How the World Balances Health Care Risk

The New York Times
January 8, 2010
By Uwe E. Reinhardt

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.