Mandate for Health Insurance Reform

As health care reform moves forward in the Senate a review of some basic insurance principles may be helpful. Although many continue to believe a single-payer system is the most desirable avenue for reform, it seems clear that such approach is not going to be part of the legislative package upon which sufficient members of Congress will agree.

We have a health care crisis in this country which is quite apparent when one considers the vast amounts of money spent per capita and as a percentage of gross domestic product (GDP) contrasted with the resulting performance of our health care system as compared to other countries. For now, the reform approach under serious consideration is restructuring our health insurance system.

Currently our system primarily relies upon insurance plans, both for-profit and non-profit, providing health insurance coverage through employer groups. Of course there are exceptions, most significantly including Medicare, Medi-Cal, Veterans Affairs coverage, Native American coverage and individual coverage purchased by those of us not eligible for insurance through a group.

Individuals seeking to purchase insurance coverage for themselves and their families are often faced with coverage limits or outright denial of coverage due to pre-existing medical conditions. While it is imperative that insurance system reform require a “take-all-comers” approach where insurers must accept everyone that applies for coverage, for such reform to work, everyone must obtain health insurance coverage. This is the individual mandate.

Health insurance is provided through pooling a large number of people to share the costs incurred by people within that pool who need medical care. At any given time, certain people in a large enough pool will be healthy, needing little medical care, while others will be unhealthy, needing lots of medical care. If people needing lots of medical care are not joined in the pool by those needing little medical care, the coverage costs will quickly become unsustainable.

Permitting people to opt-out of a health insurance system that operates on a “take-all-comers” basis will result in adverse selection. This means that unhealthy or risk-adverse people obtain coverage for themselves and their families while people who are currently healthy do not obtain coverage knowing they can “free-ride” the system until they have a condition requiring medical care. Then, they would obtain coverage that “take-all-comers” insurers would be required to issue. It would be akin to permitting someone to purchase fire insurance for their home after the fire has started and it simply will not work.