Should Health Insurance Abandon "Risk Assessment"?

Many health care reform advocates want to eliminate “risk assessment,” the ability of health insurers to consider the health of an individual or group when determining whether to provide health insurance and at what price the insurance is issued. But doing so will drive up health insurance premiums.

Just imagine if people were able to buy a homeowner’s policy after their house had caught fire. People would begin to wait until they smelled the smoke before calling the insurance agent. The pool of insured would be small and very expensive — because everyone would have high claims. That’s why nearly every type of insurance assesses the risk when someone applies for coverage, also known as “underwriting.”

Now a new analysis by the Council for Affordable Health Insurance and actuary Mark Litow looks at what happens to health insurance premiums if health care reform forces insurers selling in the “individual” health insurance market, where people buy their own policies, to accept everyone and charge them roughly the same price — in other words, imposes price controls. (Note: the vast majority of Americans get their health insurance through employers — i.e., the “group” market — or the government, where different rules apply.)

According to the study [pdf here], the proposal by President Obama when he was still a candidate would more than double premiums in the individual market. Proposals similar to a plan that passed in Massachusetts a few years ago — and one that appears to be a model for Democratic reforms — would likely increase premiums by 75 to 95 percent.

Yes, more people would likely be covered if Congress requires everyone to have health insurance or face a penalty, known as an “individual mandate,” so that some can’t wait until they get sick to get covered. But premiums will still go up, especially if people are given a choice of several plans and can switch periodically. By how much depends on the health insurance options available and the degree to which risk assessment is discouraged — that is, how aggressively prices are controlled.

All of these efforts to micromanage health insurance premiums impose greater inefficiency, distortions and lack of transparency in the health care system.

By contrast, the freer the health insurance market and the more it adheres to the traditional principles of underwriting and risk assessment — and include an effective, viable safety net for those who cannot get or afford coverage — the more competition will provide Americans with a wide range of competitive and affordable health insurance policies.