Is There an Argument—Any Argument—for Community Rating?

I’ve never seen an intelligible argument for community rating.

I think I know why. I’m afraid there isn’t any.

Don’t believe me? I’ll tell you what I’ll do. I let you pick any recognized ethical system in the entire history of Western philosophy. (Only Western? Yeah, we’re not cultural relativists here.) Altruism, Egoism, Nietzschean ethics, Nicomachean (Aristotelian) ethics, Kantian ethics, Thomism (Christian ethics), Utilitarianism, Rawlsian ethics, etc. ― pick any one you like. Then at the other end, I won’t even confine you to health care. You can pick any good or service you like. Your task: to show how you can logically go from the chosen ethical system to the conclusion that the “just” amount a person should pay is the same for everybody, regardless of expected consumption.

While we’re waiting for that demonstration, let’s review the bidding. As everyone acknowledges, community rating creates horrible perverse incentives for everyone. On the buyer side, people have an incentive to refrain from insuring until they get sick. Once they do decide to buy, those who are charged an artificially low premium will over-insure. People who are over-charged will under-insure. Insurers will seek to attract the healthy and avoid the sick. After enrollment, their incentive will be to over-provide to the healthy and under-provide to the sick.

To put up with the bad outcomes of all those perversions, there must be some really compelling moral objective behind it. But I suspect that after it is examined closely most people will actually find community rating morally objectionable.

One of the worst aspects of community rating is that it generally takes from the young and gives to the old ― which is to say that it takes from those who have less and gives to those who have more. People in their fifties and sixties have higher incomes and more assets than people in their twenties and thirties. They are far more likely to have paid off their mortgage. They are more likely to have finished paying education expenses for their children. And with their greater disposable cash flow, they are in a much better position to pay actuarially fair premiums for health insurance than young people are prepared to pay for their higher community rated premiums.

Note: there is nothing progressive about community rating, even though such progressive health economists as Uwe Reinhardt and Jon Gruber are (inexplicably) out there defending the practice. Ditto for Paul Krugman.

Jon Gruber maintains that if you are healthy you are a “genetic lottery winner” who, in an unfettered marketplace, will face an “artificially low price.” But that’s not really an argument. It’s an epithet. It has hints of John Rawls. But you are never able to stretch Rawlsian logic far enough to explain why Sam Walton’s daughters should pay lower premiums (more on women below). Gruber doesn’t even try.

Paul Krugman, as we have repeatedly shown, doesn’t really know much about health economics. (See here, here and here.) But that doesn’t prevent him from morally castigating everyone who has an opinion different from his. In this case, he supports community rating because it is one of the three pillars of ObamaCare and he supports ObamaCare because...well...because his columns increasingly look like press releases put out by the Democratic National Committee. However, being a shill for the DNC doesn’t count as an argument either.

Uwe Reinhart doesn’t really take on the case for community rating as such. But he does argue for the idea that men and women should pay the same health insurance premium, even though women are expected to have higher medical expenses, other things equal. I was trying to grasp why Melinda Gates and I should pay the same premium the other day. Is it so that I can help subsidize health insurance for the woman who is married to the richest man in the world? (Or is he the second richest?) Of course that’s an extreme example, but it nicely illustrates an important point: community rating ignores all the factors most ethical systems would regard as important and strives to produce an outcome that most people would regard as unimportant in any other context.

If community rating is good in health care, isn’t it equally good for life insurance, disability insurance, or automobile liability insurance? Of course, these are markets where men are charged more because their probability of filing a claim is higher. If, as Barack Obama claims, women are discriminated against in health insurance, aren’t men similarly discriminated against in these other insurance fields? And if so, why isn’t the president calling for an end to discrimination against men in the insurance markets where it is so rampant?

I believe I understand the president. He doesn’t care about discrimination. He wants to elect Democrats to Congress. Fair enough. But what about Reinhardt?

For Uwe, the case for gender neutrality begins with indebtedness:

Perhaps it is thought of as a small token of gratitude for the extraordinary contribution to humanity women make in this regard.

Then it advances to a claim about investing:

Besides, there is growing scientific evidence that the physical and intellectual development of humans into adulthood is strongly influenced by their experience and nutrition in utero and during early childhood. Thus, a nation does not even have to be particularly humane, but merely smart, to grant women of child-bearing age easy access to the best maternal and child care attainable, including good nutrition. It is a solid economic investment with high social returns over generations.

And winds up as a public good:

Yet as I have noted previously, many other Americans seem to view children more in the nature of lovable human pets ― that is, more in the nature of a private good than a precious social resource.

Hmmm. I’m sure alert readers will have noticed by this point that we are nowhere near making a case for gender neutrality. Instead, a case is being made for preferential treatment for some (but not all) women of child bearing age. But, hey. Even if this case were valid, can’t we all think of ways of subsidizing children without screwing up the market for health insurance?

[Here is an aside: I suspect that if Professor Reinhart spent a little more time walking around campus and socializing, he would discover that just about every left-wing environmentalist in Princeton, New Jersey, regards every newborn child as a potential threat to mother Gaia. Children are worse than pets. They’re not a public good, they are a public bad ― whose production should be discouraged rather than encouraged. Do European leftist environmentalists really think differently?]

Bottom line: there is no case for community rating. The economics are irrational and it’s morally perverse. In fact, it’s an idea that is so strange that one wonders how anyone ever thought of it in the first place.

* * *

For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

[Cross-posted at Psychology Today and John Goodman’s Health Policy Blog]