Now that the health care overhaul effort in Congress has collapsed, Democrats are searching for some way to salvage the year of legislative work they put into the issue—hoping to score a field goal in lieu of a touchdown. One thing Democrats will likely attempt to do is attract support from centrist Republicans, and one way they might try to do this is by focusing on the bill's key insurance market regulations. President Obama has also hinted that this might be the next step for health care reform, telling ABC: "I would advise that we try to move quickly to coalesce around those elements of the package that people agree on. We know that we need insurance reform, that the health insurance companies are taking advantage of people."
Given that newly elected Republican Senator Scott Brown has expressed a vague interest in some sort of smaller-scale reform package, it certainly seems like a possibility that Republicans and Democrats could come together on the idea of reforming the insurance market in a way that would be sold as prohibiting discrimination based on preexisting conditions.
To borrow an Obamaism, let me clear: This is a terrible idea.
Now, I've written harshly about the individual mandate, which would require every American to buy health insurance. But insurance reforms without a mandate would, in their own way, be just as bad, and twice as stupid.
Prohibiting preexisting conditions entails enacting two different regulations, known as "community
rating" and "guaranteed issue." There are variations on each, but in basic terms, these regulations mean that insurance companies have to charge everyone the same amount for the same policy, regardless of risk factors, and that they have to issue policies to everyone who's willing to pay.
The problem is that with these regulations in place, there's no incentive to buy insurance until you're already very sick. After all, if the insurance companies can't turn you down or jack up your rates, why buy in early? So what happens is that, in hopes of saving money, some number of healthy people decline to buy insurance, creating a sicker, more expensive pool. That pushes a new wave of the healthy people to jump ship, which creates a pool that's even sicker and even more expensive. Go through a couple iterations of this, and fairly quickly you have a very small, very sick, and very, very expensive insurance pool.
It's called a "death spiral," and we know it happens because we've seen it in every single state that has enacted those two insurance regulations. We've seen it in the state of New York, where, under community rating and guaranteed issue, the individual health insurance market declined from 4.7 percent of the state's health insurance to 0.2 percent. Meanwhile, premiums skyrocketed; according to an October 2009 report from the insurance lobby, the state's individual market premiums are now the highest in the nation.
And we've also seen the death spiral in Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, Vermont, and Washington. Over and over again, it's the same story. Premiums spike. The market dries up. Everyone who has paid even the slightest attention to the most surface details of health care policy knows that the combination of these two seemingly innocuous regulations is disastrous.
This is not an argument for a mandate, nor for a big bill rather than a small one. Rather, it's a warning that a smaller, superficially less intrusive bill of the sort that's being talked over now could be just as bad, in its own way, as the proposals we just spent the last year debating.