How the state destroyed its insurance market using ObamaCare rules.
July 23, 2013
President Obama has found a new example for the pending wonders of his health-care reform—New York. In his latest sales pitch last week, he declared that insurance rates in New York's ObamaCare exchange "will be at least 50% lower next year than they are today. Think about that: 50% lower."
Thinking is good, which is why you may have guessed that there's more to this story than a 50% discount. The real news is that New York ruined its individual insurance market two decades ago by imposing the same regulations that ObamaCare is about to impose on every other state. If the Empire State's premiums do now fall, it will be because the Affordable Care Act partially deregulates New York insurance.
The culprit behind New York's long-standing insurance woes is a regulation known as "community rating" that hides in higher premiums the income transfers from one group to another. Insurance works best when people pay rates that are tied to their expected health risks over time. But a few states limit how much premiums can vary from person to person.
President Obama speaks about the Affordable Healthcare Act in the East Room of the White House on Thursday.
ObamaCare takes this community rating national. The law says that no individual can pay more than three times what the least expensive person pays, regardless of risk. Today 42 states have rating bands that are five to one or more.
New York's ratio is one to one. This means that insurers must vastly overprice coverage for, say, a 28-year-old who exercises regularly and doesn't smoke but vastly underprice coverage for a 55-year-old with high-cost chronic illnesses. Democratic Governor Mario Cuomo adopted this rule in 1992.
Premiums shot up 30% to 40% on average in the first year, often much more, and continued to spike. Insurers shed books of business, while customers cancelled their policies. Enrollment fell 38% in three years. About a dozen major insurers at the time sold the dominant style of indemnity coverage, similar to traditional fee-for-service Medicare. By 1996, every one had fled the state.
Bad incentives caused the exodus. The majority of people under 65 with low risks can avoid community rating's economic distortions by not buying coverage, especially because another rule called "guaranteed issue" lets them wait until they are sick before they buy coverage.
And that is what they do. Mutual of Omaha, by far the largest New York indemnity carrier at the time, watched the average age of its membership increase by 11 and a half years before it became the last one to turn out the lights. The average age of people who dropped coverage was 37.5.
In 1996 Albany tried to fix Mr. Cuomo's mess by requiring any managed-care insurer doing business in New York to also sell on the individual market, but the market never recovered. In 1992, some 1.2 million New Yorkers bought individual plans, which fell to 128,000 by 2001, and a mere 31,000 today. Think about that: Out of 19.5 million residents, and with three out of every 15 nonelderly adults uninsured, 0.0016% of the population uses this market.
Liberals claim community rating is a fair trade for subsidizing the needy and to counter the lotteries of disease and accident. But this forces young, generally low-income people starting their careers to pay hundreds of dollars more every month for insurance, rather than simply subsidizing the needy directly.
Individual per person premiums now average about $500 a month, far more in New York City and slightly less upstate. In less regulated Connecticut the comparable figure is $306, and in still less regulated Pennsylvania it is $225. In the Empire State insurance is available to anyone, only the price is unaffordable for millions.
ObamaCare's central planners are hoping to avoid a national reprise of New York by requiring and subsidizing individuals to buy insurance. The White House is planning a national campaign to persuade the young adults and minorities most likely to lack insurance to sign up, just as they turned out at the ballot box in 2012. But being forced to buy an overpriced product is different from casting a vote. Even with subsidies, ObamaCare's plans will sometimes be cheap to consumers, sometimes not, but never free.
Low- to moderate-income people with little net worth are highly sensitive to month-to-month finances. Some 17% of all workers already decline insurance that is sponsored by their employers, preferring more take-home pay. The figure for young workers is 40%. More than one in four of the uninsured are also "unbanked," meaning they lack a checking account or credit card, according to Jackson Hewitt Tax Service.
The ObamaCare gamble is that these Americans will act against their financial self-interest and buy insurance that is more expensive than what they need. But the great liberal fear is that they won't, and that premiums will then have to increase and some exchanges might fail. New York is less a model than a warning.
A version of this article appeared July 24, 2013, on page A14 in the U.S. edition of The Wall Street Journal, with the headline: Obama's New York Model.
http://online.wsj.com/article/SB10001424127887323993804578615760275211052.html?goback=%2Egde_2889111_member_260348358
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