How do we make health insurance work like the life insurance market? From earlier posts (one, two, three), several things will help.

Eliminating the exemption of employer paid premiums from taxation and replacing it with a refundable credit would force HR departments to start offering many more choices in plans.

The contribution that the employer makes for you (with your income) should be the same no matter which plan you select. Therefore, you would be required to contribute more for higher cost plans.

Having "skin in the game" will lead to economizing on the purchase of health insurance.

While the employer contribution should be equalized so that we see (out of our pocket) the cost of coverage, an important change does need to be made in the determination of that amount. One of the reasons that the life insurance market functions well is that premiums are risk-based. Older men pay much more for coverage than younger women. Carriers writing policies price them so they reflect the marginal risk of the applicant. The plans that sell health insurance to companies need to do this as well. This presents a problem. "Sicker" employees will have to pay much more out of pocket than "healthier" ones will. The solution to this equity issue is for the boss to "risk-adjust" the contribution she makes towards the health premium. In the past this adjustment was tough to calculate and, indeed, was one of the reasons for "community rating" in health premiums that helped make the market dysfunctional. The advent of high speed software now makes risk-adjustment much easier to do. It is not (and never will be) perfect but it would vastly improve the health insurance market.

Pie in the sky? Not at all. Medicare risk-adjusts premiums in the Medicare Advantage Plan and Florida Medicaid is phasing in risk-adjusted premiums in their path breaking reformdemonstration. 

(Continue on to part 5)