Should insurers be able to offer less expensive policies to the young and healthy? Or should they be required to offer the same benefits to everyone at the same price?

In states where insurance is mandated, should twenty-somethings get a break? In a post on Health Care Policy and Marketplace Blog Robert Laszewski addresses these questions. He begins by focusing on a report  just released by the health insurance trade association (AHIP). The study looks at state health insurance reforms of the 1990s that tried to eliminate discrimination by insisting that insurers must sell “individual” policies to people who are not covered by an employer or another group without discriminating on the basis of health, age or gender. According to the AHIP, these reforms have had some “unintended consequences.”

Under “guarantee issue” laws, insurers in some states are forced to sell insurance to applicants without considering their health status: in other words, companies cannot tell someone with cancer, “Sorry, we won’t cover you.” In other states “community rating” laws say that insurers must charge everyone in a given community the same premium for the same coverage, regardless of whether they are sick or well, old or young.

As a result of these reforms, five states– New York, New Jersey, Maine, Vermont and Massachusetts — have comprehensive laws that prevent insurers from rejecting sick applicants while also placing significant restrictions on an insurer’s ability to adjust the price of its plans based on health or other factors.

But according to the AHIP report, these reforms, while “laudable,” have in many ways, made things worse. In states where insurers have to sell insurance to everyone who applies, healthy people tend to wait until they have problems before buying insurance. They know the insurer cannot turn them down. “Community rating” can have a similar effect. In states where twenty-somethings are paying the same premiums as fifty-year-olds, younger consumers are subsidizing their older neighbors. Some may balk at the idea and decide not to buy insurance at all.

The result, in both cases, is that those who do buy insurance will tend to be older and sicker with higher-than-average medical bills. When that happens, premiums inevitably rise—which means that more and more healthy, younger consumers will put off buying insurance until they really need it. Overall, the report observes, in the states that instituted these reforms in the 1990s, premiums have climbed, fewer individuals enrolled in insurance plans, and many health insurers have simply left the state.

“As far as it goes the report’s authors are right,” says Laszewski. “Before health insurance reform in the mid 1990s, it was the carriers that were ‘selecting against’ consumers” by charging sicker and older consumers such high premiums that many were excluded from the insurance market. Insurers were “cherry-picking the best risks and discouraging everyone else” from buying insurance.

By contrast, “after the reform, the insurers had to basically take all comers under terms that vary by state but are generally good for the consumer. So, with underwriting reforms, the balance of power in the market shifted—from the insurer to the consumer. “

And as consumers began to wait to buy health insurance until they became sick, now the insurers found themselves on what Laszewski calls “the bad side of the deal.”

“So what should we do?” he asks. “Go back to the bad old days of letting insurers cherry-picking?"

Certainly not; Instead, many reformers suggest that we should follow Massachusetts’s model and mandate that everyone must buy insurance and become part of the pool. That way, neither the insurer nor the consumer has a chance to “select against” the other or “cherry pick.”

But Laszewski isn’t sure that mandates are necessary. Rather than focusing on the market for insurance sold to individuals who are not part of a group, he suggests that we look at the parallel market where individuals get insurance through their employer. This is a market that is voluntary—no one is required to take their employer’s insurance—and community rated. In virtually all cases, the insurer cannot charge some employees more than others based on pre-existing conditions or age.

Yet, somehow it works: younger healthier works sign up—along with older sicker workers.

Why?

“Cost,” says Laslewski. Because employers typically pay 75% of the cost, younger workers are less likely to resent paying premiums, and this, he says, is why no mandate is needed: “When a consumer is presented with a good health plan that costs them a relatively small contribution, more then enough of them buy it giving the plan a good ‘spread of risk’ and that makes each employer pool work very well.”

Here, I would add just one caveat: Today more and more employees are finding that their employer-based insurance requires more than a “relatively small contribution.” Thus, I’m not convinced that enough younger, healthier workers will continue to sign up for their employer’s insurance.  Meanwhile, the pool of workers who do sign up is likely to become riskier, making the insurance more expensive, and in turn, forcing more employers and more healthy employees out of the market.

But I agree that the key to universal coverage is making insuran ce affordable. Do that and adverse selection by consumers (with younger healthier people going without insurance) won’t be an issue. And I agree that government mandates requiring everyone to buy insurance are not the answer—at least, not today. Mandates won’t work unless working-class families can afford the premiums. People simply cannot buy what they cannot afford. We are seeing this in Massachusetts —in part because the state is still letting insurers charge older customers twice as much as it charges younger applicants. This is because the Commonwealth has only “modified” community rate—age is one of the few things health plans can use to charge some people higher prices. As a result, a 60-year-old can be charged $352 a month for a policy that would cost a 27-year-old $176 a month.

And this is one reason why Massachusetts will wind up exempting roughly one-fifth of its low-income uninsured from the mandate. Thus many of those who most need health insurance—the poor and the elderly– won’t have it. So much for universal coverage.

Of course Massachusetts could change its law, go to full community rating, and insist that insurers no longer discriminate by age when pricing their policies. But to make up the difference, insurance companies would no doubt then raise rates for younger policy-holders. Unless someone decided to regulate both what insurers are required to cover—and how much profit they are allowed to make.

In this post, Lazewski does not discuss howto make insurance affordable. So let me add my suggestions.

Start with coverage. Should insurers cover PSA tests for prostate cancer when, according to the National Cancer Institute, it is not clear that early detection and early treatment has any effect on the progress of the disease? Because there is so little solid evidence of benefit, the American Cancer Society now says that it is “inappropriate” for physicians to recommend the PSA test for average-risk men. (See my August 27 post on screening for prostate cancer and my August 29 update below.) Should insurers pay for Gardasil, Merck’s new vaccine for cervical cancer, when there is no evidence that it will be more effective in saving lives than regular Pap smears? (See my August 27 post on drugmaker’s direct-to-consumer advertising below)

Should the citizens of Massachusetts be required to pay for insurance that will cover their neighbor’s gender-specific artificial knee a knee made especially for women) when many physicians say that it is not any better, or even very different, from a plain-vanilla knee? Though it is, of course, twice as expensive—I plan to write more about these "Virginia Slim" knees sometime soon. (If anyone has any experience with gender-specific knees, either as a patient or as a doctor, please scroll down, click on “contact” on the left-hand side of the page and send me an e-mail.)

When insurers cover unnecessary, unproven or overpriced treatments, drugs and devices, they pass the cost along, in the form of higher premiums. This is why a government that wants to mandate health insurance—and wants to make sure that families can afford that insurance—must take a close look at what policies cover. No one wants to scrimp on necessary care; policies must include all of the essential, high-quality care that a legislator would want for himself or herself. But policies should not cover over-priced, unproven treatments that, in many cases, may prove hazardous to a patient’s health. Who should decide what is over-priced and unproven? Independent panels of physicians and scientists who have no financial stake in the outcome. (I’ll be posting about the move toward unbiased research comparing the effectiveness of various treatments—and the folks who are trying, very hard, to stop such research–soon.)

Then there is the question of the insurance industry’s profits. Perhaps for-profit insurers, like utilities, should be required to make a case to the state before being allowed to raise prices, with a state keeping an eye on just how high profits go? Health care, after all, is a necessity, just like heat and light.

And as the critics of universal mandates point out, without cost controls, mandates are simply “political pork” for the insurance industry, guaranteeing a captive audience of new customers without any cap on how much they can be charged.