Cost of Health Insurance Isn't All about Fairness

Pricing differences for women or people with chronic diseases are a reality. The question is where to set the line.

Should women have to pay more for health insurance than men? That has been a critical question for opponents of Republican health-care reform, and it requires grappling with the fundamental nature of insurance, market prices and fairness. Related are questions about how much older people should pay relative to the young, or to what extent individuals with pre-existing conditions should be vulnerable to higher premiums.

The Affordable Care Act limited the ability of health insurers to charge women more than men, and more generally imposed greater uniformity of policy prices. Under Republican plans, those provisions are repealed. The return of many decisions to the states would most likely mean more differential pricing, namely higher policy prices for people with higher expected health-care expenses. After all, women’s lifetime costs are expected to be much higher than for men, by about $100,000 by one estimate.

Let’s first consider the negatives of such a change in course from Obamacare. Insurance is fundamentally about the pooling of risk. If you are trying to cover $100,000 in health-care costs by buying a policy that costs you about $100,000, that isn’t really insurance at all. It’s merely changing who cashes your check. Differential pricing moves in this direction, and thus it limits one of the major benefits of insurance.

Second, the higher health-care spending for women is partly because of services related to childbearing. Society may have an obligation to help out babies (and mothers), plus they will someday finance our retirement, so let’s make childbearing easy. That said, governments have numerous means of subsidizing childbearing -- direct payments, tax credits, free clinical services and public education -- and it’s not obvious that regulating insurance pricing is this best way to achieve this end.

So what is there to be said for differential pricing?

First, it doesn’t mean that individual policy prices exactly match individual spending. If many women are pooled together into more expensive policies, the women with especially high health-care costs are still subsidized by the women with especially low health-care costs. That is less gain for women than if they received an indirect subsidy from male policyholders, but much of the value of insurance remains.

Second, uniform pricing increases the incentive for some insurance policyholders to try to leave the system. To the extent that men are systematically subsidizing women, for instance, men will be less keen to sign up for insurance, even if there is a legal mandate. Many insurance companies think there is a preponderance of high-expense individuals on the exchanges, and so they have been withdrawing their participation, creating a sustainability problem for Obamacare.

Under uniform pricing, men, or whichever group is paying the subsidy, will also be less willing to politically support such a regime. For all the moral arguments against differential pricing, health-care reforms must be politically sustainable, too.

Uniform pricing also gives insurance companies less incentive to attract female policyholders. To be sure, as a matter of law the companies cannot turn women away. But if writing policies for women is less profitable, or perhaps unprofitable altogether, the insurance companies will allow or encourage their provider networks to evolve in a way that is more attractive to men than to women. Services for women, including for childbearing, might end up underprovided or stagnate in quality. That also would be a kind of differential treatment, with potentially dire consequences.

Finally, not every health-care expenditure should be covered by government or by private insurance. All American health-care systems, including single-payer Medicare, embody that principle to varying degrees. Last year I spent about $250 on a yellow fever shot for a Nigeria trip. My health insurance should not picked up any of that tab; insurance ought to be for catastrophic expenditures, not routine reimbursements.

One way to limit health-care costs is to have insurance policy costs reflect actual expected expenditures to a greater degree, thus encouraging employers and individuals to seek policies oriented toward catastrophic coverage. It also will mean a degree of differential pricing, if only to encourage economization at the level of policy choice. Keep in mind also that there is de facto differential pricing when there is any co-pay at all, even if policy prices are set equal up front.

Many people consider differential pricing unfair or offensive. But short of complete reimbursement for everything, all health-care systems make pricing choices, whether transparently or not. The reality remains that some differential pricing is better than none at all, even if we haven’t figured out exactly where to draw the line.