There have always been two diametrically opposite approaches to the pricing of insurance coverage: 1) community rating, where everyone in a defined “community” shares equally in the risk and costs of insurance; and 2) experience rating where prices will differ for risk-based segments of the population. In addition to adding to the price for higher-risk segments, the benefits of coverage are often reduced for such segments, in order to reduce the financial risks to insurers and the premiums charged to individuals, as well.

There are two major advantages, for both insurer and insuree, in basing prices and benefits on a community that shares in the risks and costs. Employer-sponsored insurance means the employer can handle the paperwork of identifying who is still covered and deduct premiums from individuals’ paychecks, saving the insurer a lot of overhead costs. It also means that the risk for individuals will be mitigated by having a large percentage of the population who will use hardly any benefits in any given year.

There have been a growing number of recommendations that employees and all citizens should purchase and own their own health insurance as individuals, and a growing practice among insurers to “individualize” plans for healthy/low-risk “indestructibles”, usually younger members of any population, or even for those who manage their own health risks well in terms of weight, exercise, smoking, and other risk factors. Even “Consumer-Directed Health Plans” with high-deductibles and savings accounts are aimed primarily at the healthy, since the deductibles would tend to hit the unhealthy hard in the pocketbook every year.

If insurance truly moves toward an individual responsibility, with employers or governments offering “defined contribution” support via cafeteria benefit plans or tax exemption for each, but each required to choose and purchase the best deal each can find, there will be two predictable negative impacts. First will be that the overhead costs of insurers will tend to increase, either because no employer will handle all the payment obligation, and individuals will have to handle that obligation, except for those in formal government programs such as Medicare and Medicaid.

And more significant, there will be a tendency to “underwrite individuals”, making the coverage and prices for insurance vary dramatically across individuals based on their measured risks. One place where this is already true is in Washington State where there is a government-regulated system of individual insurance, in which each insurer is required to use the same standardized questionnaire in screening eligibles and pricing their coverage. The intent is to de-select those who fall into the highest 8% of the population in terms of risks and predicted costs, forcing them to get insurance from a statewide risk pool similar to those for high-risk drivers.

The high-risk pool members are, themselves, rated at least partly on a community basis, since by law the premiums charged must range between 10% and 50% above prevailing rates for the 92% not de-selected. Since some individuals are likely to experience actual healthcare costs far greater than 50% above average, this means that individuals are not truly paying experience-based rates, which would not amount to insurance at all, after all. It would simply mean they would be charged premiums equal to the predicted or actual costs of their healthcare use and costs, as is true for self-insured employers.

There is a major political as well as practical issue related to experience rating for individuals. Should it apply to only those health risks which are “lifestyle” in origin, or to those that are genetic and purely “luck of the draw” factors relative to individuals? The Washington State program, for example, includes risk factors such as AIDS, cholesterol and blood pressure that are clearly, even mainly related to lifestyles, but also those that are not, such as tuberculosis, multiple sclerosis, MSRA, autism, Alzheimer’s, ovarian cysts and reproductive difficulties.

The “justice” in varying individual prices is presumably based on a desire not to penalize those who adopt and maintain healthy lifestyles and health status, by forcing them to “subsidize” those who do not. There is ample support for this idea, if only in the adjustment of premiums based on lifestyle, limited to + 20% of the total employee premium contribution by federal law. But a system where every individual “owns” an amount derived from employer or government, or from each’s own income assuming some affluent individuals will be expected to pay their own way, will mean far greater potential of “making the punishment fit the crime”, with regard to individual premiums.

This may prove a boon for insurance companies, since they can more easily control and limit their risks through extensive questioning of applicants, and reviews of past medical records or claims. But it will greatly reduce the insurance protection available to individuals whose health has been damaged through no fault of their own. In Washington state, for example, even cured diseases such as TB, MRSA, premature birth, and lymphoma can disqualify applicants from anything but the high-risk-pool coverage.

We need to learn much more about the true extent to which what are deemed “lifestyle choices” such as overweight/obesity, substance abuse, smoking, etc. vs. pure happenstance or genetic predisposition, which amounts to happenstance for the children affected, cause the risk factors that would justify a premium penalty or limit to coverage. At the moment, there is mostly argument over whether smoking is an “addiction” or a choice, and whether people can be so genetically predisposed to overweight/obesity that they should not be punished, only pitied for their condition. This argument can always be settled politically, but the growing experience of sponsors and suppliers of population health management programs should probably guide a more rational approach.