Avoiding side effects in implementing health insurance reform.

10.1056/nejmp0912181 nejm.org 1 policies directly to individuals now charge premiums based to some extent on characteristics thought to predict the risk of high-cost conditions; insurers also exclude some or all preexisting conditions from coverage and simply refuse to cover some people. Without such “risk rating” and coverage exclusions, insurers would be subject to substantial adverse selection — that is, consumers would seek them out primarily if and when they became ill and therefore represented higher risks to insurers — which could lead insurers needing to cover their costs to charge premiums so high they would drive lower-risk consumers to choose minimal coverage or forgo insurance altogether. A few states, having decided that hazarding greater adverse selection is the lesser of two evils, require premiums to be the same for everyone in a given geographic area (an approach called community rating) or limit the extent to which premiums can vary with risk. Such regulation can beget the worst of both worlds — “adverse selection” when lower-risk people choose not to carry insurance and “cream skimming” when insurers avoid and mistreat highrisk people in their search for profitable lower-risk enrollees — but these adverse effects are presumably considered preferable to risk rating and exclusions. Legislation currently before Congress would extend this imperfect arrangement nationwide, though the details are as yet undetermined. Given the tradeoffs, how should such arrangements be designed, and can they be made to work better? I would argue that both laws and regulations should make strict community rating a last resort rather than the first line of defense for people with aboveaverage risk, and the laws and regulations should do so in ways that help to avert adverse effects. There are two complementary ways to frame the social goal of community rating: equity and efficiency. The equity argument is that it is unfair for persons who have higher health risks to have to pay higher premiums or compromise on coverage. This sentiment is strongest in regard to people with exogenous chronic conditions and low or moderate incomes. The efficiency argument is based on the idea that riskaverse people would like to avoid Avoiding Side Effects in Implementing Health Insurance Reform