Gov. Schwarzenegger has unveiled his new plan for universal health care for all people in California. This is a big topic and as such it is a difficult one to discuss in a single blog post, so I’m not going to do it. There is one thing that caught my attention, the idea of community rating in terms of health insurance premiums.
Why is this important? Well, the idea of community rating is that everybody is charged the same insurance rate in a defined community irrespective of age, gender, health history, etc. All that matters is are you in the community and what are the costs for that community as a whole. In insurance lingo this is called a pooling equilibrium. That is, everybody is put into the same pool when it comes to figuring out insurance premiums. Why is this interesting? Well, without regulations enforcing the pooling equilibrium such an equilibrium is “broken” by a seperating equilibrium. A seperating equilibrium is where insurance companies would offer more than one insurance policy with different premiums/deductibles to induce people to self-select. If you are generally healthy and lead a fairly non-risky lifestyle having a low monthly premium, but a high deductible might appeal to you. Thus, healthy people end up leaving the pooling equilibrium and since only the unhealthy are left in the pool, it is no longer viable.
Is this forced pooling equilibrium a good thing? Well that is hard to say. There could be some equity concerns here, and when the economy is not perfectly competitive seperating efficiency and equity is not possible. That is, equity concerns could have implications for efficiency. Or to put it in simpler terms, if the economic pie becomes to unequal it could be that it has an adverse impact on the size of the pie. My initial feeling though is that not a great deal of thought has gone into Schwarzenegger’s plan and that doesn’t bode well for either equity or efficiency.
