The health insurance reform bill, LD 1333, is now signed into law, but uncertainty remains. It’s clearly a partisan issue, with media reporting party line votes and using phrases such as “Republicans insist” and “Democrats object.”
Insurance is inherently complicated, and the partisanship has made it difficult to develop an objective perspective. This is where academics can be helpful, and I consulted Dr. Dana Kerr, professor of risk management and insurance at the University of Southern Maine. He has no dog in this fight other than scholarly interest. After talking with Dr. Kerr, here is my take:
First, Maine’s market for individual and small group health insurance truly was broken. Mainers pay among the highest health insurance premiums in the nation, largely because of well-intended but failed attempts to legislate insurance that is affordable to all individuals, including those with serious medical needs.
The biggest problem may be Maine’s “modified community rating,” which essentially requires that healthy individuals subsidize the sick. This system actually works if the insured population includes all individuals. However, if individuals can opt out, this enables adverse self-selection whereby the healthiest individuals decide that the cost of insurance isn’t worth it and the insurance “community” becomes dominated by the less healthy. This drives up premiums, and even more healthy people opt out. The Maine insurance market was caught in this “death spiral,” resulting in expensive health insurance with many Mainers uninsured.
There are basically two ways to correct this problem. One is a mandate requiring all individuals to purchase health insurance, thus assuring that the community includes healthy individuals. Massachusetts does this, as will the federal Affordable Care Act, if it survives as currently passed in Washington. The problem is that requiring all people to purchase something rubs many the wrong way. (Never mind that we do this now for auto liability insurance, which most of us accept as a necessary exchange for the privilege of driving on public roads.)
The second solution to the adverse selection problem is to encourage the healthy to voluntarily participate in the health insurance pool. This can be done by moving away from community rating, allowing health insurers to charge a greater rate differential between those generating higher health costs and those generating lower health costs. Health insurance essentially becomes more affordable for the healthy at the same time that it becomes less affordable for those who likely need it the most.
This is the direction of LD 1333. To mitigate the affordability issue faced by the people most costly to insure, LD 1333 creates a special risk pool for high-risk individuals. Inspired by an Idaho insurance law that seems to be working, the subsidy to the sick effectively shifts from healthy insurance buyers to the state, which will fund the pool by taxing premiums. If more people can afford insurance and opt in, then the subsidy to the medically needy is spread among more individuals.
LD 1333 also will enable Mainers to purchase insurance from other New England states, excluding Vermont, as an attempt to increase health insurance competition. However, Maine would lose its ability to regulate these policies, and this raises other questions. For example, if Maine citizens have a dispute with an insurance company now, they can complain to and be serviced by Maine’s Bureau of Insurance. Suppose a Maine citizen has a dispute with a New Hampshire insurance company. Who services the complaint?
There also are questions of whether the new Maine law will be compatible with the federal Affordable Care Act. Federal law will trump state law, and between the unstable federal environment and the Law of Unintended Consequences, LD 1333 is likely to require future adjustment.
So who gains and who loses? It appears likely that health insurance rates will drop for younger people living in urban geographic areas of the state, where health care costs are generally lower. The losers are likely to be older people in rural regions of Maine, where health care costs are relatively higher. The existing Maine community rating law allows geographic rate differentials of up to 50 percent. Under LD 1333, the geographic differential can be as much as 500 percent. Also, health insurers currently can charge up to 50 percent more based on age, and this rises to 300 percent. Health status itself still would not be allowed as a rating factor.
In conclusion, Maine’s Democrats are right that we don’t really know how the new law will work for people, especially older and rural people. However, the Republicans are right that the present system was broken and needed to be fixed. It’s too bad the process was so acrimonious, because this is a discussion that needed to happen and likely will continue.
James Shaffer is dean of the University of Southern Maine’s College of Management and Human Service. He is a former media executive who served as the chief financial officer of the Los Angeles Times before coming to Maine in 1991 to be CEO of Guy Gannett Communications, which was based in Portland and had TV, newspaper and other media properties in seven states.