How to destroy health insurance

If you want to destroy a health insurance market, institute community rating (every customer pays about the same, regardless of risk) and guaranteed issue (no applicant can be turned down). That puts the market into a death spiral: prices soar, so the healthy flee, so the prices soar even more. New York showed how it’s done:

New York state’s guaranteed issue and community rating rules—the two regulations that limit how insurers can charge based on health history and require them to sell policies to all comers—took effect in 1994. At the time, there were about 752,000 policyholders in the state’s individual market, or about 4.7 percent of the non-Medicare population. But by 2009, according to a Manhattan Institute report by Stephen Parente and Tarren Bragdon, the state’s individual market had practically disappeared, leaving just 34,000 participants, or about 0.2 percent of the non-elderly population. Individual insurance premiums, meanwhile, were among the highest in the nation—about $388 on average in 2007, compared with just $151 in California, another big Democratic-leaning state. In New York City, the annualized premium cost for individuals was more than $9,300 and more than $26,400 for a family.

The median household income in New York City is $50,711, so health insurance is quite literally unaffordable, it would cost over half the typical family’s income.

Obamacare is different, as it includes an individual mandate. This is supposed to prevent the death spiral: prices soar (boy, do they), but the healthy aren’t allowed to flee, so prices don’t soar further. There’s a couple of problems with the theory though.

First, the individual mandate’s penalty isn’t really severe enough to force people into the market. Many people will pay the penalty rather than sign up for expensive insurance they don’t think they need. In fact, the fact that the penalty isn’t severe enough is part of why John Roberts was able to convince himself that it could be construed as a tax, not a penalty, and thus found constitutional. If the mandate actually worked, it would be unconstitutional.

Second, as I’ve noted before, the quality of health insurance is not uniform. Even if the mandate worked, it doesn’t force healthy people into good plans. Consequently, good plans will become unaffordable and cease to exist.

(Previous post.)

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