Health Care Debate May Be Giving Way to Revolution: Insurance Market Reform : Legislation: Even a scaled-back effort to change industry’s rules carries a big risk. Without universal coverage, it would drive up rates for everybody.


Out of the ashes of President Clinton’s ambitious but ill-fated health reform initiative, the outlines of a new revolution are emerging. The term used to describe it--insurance market reforms--is not likely to stir voters’ souls.

But if enacted by Congress, possibly before its October adjournment, such changes would fundamentally alter the rules of the medical insurance industry, opening the market to millions of Americans who are unable to buy coverage because of an existing illness or simply the high cost of premiums.

But insurance market reforms carry a huge risk.

If not done with precision--and followed by additional reforms of the type envisioned by the President--such changes could cause instability in the system by increasing the number of people without insurance while causing rates to rise for everyone else.


That’s because sweeping insurance reforms--without a concomitant requirement for universal coverage--would drive up rates for everyone, including the newly enfranchised. Their premiums would increase because the young and healthy would be likely to drop coverage, secure in the knowledge that they could buy coverage if they were to develop a health problem.

In turn, that would leave the insurance pools with an increasingly disproportionate share of sick and high-risk people, which would further drive up rates.

Despite the pitfalls of such a potential “death spiral,” in the words of Sen. Paul Wellstone (D-Minn.), there is growing pressure on Congress to enact such legislation as a minimum first step in health care reform when it returns in September.

Such action could go a long way toward dispelling the image of a gridlocked Congress on an issue that Clinton has made the cornerstone of his presidency.


Even Senate Majority Leader George J. Mitchell (D-Me.), who has championed comprehensive reform for years, Friday abandoned his quest, suggesting that he--like other White House allies in Congress--may settle for far more modest reforms.

Referring to such scaled-back efforts, the President said Friday: “I certainly don’t want to embrace an approach that will do more harm than good and that won’t achieve our objectives. . . . I’m not prepared to make a final judgment on that at this time.”

Separately, White House Chief of Staff Leon E. Panetta said that insurance reforms and other limited steps are “something obviously the President would look at.” But Panetta, during a lunch with reporters, hastily added: “It isn’t health reform. No one should be misled.”

The political appeal of enacting insurance market reforms--at least in the short-run--is apparent.


No single element in the complex health care debate enjoys greater bipartisan support. Almost every health reform bill in recent years has proposed variations of it. And for good reason.

Ending discriminatory insurance practices would instantly allay deep-seated middle-class fears of losing coverage because of job changes or being priced out of the market after major illnesses.

“Insurance reforms will solve many of the problems that the insured, voting middle-class is worried about,” said Drew Altman, president of the Kaiser Family Foundation, a health care philanthropy based in Menlo Park, Calif.

But skeptics of insurance reforms point to the experience in New York as Exhibit No. 1.


There, a law took effect last year that barred insurers from setting premiums based on age, sex or health status and required them to guarantee coverage to all. In effect, young people were forced to pay as much as older people, even though a 25-year-old’s medical bills average only one-fourth that of a 60-year-old.

In less than a year, the number of uninsured in New York grew by 500,000--predominantly the young and healthy--while rates went up by as much as 170%.

“The people who are going to choose not to buy coverage are going to be the healthy. And if they drop out of the pool, the average risk in the pool becomes more expensive,” said William Custer, director of research of the independent Employee Benefit Research Institute.

“So either you have to subsidize people to buy coverage or their premiums go up,” he said. “And if the premiums go up, the more healthy drop out and you have a self-defeating system.


“That’s the problem with insurance reform without universal coverage.”

Marilyn Moon, an economist for the Urban Institute, a Washington think tank, said that insurance reform is “a real tough call because you would improve life for some folks. There’s no doubt about it. But you would also disadvantage a lot of other people.”


Experts say there are ways to guard against unintended consequences, although not any one bill now pending in Congress would quite do the job.


One requirement to avoid, they say, is a so-called full community rating, in which customers are charged the same premiums regardless of age, risk or geographic location. That is what happened in New York.

“If you have full community rating, you’re going to see lots of young folks say, ‘Adios,’ ” said Gail Wilensky, former head of the Health Care Financing Administration.

Instead, she and others said, federal legislation must take into account demographic differences. The bill proposed by Senate Minority Leader Bob Dole (R-Kan.), for instance, would initially allow insurers to charge older people no more than four times what it charges the young and healthy. Over time, this ratio would be reduced to 3 to 1.

Some insurance experts say that a 2 to 1 “age band” ratio may be more appropriate.


Another safeguard would be to impose penalties against those who allow their insurance to lapse.

“You really have to have meaningful penalties against those who drop out or don’t enter the system until they need it,” Marianne Miller, director of research at the Health Insurance Assn. of America, said Friday.

Such a penalty might work this way: An insurer could not deny coverage to someone who has allowed his insurance to lapse but it could write the person a policy that excluded coverage for a pre-existing condition for six or 12 months.

Another device to ensure greater insurance participation would be to limit the enrollment period to perhaps 30 days a year instead of allowing enrollment at any time, Miller said. “Again, this would encourage people to buy ahead of time,” she said.


Even with such safeguards, insurance reforms “do not answer some very serious problems,” said Wilensky. “So don’t fool yourself.”

Kaiser’s Altman elaborated: “It won’t control costs or insure the uninsured--the two biggest challenges we face.” Added Edward F. Howard, executive vice president of the Alliance for Health Reform, a nonpartisan educational group: “You buy some time, but costs will continue to escalate.”

Wilensky, an adviser in President George Bush’s 1992 reelection campaign, said: “I would do insurance reforms even if that were the only thing--although recognize that you will let some people in who have been shut out and you will probably encourage some who have been in to drop out if their premiums go up very much.”

Even so, she said, “That’s a giant step from where we are now.”