What to do about “Lemon Drops”

March 15, 2010

The White House is saying that we will have health reform enacted by next Sunday. While health reform is the term often used to describe the House and Senate passed bills, in fact a large part of what is called health reform is really focused on health insurance reform. And, a big piece of that reform is designed to deal with the fact that today many Americans cannot get health coverage because of their health status. Leave it to the British to coin the artful phrase in describing this problem: “lemon drops.” Lemon drops is their term for what we call, much less elegantly, those with “pre-existing conditions.” And, what an appropriate term it is: those who are sick are the “lemons” that no health plan wants to cover. As an effort to avoid “lemon drops,” insurers spend a tremendous amount of time and money on trying to “pick cherries” — that is, applying medical underwriting to try and avoid covering those who are most in need and covering instead those who are healthy and likely to stay so.

The health reform bills in Congress are as complex as they are, in part, because of the goal to reform the insurance market and eliminate pre-existing condition exclusions and medical underwriting in the individual market. For that to occur, mandating coverage has been described as a pre-requisite. Linking guaranteed issue and mandatory coverage in the individual market makes sense because unless everyone is required to purchase coverage, it is likely that people will do a rational calculation: only buying coverage if they think the cost of that coverage will be less than the cost they would otherwise spend on care. That means that only those who are sick or expect to get sick will likely spend the money for coverage, breaking down the fundamental insurance principle of pooling of risk and sharing of cost. Over time, an adverse risk spiral can develop with those at the lowest risk dropping coverage leaving behind a sicker and sicker population in the insurance pool. We have seen this occur in Michigan where only Blue Cross and Blue Shield of Michigan is required on a continuous basis to take all comers regardless of health status.

Some economists, however, have argued for a different structure for getting to universal coverage in the individual market. Rather than mandating consumers to purchase coverage and requiring insurers to guarantee issue, they suggest an incentive based system. They rightly note that the penalties for failure to purchase coverage are politically vulnerable and likely to be too low (as they are in both the current versions of the Senate and House bills) and that over time, the same adverse risk spiral will develop nationwide as exists now in Michigan (indeed, if you listen closely to what the insurance industry is saying, this is what they are really arguing when they say the bills aren’t strong enough). Mark Pauly has been the most elegant proponent of this concept. In his approach, rather than mandating coverage and requiring guarantee issue, there would be financial incentives for individuals to purchase coverage while young and healthy. That is, cost would increase later in life. This approach is taken in the long term care market. Though that market is small, there is some indication that this approach does work to encourage people to buy and keep coverage — without the added complexity and political volatility of mandating such coverage

Americans hate being told they have to do something. Much of the turmoil around health reform has really been about Americans’ dislike of being mandated to participate and feeling that they are subsidizing the costs of others. Of course, that is what insurance is all about, but that concept when applied to social insurance is in serious tension with apparent American values. Mark Pauly’s idea may not be perfect but it may, in fact, be the better method to approaching universal coverage consistent with what most Americans seem to want. If health reform does pass this week and maintains the current mandates coupled with insufficient sanctions to really make community rating work, then we will have a great experiment to look forward to. If this method of dealing with the “lemon drops” doesn’t work, however, then it will be well to consider the ideas Pauly has put forward in the next round of health care reforms.