Community Rating

The other day I posted about Gov. Schwarzenegger’s universal health care plan. I focussed solely on the community rating issue. Kevin Drum seems to, currently, like the plan. He likes the idea of community rating. However, there is one problem. Kevin doesn’t really know why he likes community rating.

In the end, the reason I support Schwarzenegger’s plan is because it includes insurance company regulation, and in particular because it enforces community rating (i.e., a requirement that insurers accept all comers at the same price, regardless of age, occupation, or medical history). And while I can’t back this up with a solid argument, my gut tells me that community rating will eventually put private healthcare insurers out of business.

I find it simply amazing to support something so massive in terms of invasivness in the economy on little more than a gut feeling. Of course, this strikes me as pretty much what most politicians do at their best (at their worst they do things for more cynical reasons such as pork barrel politics).

Further as I noted there are equity vs. efficiency issues with regards to how you handle insurance premiums. However, if the policies that are put in place aren’t done right they can backfire and end up making equity worse as well as efficiency. And for California in particular the idea of community rating might not be such a great idea. Granted that link goes only to the abstract (full article here with the math omitted), but the conclusion seems pretty clear,

CONCLUSIONS: Mandated community rating of premiums in a heterogeneous state such as California results in large unintended transfers of wealth from poorer, rural communities to urban, wealthier communities. Allowing premiums to vary with the regional cost of medical care would eliminate some of the transfers without sacrificing the benefits of community rating.

Now…where do most of the voters in Southern California live? In rural or urban areas? Here’s a hint, if they lived in rural areas, those rural areas wouldn’t be rural anymore. Here is another question with some possibly unpleasant ramifications for Mr. Drum’s view. Do politicians like to have one group subsidize another? Absolutely. Are the groups that subsidize others always the rich and affluent? No. So, the idea of community rating could be a very bad thing for some, and a very good thing for others in a way that should make Kevin rethink his views. After all, he is the one who has posted a fair amount on the issue of income inequality (long story short, Kevin argues it is bad–again with little or no justification).

For example, suppose we have a healthy young couple who are just starting out. They are fairly low in terms of income, but the are no mandated to buy insurance where the price is driven up by older couples with more income who also have higher health expenditures. If health expenditures are correlated with age and income, then you could have a case where those who are healthy and have lower incomes in a “community” end up subsidizing those who are unhealthy and have more income.

In short, there might be some good reasons for community rating. I haven’t thought of any yet, or run across a study that puts any forward, but the idea of liking something that will cost billions maybe tens of billions and impact millions because based on nothing more than gut feelings is just plain dumb.

FILED UNDER: Economics and Business, Health, US Politics, , , ,
Steve Verdon
About Steve Verdon
Steve has a B.A. in Economics from the University of California, Los Angeles and attended graduate school at The George Washington University, leaving school shortly before staring work on his dissertation when his first child was born. He works in the energy industry and prior to that worked at the Bureau of Labor Statistics in the Division of Price Index and Number Research. He joined the staff at OTB in November 2004.


  1. Deb says:

    Well, I can’t say I hate it personally because I’d never be able to afford insurance without it, mandate or no. A girl’s gotta eat, even if she’s already got a health problem or two. I agree, though, that the statewide setup doesn’t make a lot of sense. If I understand how it works here (MA) correctly, it’s based on much smaller areas. I’m not sure if it’s by town or by a defined region, but I know when we moved my premium changed.

  2. steve says:

    but the idea of liking something that will cost billions maybe tens of billions and impact millions because based on nothing more than gut feelings is just plain dumb.

    Kinda like Iraq, huh?

  3. Steve Verdon says:

    Well, at the risk of going way off topic, I don’t think it was just a gut feeling. Of course, not the reasoning doesn’t look so bad and/or the plan for the long term was bad/non-existent. Still, saying that I have lots of buyers remorse over early support going into Iraq is…a bit of an understatement.