (price differentials limited to age and risk-factors and capped at 3:1). The law attempts to ameliorate insurance market distortions by mandating the purchase of insurance for many (thereby broadening the risk pool and premium payments). But the penalties are relatively low compared to premiums, providing incentives for the young and healthy to avoid insurance until they get sick (and for employers to terminate their group plans, forcing employees onto public plans). Either would be expensive.

Think I'm over-hyping a doomsday scenario? Hardly--it's similar to what happened in Massachusetts, according to the Boston Globe:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state’s largest private insurer provided the Globe.

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company’s data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions. . .

Insurers want rules that would restrict enrollment for individuals buying on the open market to a designated month each year, unless they have had a major life change, such as a divorce -- similar to the practice used by most employers. They say this would curb the practice of buying coverage just before an expensive elective procedure that can be planned ahead, such as knee or hip replacements or fertility treatments. Imposing waiting periods for coverage on this group, which was effectively disallowed by the 2006 law, would also deter this practice, insurers say.

"I raised these concerns with the Patrick administration, but I didn’t make much progress. And I even sent them my data," said Charles D. Baker, a Republican candidate for governor and former chief executive of the state’s second largest insurer, Harvard Pilgrim Health Care. He blogged about these issues last June, when he was still at the company.

Baker’s data showed that about 40 percent of the consumers who purchased insurance from Harvard Pilgrim on the open market kept the insurance fewer than five months, and they incurred, on average, $2,400 a month in medical expenses -- about six times higher than the monthly spending of other consumers.

My one quibble with the piece: this isn't gaming the system. It's responding to incentives intentionally included in the law.

Conclusion: Welcome to the worst of all possible worlds. We didn't control healthcare costs or promote insurance competition or alter perverse incentives; Obamacare is worse than Masscare. And, contrary to lefty goals, the number of uninsured may increase over time, because we've Federalized the worst aspects of state insurance regulation, increasing inequality. Why? Ironically, in the name of fairness:

Insurers compete to charge people rates that reflect the cost of their care. If you can reasonably be expected to need 50% more care, they'll be happy to sell it to you for 50% more. Take a look at life insurance. They don't "deny coverage" to anyone over the age of 40. But they do charge higher premiums. Why is that the end of the world?

It is for those determined to mandate the government option. Expect another decade of bashing insurance companies and blathering about "the children."

(via Coyote Blog)