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Recommended Reading: Recent Legal Scholarship on “Risk Classification by Design”

Posted May 20 2011 12:24am

kate-greenwood_high-res-2011-comp3 Tom Baker’s Health Insurance, Risk, and Responsibility after the Patient Protection and Affordable Care Act (forthcoming in the University of Pennsylvania Law Review) is short (it would seem a theme is beginning to emerge in my Recommended Reading posts), tightly-reasoned, and instructive.  I highly recommend it.

Professor Baker’s essay “explores the contours of the solidarity and individual responsibility” embodied in [the Patient Protection and Affordable Care Act].”  He identifies a number of challenges to the Act’s vision of “achieving … solidarity through individual responsibility[,]” including what he terms “risk classification by design.”   With the passage of the Act, health insurance companies will no longer be able to evaluate each prospective policyholder to determine the risk that he or she will need medical care and then charge him or her a premium that accounts for his or her individual level of risk.  Risk classification by design could still occur, however, “as individuals’ self select into different health care products according to their self-assessed health risk status.”  For example, ["h]igh health risk people tend to prefer more complete health insurance coverage, fewer restrictions on their choice of doctors, and other plan features that make it easier to consume more health care.”  If a plan offering with those features attracts a disproportionate number of high risk individuals, the health care costs associated with that plan would rise and premiums would increase accordingly.  The end result would be high risk individuals paying more than low risk individuals for their health insurance, “challenging the core non-discrimination value embodied in the Act.”

Professor Baker points to a number of regulatory tools that the Act gives the states, the health insurance exchanges that states have begun to create, and the Department of Health and Human Services, to address the challenges posed by risk classification by design.  These include (1) the minimum coverage requirements, which allow “less room for variation in plans that can be used to segment people into separate risk groups,” (2) the exchange certification requirement, pursuant to which an exchange can decline to certify a plan that uses “marketing practices or benefit designs that have the effect of discouraging” enrollment by high risk individuals, (3) the medical loss ratio requirements, which work by “requiring a successful cream skimming insurer to return to its policyholders all or most of the benefits of the cream skimming,” and (4) the risk adjustment procedure, the goal of which is premiums that reflect the entire exchange pool as opposed to the  pool that has self-selected into a particular plan.  These tools, Professor Baker argues, will only be partially successful, but that “will simply mean that more actuarial fairness survives than the Act’s drafters may have intended.”  And actuarial fairness, he notes, has “many supporters, not all of whom are insurance industry apparatchiks.”

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