I read an analysis today indirectly defending the Baucus plan "ratio" of 5:1 that allows insurers to charge premiums five times higher for the oldest enrollees than premiums for the youngest. The comparable ratio in the House bill is 2:1.

To be sure, the argument seems logical within its framework. Since older people are much more likely, on average, to have higher medical costs, and younger people are more likely on average to have lower costs, there’s an argument that we should reflect that difference in the allowable premiums.

And since private insurers have an incentive to lower their "medical losses" to remain profitable, they will have an incentive (assuming cost-sharing rules are imperfect) to discourage older, high-cost enrollees and focus their marketing and better service on the younger, low-cost enrollees.

So if we force private insurers with their profit incentives to accept a ratio of 2:1, as the House bill does, the insurers will be even more tempted to game the system and evade the regulations that require them to accept all enrollees, regardless of age.

But what is this analysis telling us? First, the incentives that drive private insurers are likely to overcome regulatory goals of reducing age-based discrimination in premiums. Regulation is not enough, and we need a stronger counter-incentive to gain compliance. How about loss of market share to a public option that doesn’t discriminate?

Second, the logic is premised on the idea that it’s okay in the health care sector to base insurance premiums on cost causation, rather than ability to pay. If that’s the goal, then insurers should also be allowed to base premiums on current health and prior medical conditions, exactly the factors we’ve all concluded need to be excluded from the decisions. Otherwise, the incentives for gaming will still occur.

That logic leads, in the extreme, to requiring the very sick to go bankrupt and/or to rationing by price, leaving millions uninsured or underinsured. The reforms are trying to move away from that mindset, not embrace it.

I also wonder where else the logic leads. How, for example, would we justify Medicare or Social Security if we followed the implicit principle that the elderly should pay for security based on the costs of providing it? Should we start charging Medicare people much higher premiums as they get older too?

In describing various European countries that impose insurance mandates, Princeton health economist Uwe Reinhardt has written:

In Europe, as in Canada, that social ethic is based on the principle of social solidarity. It means that health care should be financed by individuals on the basis of their ability to pay, but should be available to all who need it on roughly equal terms. The regulations imposed on health care in these countries are rooted in this overarching principle.

It’s always important to pay attention to the logic of incentives. But in this case, the overarching principle is even more important.

More:
Yglesias, The Age Ratio Thing