Does Community Rating Have an Economic Rationale?
Austin Frakt draws our attention to an NBER paper that finds an economic benefit from community rating. The argument: in imperfectly competitive markets, the gain to older buyers of insurance is less than the loss for younger buyers. However, the study ignores the most basic harm caused by the mispricing of health insurance; those who are over-charged will underinsure and those who are undercharged will over-insure. It also ignores an ethical problem previously addressed at this blog; older buyers are wealthier and have higher incomes.
The better answer: let insurance markets become competitive.
Dr. Goodman,
Is there a way to directly compare the economic impact of the operation of this mechanism; “those who are over-charged will underinsure and those who are undercharged will over-insure” with the economic gains the Frakt article points out, both presently and in a market in which the ACA is implemented either with or without age based price regulation?
“The better answer: let insurance markets become competitive”
Competition breeds success. Let those insurance companies fight for their customers, and let the market determine the costs.
It also ignores an ethical problem previously addressed at this blog; older buyers are wealthier and have higher incomes.
Higher medical costs in old age is a problem for many people. But as the post explained, the solution isn’t to over-charge young people. The solution is to spread risks across a lifetime rather than rely on captive groups of people with different expected costs to pool risks.
“It also ignores an ethical problem previously addressed at this blog; older buyers are wealthier and have higher incomes.”
-Definitely does not make sense to overcharge young people!
“The reasoning is pretty intuitive. In an imperfectly competitive health insurance market, insurers can exercise market power and charge markups over the competitive price. The degree of markup is related to consumers’ price sensitivity. In the insurance market, older consumers are less price sensitive than younger ones. That is, older consumers are willing to pay more for the same product.”
He has a really good point here. However, I would like to see the ability to re-negotiate the “3x” price floor for older persons. As an economist, I fear greatly when the government set completely arbitrary numbers into law.
The price should be determined by the market, which through competition it should go down due to a pervasive demand in health care insurance. Otherwise, fixed pricing or regulations will end up increasing prices.
As a young professional, I am deeply concerned and disturbed with what is happening in our health care system. We will be the future of this country, yet we are being castigated with huge financial burdens and lack of opportunity.
Now the next challenging question to tackle is, “how are we going to make the insurance market be competitive?”