American Journal of Law & Medicine

Health reform: what's insurance got to do with it? Recognizing health insurance as a separate species of insurance. (Follow the Money: The Impact of Economic on the Delivery of Health Care)

I. INTRODUCTION

Health reform debates in the United States are typically conducted using the language of insurance) President Barack Obama described his hopes for expanding access to care as "health insurance reform." (2) Both proponents and opponents of reform debated the merits of reform proposals leading to the Patient Protection and Affordable Care Act of 2010 in insurance terms. (3) Yet, disagreements over the structure of reform reveal deep differences in what proponents and opponents of reform mean by insurance and the role it should play in mediating access to health care. Scholars of insurance law are likely to describe insurance somewhat narrowly as a risk spreading device. (4) Industry representatives, among others, often view conventional indemnity insurance as the norm. (5) From this perspective, reforms that move too far beyond underwriting risks can be seen as undermining actuarial fairness, threatening the very idea of insurance and possibly the industry itself. (6) In contrast, most reform proponents discuss insurance as though it were simply a mechanism for financing health care: Health insurance ought to be universally available (on affordable terms, if not free), because health care ought to be universally available, (7) perhaps a human right. (8) From this perspective, most underwriting techniques are incompatible with the goals of reform. (9)

I have argued elsewhere that such conflicting conceptions of health insurance can impede agreement on a unified structure of reform. (10) Here, I argue that it is possible to reconcile these conceptions if we recognize health insurance as a separate species of insurance--distinct in function, and therefore content, from conventional indemnity insurance models. Both regulation and industry practices already have moved health insurance a long way toward becoming an identifiably separate species by limiting some risk classification methods, but universal coverage requires purging or greatly circumscribing most tools of conventional insurance. In addition, health plans no longer limit coverage to fortuitous losses, as does conventional indemnity insurance; by covering preventive care, they have added a service component to pay for regular care. This is a familiar concept in social insurance systems, which are more concerned with financing care than spreading risk. The role of insurance in such systems, especially in Western European countries, offers a model for integrating insurance plans and actuarial expertise into a financing mechanism for universal access to care. (11)

Thus, health insurance can be, and to a large extent already is, a separate species of insurance. Little conventional insurance remains in today's health plans, (12) and there is little reason to believe that conventional insurance is necessary to provide access to health care. (13) However, even our hybrid species of health insurance is not likely to be universally affordable without ensuring participation by virtually all Americans. (14)

II. CONVENTIONAL INSURANCE RISK CLASSIFICATIONS ARE INCOMPATIBLE WITH EXPANDED ACCESS A key goal of health reform is to give everyone access to health care.

Health insurance is simply a means to that larger end: appropriate, affordable health care regardless of employment, residence, health status, age or other factors that currently inhibit access. To use insurance to pay for care, insurance must be available to everyone. Thus, as reform proposals recommended, the 2010 Act requires plans to pay for health care in ways that necessarily limit the scope of conventional insurance techniques. President Obama and members of Congress stressed that reform legislation should prohibit insurers from classifying people according to their risks in order to refuse coverage or greatly increase insurance premiums. (15) The 2010 Act, (16) as well as the Affordable Health Care for America Act, (17) which the House of Representatives passed on November 7, 2009, and virtually all the reform bills seriously considered by Congressional Committees, prohibit insurers (18) from refusing to cover preexisting medical conditions, (19) refusing people coverage because of their medical history, (20) dropping coverage after illness occurs, (21) discriminating on the basis of health status, (22) discriminating in benefits on the basis of age or disability, (23) charging much higher premiums on the basis of age, (24) providing less coverage for mental health and substance abuse disorder benefits than for medical conditions, (25) capping the dollar amount of coverage, (26) and charging high out-of-pocket expenses. (27) The public also appears to support regulating health insurance coverage in this manner. (28)

These prohibitions remove tools of risk classification that insurers have regarded as essential to permit underwriting in conventional insurance, if not inherent in the concept of insurance itself. (29) Conventional indemnity insurance in an unregulated, competitive market relies on risk classification (by definition, a discriminatory process) to exclude bad risks and to underwrite or price those accepted according to their risk profiles. (30) Familiar examples include homeowners insurance and life insurance. To achieve universal (or nearly so) access to health care, therefore, reform legislation must prune and pad health plans so that they no longer look or function like conventional indemnity insurance policies. Medical underwriting and preexisting condition exclusions must be suppressed like bad genes, while guaranteed issue and preventive measures are grafted on.

What remains of conventional insurance is risk rating--setting premiums according to risk profiles, analogous to charging loan interest rates according to credit-worthiness. Neither the Act nor the reform proposals that preceded it restrict premiums beyond imposing rate bands for plans to be offered on exchanges, limiting the degree to which the premium for an insurer's highest priced product may exceed the premium for its lowest priced product for a defined population. (31) Thus, it will still be necessary to estimate a population's total need for medical services in order to calculate premium rates that can cover the cost of providing benefits, as well as administrative costs, profit and taxes. (32) However, to make premiums affordable to all, subsidies will be needed for low-income people with higher health risks. (33) Moreover, if health plans must accept anyone who applies, then plans (public or private) with high risk populations will need subsidies or access to reinsurance if premiums are to remain competitive across the market, (34) possibly financed by taxes on individuals or health plans with healthy populations. (35) Such redistributional measures are necessary to achieve affordable premiums, but they distance premium rates from individual and even group risk. Indeed, the calculations may differ little from those needed for financing many non-insurance services. The more that risk rating is diluted with redistributional funding, the more health plans look like vehicles to finance health care.

III. CONVENTIONAL INDEMNITY HEALTH INSURANCE IS DISAPPEARING

The health insurance industry in the United States is already far down the path toward becoming primarily a health care payer, and only secondarily an insurer of health risks. Federal and state laws have circumscribed insurers' freedom to use risk classification by mandating coverage of specific benefits and prohibiting the exclusion of some risks or charging higher premiums for others. (36) For example, federal and many state laws prohibit discriminating against or excluding anyone from health coverage on the basis of a health factor, (37) experiencing domestic violence, (38) or genetic testing. (39) Some states also prohibit or limit risk rating on the basis of gender, at least in group policies. However, San Francisco's Attorney General has sued the insurance commissioner for permitting health insurers to use gender rating in individual insurance policies. (40) If, as reported, women use more medical services than men, (41) then it would be actuarially fair to charge women higher premiums than men, as many states permit. (42) This actuarial fairness argument is regularly invoked to justify higher premiums for the elderly, smokers and others with above average health risks. (43) If the goal of a reformed health system is to treat everyone the same, however, then actuarial fairness is irrelevant.

Insurance companies already function solely as payment intermediaries rather than conventional insurers for tens of millions of Americans in employee group health plans. In 2008, 55% of employees with health insurance participated in employer-sponsored plans that are fully or partially self-insured (up from 49% in 2000). (44) Insurance companies do not issue insurance policies to such plans. …

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