Unfortunately, because of the federal tax-code, state reformers often throw "exchanges" (a.k.a. "connectors") in the mix: Witness Massachusetts or (most recently) Utah. Nevertheless, the option of an exchange embraces a fundamental flaw in the way most people think about health insurance: That employer-based groups pool risk better than individuals.
No: they do not. If they did, we would get all of our insurance from our employers - including life, homeowner's and auto. Our great ally James Capretta has written an excellent essay in National Review which appears to suggest pooling small businesses in large groups as an advantage of health-insurance exchanges:
"Moreover, job-based coverage doesn’t work nearly as well for workers in smaller firms. Insurers charge premiums based on the known risks of the group they are covering, and the smallest firms simply are not big enough to spread these risks broadly. Most states have rules requiring insurers to treat all small businesses as if they were part of one large group, but there’s usually some give in the rates they can charge, allowing for adjustment based on a business’s recent claims history. Consequently, it is not uncommon for a small business with one or two workers newlyiagnosed with cancer to see premiums jump 20 or 30 percent, and sometimes even more, in just one year."I may have misunderstood the paragraph. However, a "known risk" is not, of course, a "risk" at all, and the aggregate risk of all the employees in any one firm is trivial to the block of business of the health insurer.
If this understanding of pooling risk were correct, then the small business with one or two workers newly diagnosed with cancer, whose premiums jump 20% or 30%, would have had its problems solved by the small-group reforms of the early 1990s. Many states imposed a modified community rating on small-group policies, but this neither contained premium hikes nor insured more small businesses (as I wrote about in my analysis of Gov. Schwarzenegger's failed California reforms.)
The problem with the small-group market is not instability of insured risks, but instability of employment. One or two people quitting or new ones getting hired changes the health-risk of the small business. So, small businesses and carriers write policies that last only one year, which is a ridiculous term for health insurance.
It works okay for auto or homeowner's insurance, because you are insuring against an acute event (e.g. theft or fire). However, catastrophic health events last longer than one year. If you were free to buy your own health insurance, you'd never buy a policy with a one-year term. You'd buy one with guaranteed renewability, and a mechanism to ensure the insurer did not "game" the block of business, by investing in health-status insurance as described by Professor Cochrane).
Even with the current prejudice against individuals buying their own health insurance, the individual market functions much better than the media reports. Professor Pauly has studied the data and concluded that guaranteed-renewability works quite well even in today's malformed individual-insurance market, (as I reviewed in my analysis of Senator McCain's presidential proposal).
Mr. Capretta (whom I've had the pleasure of meeting a couple of times when the zookeepers allow me out of the cage to mix with my betters) also has another important essay in the Weekly Standard, in which he recommends health-insurance exchanges. I'm not against an exchange qua exchange, but we've got to clear our heads of the notion that people can only buy health insurance effectively buy shopping in large groups, like mastodons marauding the pre-historic tundra.
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