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Greg Mankiw on families and community rating

11/11/2013 01:31:00 PM
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Apu learns that family size is not community-rated.
Greg Mankiw has a post up asking if community rating is fair. If you haven't followed the healthcare reform debate, "community rating" is a term that means that all buyers of a particular insurance plan pay exactly the same premium, regardless of personal characteristics or health status--the ACA requires that all plans offered on the new healthcare exchanges follow a "modified community rating," where premiums can be adjusted for some factors like age, but not for other factors.

Ultimately, Mankiw is right that community rating would lead some people to pay for things that don't apply to themselves. Skinny people will have to pay for type-II diabetes treatments, even though type II diabetes occurs almost exclusively in obese people. However, I'm affraid that Mankiw chose his example--that non-parents pay for parents--very poorly. Mankiw says:
"In the law, having children has been deemed a pre-existing condition, although it is not quite described as such."
Some people don't seem to be aware that parents do pay extra to keep their children on their insurance. In fact, one of the few modifications in the ACA's modified community rating is that insurers can adjust premiums based on family size. That means you pay more if you have more children.

Now, I do think that Mankiw is aware that children aren't actually community rated, so he set his target on pregnancy-related benefits instead:
"Everyone is now expected to buy insurance to pay for pregnancy and maternity care, even those who never intend to have children. The goal is to spread the risk of childbirth among the larger community."
But he's still wrong. Think about it: if you need pregnancy and maternity care, that means you are also going to need to buy insurance for your children. What this means is that insurers will still be able to segment the market so that these costs will be added onto the premiums for family plans, and not onto individual plans. In mathematical terms, we have a separating equilibrium where insurers will continue to engage in risk-rating by offering different plans to parents and to non-parents, enabling them to charge different premiums to people despite the community rating regulation.

I don't really think that this is optimal--I'd like to see more redistribution through the insurance market than the ACA allows. But, if you are a non-parent worried about paying for other people's babies, you can rest easy knowing that you aren't really paying for pregnancy and maternity care.