The effect of community rating in health insurance markets

Maybe there's been enough discussion of Paul Krugman on health care but still this caught my eye.  In a recent blog post Krugman wrote:

The reason we have restrictions on interstate sales of health insurance is that a number of states regulate insurers. In particular, some states have a form of community rating, which basically says that insurers can’t deny you coverage or charge extremely high premiums if you have a preexisting condition. And community rating will be unsustainable if individuals can buy insurance from out of state; insurance companies in states that don’t have community rating will cherry-pick the healthy, good risk people, leaving the community rating states with only the highest-cost people.

Krugman's post seems to be very approving of such community rating.  When it comes to California, which has no community rating, "insurers compete by doing their best to deny coverage to anyone who might actually need medical care."

Based on a close look at the data, Herring and Pauly write (I can't find an ungated version can you?):

Some states have implemented community rating regulations to limit the extent to which premiums in the individual health insurance market can vary with a person's health status. Community rating and guaranteed issues laws were passed with hopes of increasing access to affordable insurance for people with high-risk health conditions, but there are concerns that these laws led to adverse selection. In some sense, the extent to which these regulations ultimately affected the individual market depends in large part on the degree of risk segmentation in unregulated states. In this paper, we examine the relationship between expected medical expenses, individual insurance premiums, and the likelihood of obtaining individual insurance using data from both the National Health Interview Survey and the Community Tracking Study Household Survey. We test for differences in these relationships between states with both community rating and guaranteed issue and states with no such regulations. While we find that people living in unregulated states with higher expected expense due to chronic health conditions pay modestly higher premiums and are somewhat less likely to obtain coverage, the variation between premiums and risk in unregulated individual insurance markets is far from proportional; there is considerable pooling. In regulated states, we find that there is no effect of having higher expected expense due to chronic health conditions on neither premiums nor coverage. Overall, our results suggest that the effect of regulation is to produce a slight increase in the proportion uninsured, as increases in low risk uninsureds more than offset decreases in high risk uninsureds [emphasis added by TC]. Community rating and guaranteed issue regulations produce only small changes in risk pooling because the extent of pooling in the absence of regulation is substantial.

You'll find some unadjusted raw data for states here

Herring and Pauly, who wrote this paper in 2006, stress that what I am describing as the Krugman view is the "conventional wisdom" yet not supported by the facts.  More generally, you can think of their excellent paper is a contribution to the ongoing debate over health insurance and adverse selection.  As the authors say "there is considerable pooling."

I am not, by the way, suggesting that we should move everything to the individual insurance market or that Jim DeMint is an objective analyst of U.S. health care.


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