The Fundamentals of Insurance Reform: A Reminder

August 16, 2010

On August 1, 2010, the U.S. District Court in Virginia ruled that the lawsuit against the Affordable Care Act (ACA) can proceed. Judge Hudson defined the issue as: “whether or not Congress has the power to regulate – and tax – a citizen’s decision not to participate in interstate commerce [by choosing not to buy health insurance.]” A summary judgment hearing on the case will occur on October 18 and every state and the federal government will be watching closely to see how the judge rules on the merits.

I have no expertise to comment on the merits of the case – there are attorneys on all sides of this question making what seem to me to be persuasive constitutional arguments both for and against the federal government’s authority as expressed in the ACA. And, clearly, the Virginia case will not be the last word on this issue. No matter what the outcome of that case, we know it will be appealed and the court action on the ACA will continue for a long time.

What I do want to comment on, however, is the merits of the idea of having a “mandate” – whether it is a true mandate or a tax is irrelevant to the way it is intended to operate in practicality. Recently, the Wall Street Journal reported that in many ways, health reform will represent a redistribution of benefits  This article focused on the transfer of funds and benefits from the old to the young.

Many more of our safety net programs transfer assets and costs from the young to the old – with a different framework of social justice: namely, the idea that older, retired members of society who have made their contribution should be supported by younger, working adults. The idea behind the redistribution of assets in health care reform is based on two fundamental principles: one a pragmatic, actuarial concept and the other a philosophical framework.

The actuarial concept behind the ACA’s requirement that all citizens have health insurance coverage is this: unless everyone is required to have coverage, only those who are or expect to get sick will get coverage. Over time, that would lead to what’s known as an “adverse risk spiral”: healthier individuals decide they don’t want to pay the costs of coverage, leaving behind a sicker population that raises the cost of coverage for everyone.

This issue is dealt with for the majority of those with coverage, by virtue of the employer-based group coverage approach used in the United States. In that model, all members of a group are required to be included in coverage, whether they want or need that coverage or not. This model has been somewhat modified in recent years as some employers have encouraged employees forgo health insurance for a cash bonus. But, the basic approach stands: group coverage always includes a mix of relatively healthy and relatively sick individuals, with some range of ages and circumstances as well. As such, group coverage is less vulnerable to the adverse risk spiral found in individually purchased coverage. The mandate component of health reform is an attempt to shift the individual market to look more like the group market, thereby making it more sound.

But, there is another issue at work with the ACA’s mandate– an issue about social justice and equity. Essentially, the ACA puts in place a principle that says it is in the public interest for all in society to have health coverage. There are many rationales for this principle. One is that insurance coverage is important in the context of population health: that is, we know that those with health coverage have better health status than those without. Another rationale is an economic one for society: those in better health are more productive than those who carry a significant disease burden. Additionally, health insurance coverage for all has an important component of fairness: that is, everyone will become sick at some point and when individuals with no health coverage end up sick, any care they receive is subsidized by the rest of us – the “free rider” effect. So assuring that everyone is required to have coverage does increase societal fairness for all.

Whatever happens in the health reform lawsuits, the underlying principles about how health insurance works – a pooling of the risks and sharing of the costs – cannot be forgotten. Like it or not, the individual mandate will make the private insurance market work better. And, it certainly improves fairness as well. Let’s not forget these important fundamentals in all the debate about taxation, states’ rights and the Constitution.