Repeal Community Rating

Published March 1, 2004

A main tenet of modern liberalism is that government must take from those who have a lot, and distribute benefits to those who have little. Thus it is always baffling when liberals demand the poor be taxed to shower benefits on the rich. The latest example of this Robin Hood in Reverse policy is the liberal opposition to Vermont Gov. Jim Douglas’s (R) plan to back off from strict community rating in health insurance.

Community rating says everyone buying health insurance must pay the same premium for the same benefit package, regardless of age, gender, or anything else that affects their health care costs.

Health insurance is the only type of insurance where community rating applies. In auto insurance, drivers with driving violations pay higher premiums. In life insurance, young people pay low premiums, and old people, soon likely to die, pay very high premiums.

Community rating of health insurance forces healthy young people to pay higher premiums to cover the elderly sick. That may seem charitable, but consider this: A young couple in their twenties is typically trying to pay for a home mortgage, cars, children, and often college loans. They are trying to meet these responsibilities when they are at the low end of their career income curve.

Their grandparents, by contrast, have long since paid off their educational loans, paid off their home mortgage, and seen their children grow up and leave the home, perhaps starting families of their own. The breadwinner, with 40 years of work experience, is usually earning his or her highest income.

So, the proponents of community rating propose to “fix” health insurance law so that statistically less healthy, but more wealthy, Grandpa and Grandma get the lower insurance premiums, paid for by their much healthier, less wealthy grandchildren. Does that sound fair or reasonable?

That’s exactly what Vermont insurance law has required since 1992, when community rating was adopted to fend off the insolvency of Blue Cross and Blue Shield of Vermont.

The result was the destruction of the state’s competitive health insurance market. Insurers who were marketing very affordable coverage to healthy young people abandoned Vermont, as the backers of community rating intended. Blue Cross, with considerable regulatory assistance, emerged from its near-bankrupt status to gain a near-monopoly on the small group and individual insurance markets in Vermont.

Worse than this bit of corporate welfare is the overall impact on health care policy. Robin Hood in Reverse community rating drives out competition and choice, and forces people who choose healthy lifestyles to pay for the problems of those who don’t. If it is to be effective in the long run, any serious health care reform requires restoring personal choice and responsibility for health-affecting lifestyle choices, and market competition in care and risk protection.

In 1999, Gov. Howard Dean’s insurance commissioner, probably without legal authority, removed the 20 percent premium variation allowed by the 1992 law and imposed the nation’s strictest community rating principle: zero premium variation for age of the insured.

Douglas now proposes to roll back that rule. Liberal legislators have vocally protested. They are willing to ignore the awkward fact that community rating taxes the relatively poor to benefit the relatively rich. They correctly see any weakening of community rating as a step back from their goal of socialized medicine.

Douglas’s customary caution may serve him badly in this instance. His proposed administrative rule change to expand the premium rating band is not likely to attract any more insurers to the state. It has, however, brought down upon the governor the wrath of single-payer liberals. Sen. Peter Welch, the Senate Democratic leader, was quick to call Douglas’s proposal the single biggest mistake Douglas has made in office.

If Douglas is determined to lay the groundwork for health care reform based on responsibility, choice, and competition, he needs to do much more than roll back Dean’s rating rule. He needs to persuade the people and their legislature to march off in a different direction. Repealing community rating outright, and allowing premium discounts for healthy lifestyles, are key items in a reform agenda.

Reviewing three years of community rating, the Burlington Free Press editorialized in 1995: “The ‘community rating’ law must be repealed. It had the best of intentions, but has resulted in driving people who were paying their own way off of insurance, and toward dependency on the state. Lawmakers should be bold enough to admit a failure. The plan was a fine piece of economic theory–as supporters, we share in the guilt–but reality has proved smarter.”

Eight more years have gone by. It’s time for legislators to do what the Free Press bravely did: admit this was a big mistake, give community rating a decisive burial, and move on to craft a market-oriented reform agenda that will lead the nation.

John McClaughry has been president of the Ethan Allen Institute since its founding in 1993. He is a former fellow in the Institute of Politics at Harvard University’s John F. Kennedy School of Government; a senior policy advisor in President Ronald Reagan’s White House Office of Policy Development; a member of the Vermont Senate; and Republican candidate for governor of Vermont, 1992.