Our employer-based system was a federally engineered accident. Wage freezes during World War II left fringe benefits as the chief means by which big firms were able to compete for employees. Health care as a job-related perk became common. The government then established a large tax subsidy to ratify this arrangement. Every big company is essentially a socialized health republic, in which the young subsidize the old, and the healthy subsidize the sick -- all of whom pay the same premiums for the same plans.
Reorganizing the individual insurance market to make such pooling work would be more complicated. If insurers were forced to offer the same rate to all comers, young workers would pay far more than they would under policies that recognized their relatively low actual health costs. In large companies young workers opt into such a system because their bosses pick up most of the tab. For this to work in an individual market, the incentive must somehow be replicated -- or else coercion must be involved.
What cannot be done is to let young, healthy workers opt out, or the insurance pool will face a classic actuarial disaster. It's not physics: if younger workers decline coverage, the average health costs of those remaining in the pool will be higher, and premiums will rise. But higher premiums will prompt more young, healthy workers to drop coverage. The vicious circle will continue until premiums are sky-high and only the sickest are insured, at exorbitant rates.
This is essentially what happened in New York in 1993, when the state forced insurers to apply community rating to their individual policies. Well-meaning officials hoped to extend affordable coverage to everyone; instead they got a new glut of uninsured. The lessons of Insurance 101 are clear: community rating in an individual insurance market requires either a mandate that everyone buy insurance or a subsidy generous enough to keep younger and healthier people in the pool.
McCrery said he was for both the mandate and the generous subsidy -- at least for people of lower income. That a conservative on the health subcommittee of Ways and Means backs these ideas is stunning. McCrery is one of few in his party at present who take this view. He is also one of few Republicans who have studied the issue so closely.
McDermott was amazed. "Did you know that?" I asked him.
"No, I didn't know that."
I asked McCrery, "What brought you to community rating?"
"I looked at it nine ways to Sunday," he explained, "and I don't think there's any other way to do it. I mean, that's not true, there is another way to do it, but I think the simplest way to do it is just to have community rating. Yes, you can have a high-risk pool, with people moving from under the red line to above the red line, but why fool with all that? It's complicated, it's troublesome, it distorts the market. Why not just have community rating and then let insurance companies compete on the basis of value?"
"Covering everybody," McDermott said.
McCrery nodded. "They'd have to take all comers, but they would compete on the basis of service, economies of scale, efficiencies that they could muster to provide better prices, all those kinds of things. They could still be in the business; they'd just have to compete on those bases and not on getting lucky [that is, picking healthier people to insure]."
I turned to McDermott. "You like that?" I asked. His eyes opened wide.
"Yeah," he said. "I don't want to say anything to mess it up." Both men laughed.
The top insurance lobbyist insists that community rating is a nonstarter, I pointed out. Is there anything legitimate in his opposition?
"Depends on what you mean by legitimate," McCrery said. "To them, it's legitimate. Because, I mean, much of their business now ..."
"They don't have the problems that Jim and I face, which include equity in the society," McDermott injected. "They have a different mandate. I mean, corporations take in as much money as they can, pay as little out so that they have it to give to their stockholders. It's not good or bad, it's just what they are." He looked at his colleague. "That's not what Jim and I are. He represents all 600,000 in his district, and I represent all 600,000 in my district. I can't say, well, I represent 440,000 and the other 160,000 are not my concern. I don't have that option."
"It would fundamentally alter the insurance business," McCrery said.
It would -- by bringing the business back to the way it was, in a sense. Community rating was the way health insurance worked, even in the individual market, until the 1960s. Before then insurers didn't have the data to segment people in sophisticated ways according to health risks. Furthermore, health costs were a fraction of what they are today, meaning that people didn't have much to gain by shopping for cheaper plans, and unlucky insurers burnt by a few high-cost illnesses weren't left reeling. But costs and premiums have soared famously for decades now. The data and the technology needed to identify and price policies for lower-risk customers became available. It didn't take long for entrepreneurs to realize that they could target younger, healthier people with lower rates, sweep up a ton of customers, and make a bundle. The fragmentation of the insurance market -- with its emphasis on "cherry picking" the best risks -- began in earnest.
"The Human Genome Project is going to have an impact on this whole process unlike anything we can really imagine at this point," McDermott said. "Because if I'm an insurance company and I get a drop of your blood and I can do your genetics and I find you have these and these and these proclivities, I'll insure you for everything but those. What is insurance at that point?"
"The game is over at that point," McCrery agreed.
I told them I had asked Chip Kahn, of the insurance association, about this, and he had assured me that insurers would never use genetic information that way. The two legislators exploded in thigh-slapping laughter.
"No comment," McDermott finally managed to say.
Is it reasonable to think that community rating could succeed politically? I asked McCrery. Sure, he said -- group insurers essentially already operate under such a system in big companies. I said, But what about the individual marketplace?
"Well, I may have to settle for less [than its purest form]," McCrery said. "I've talked with insurance companies about this. They tell me that as long as they can underwrite based on age and gender [but not health status], they have no problem, they can make it work."
Cecil Bykerk, an executive vice-president and the chief actuary of Mutual of Omaha, one of the largest insurers in the individual marketplace, later told me the same thing. Mutual looks at people's health status only when they sign up, he explained; once they are in the pool, it doesn't go back and adjust their rates for subsequent health developments (as auto insurers do after accidents). As it turns out, prudent pricing can be based largely on age and sex. (This is true, of course, as long as everyone buys insurance as insurance, and doesn't buy in only when he or she becomes sick; as the famous example has it, buying insurance only when the house is on fire defeats the risk-pooling concept altogether.)