Last week’s events in Massachusetts should serve as a disturbing warning to those folks (myself included) who are crossing their fingers and hoping that exchanges will provide a long term fix to the inequities of free market health insurance. The Massachusetts Connector is the prototype for national health insurance exchanges. Last week, Massachusetts Governor Patrick announced that he would reject 90 percent of the requested premium increases for policies offered through the exchange. Insurers countered that they were losing money in the exchange and would withdraw their policies if premiums did not increase. Patrick fired back that insurers would not be permitted to do business in the state if they stopped participating in the exchange. No one knows how this will ultimately end.
This battle over premiums has exposed a critical weakness in the Connector. Although individuals face penalties if they remain uninsured, the fines are modest and many choose not to buy coverage. Not surprisingly, the uninsured are healthier than average. To make matters worse, individuals can move in and out of coverage at any time; the result is that shrewder individuals wait until they need costly medical care before joining the exchange. This drives up costs and has led to the premium spikes. This in turn pushes out relatively healthy individuals and leads to the death spiral that I blogged about last month.
It is a delicate matter to make an exchange work. Whoever is setting the rules for the Pelosicare exchanges will have to balance several objectives:
1) Encourage everyone to participate – offer high subsidies.
2) Avoid being punitive – keep the penalties for not buying coverage low. (Barack Obama derided Hillary Clinton’s proposal to mandate purchases but this was a sensible idea. Even so, mandates do not by themselves mean anything. Punishments must be meted out to those who fail to comply.)
3) Keep popular support for the exchange – ask all individuals to contribute towards their insurance so as to establish individual accountability and avoid further tax increases
It may be easier for a camel to pass through the eye of a needle than to meet all three objectives.