Why Incremental Health Care Reform Won’t Work

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Note/update: A White House official denies that Emanuel has been floating any specific proposal. Says the official: “Rahm continues to speak with members and hear their thoughts, but has not been pushing or advocating one position over another.”

Politico reports that, in an effort to rescue what he can of the Obama Administration’s health care initiative, White House Chief of Staff Rahm Emanuel is floating a proposal “to pass a scaled-down bill that would focus on insurance reforms and some expansion of coverage.”

This, I’m assuming, is the same Rahm Emanuel who, in an interview with a group of reporters last July, reflected on what happened the last time Congress did something like that. “I remember all the high-fiving each other for the portable health care in ’96. It’s been empty,” Emanuel recalled, adding ruefully: “Everybody was high-fiving each other….but the portable health care bill in ’96 didn’t do anything, very little.

Back in 1996, Emanuel was a top aide in the Clinton White House, which had attempted and failed at major health reform in 1994. So health reform advocates, led by Senators Edward Kennedy and Nancy Kassebaum, came back with an incremental measure, which became the Health Insurance Portability and Accountability Act. It was hailed as a major step toward ending the insurance industry’s ability to deny coverage to sick people. It was supposed to make it easy for people to take their insurance with them when they left a job. These days, pretty much the only effect you see from it is that annoying form your doctor makes you sign saying you understand your privacy rights.

So why didn’t it work the way it was supposed to? For the same reason that other piecemeal reforms haven’t.

The basic premise of insurance is shared risk. But if a disproportionate number of the people who have it encounter a catastrophe, everyone ends up paying so much that they might as well not be covered at all.

Take the “community rating” laws that five states have passed. They sound great; everyone pays the same premium, regardless of their individual health history. But absent a requirement that everyone have insurance, what they have done is drive up the price of premiums–an additional 40%, estimates Massachusetts Institute of Technology economist Jonathan Gruber, who is also a technical consultant for the Obama Administration.

That is because these kinds of well-intentioned smaller reforms create a vicious cycle:

*Sick people buy insurance. What choice do they have?

*Healthy people, knowing they won’t be discriminated against if they get sick, decide to go without coverage.

*Insurance companies, which are footing the medical bills for a lot of sick people without offseting premiums from healthy ones, raise their rates.

*Even more healthy people decide to drop their insurance.

* With an even sicker pool of people, proportionately, insurance companies raise their rates more …

The lesson has been that, unless you have pretty much everyone covered, insurance reforms won’t work. “What many people don’t understand is there is a very high level of interdependence among the parts. The legislation that is in front of Congress now is incremental reform,” says Princeton University public affairs professor Paul Starr. “You just can’t go down much further than this.”

Say, for instance, you pass a bill that makes it impossible for the insurance companies to discriminate against sicker and older people. “You’re going to make it expensive for young people to get insurance, especially with the inefficient individual insurance market we have today,” says Starr. “Basically, health insurance becomes just a very bad deal for young people.” And without healthy people in the pool of those covered, it also becomes unaffordable for sick people, too.