Higher Premiums, Less Coverage?

Could health-care reform actually lead to fewer people being insured? Harvard economics professor Martin Feldstein argues that the answer is yes:

A key feature of the House and Senate health bills would prevent insurance companies from denying coverage to anyone with preexisting conditions. The new coverage would start immediately, and the premium could not reflect the individual's health condition.

This well-intentioned feature would provide a strong incentive for someone who is healthy to drop his or her health insurance, saving the substantial premium costs. After all, if serious illness hit this person or a family member, he could immediately obtain coverage. As healthy individuals decline coverage in this way, insurance companies would come to have a sicker population. The higher cost of insuring that group would force insurers to raise their premiums. (Separate accident policies might develop to deal with the risk of high-cost care after accidents when there is insufficient time to buy insurance.)

The higher premium level would cause others who are currently insured to drop coverage, pushing premiums even higher. The result would be a spiral of rising premiums and shrinking numbers of insured.

Now, as Feldstein explains, there are already fines built into the bill to prevent this. But for many people, those fines won't be enough to keep them in the insurance pool:

Consider: 27 million people are covered by health insurance purchased directly, i.e. outside employer-based plans. The average cost of an insurance policy with family coverage in 2009 is $13,375. A married couple with a median family income of $75,000 who choose not to insure would be subject to a fine of 2.5 percent of that $75,000, or $1,875. So the family would save a net $11,500 by not insuring. If a serious illness occurs—a chronic condition or a condition that requires surgery—they could then buy insurance. Since fewer than one family in four has annual health-care costs that exceed $10,000, the decision to drop coverage looks like a good bet. For a lower-income family, the fine is smaller, and the incentive to be uninsured is even greater.

Feldstein thinks all of this could lead to greater subsidies, or perhaps a more dominant public option. I think it's possible he's underplaying the psychological cushion of having insurance, as well as the fact that people like having insurance to help pay for routine care (as I've noted before, many people in the U.S. understand health insurance as essentially a form of medical pre-payment). But no matter what, the larger point seems pretty clear (if not surprising): The potential unintended consequences for this version of health-care reform are huge.