HJNO May/Jun 2025

WHAT’S WRONG WITH HEALTHCARE 10 MAY / JUN 2025 I  HEALTHCARE JOURNAL OF NEW ORLEANS   Actuarial Fairness vs. The Solidarity Principle Whenever a health plan accumulates a dis- proportionate share of medically expensive members, without enough healthier mem- bers to defray their medical expenses (i.e., the health plan must pay out more in medical expenditures than it collects through premi- ums), those health plans go out of business. In other words, that plan becomes a victim of adverse selection. Insurance works best if the risk is spread out across a large popula- tion, where at least some redistribution from healthy to sick, young to old, etc., is inherent to the business model. Adverse selection is a reflection and consequence of experience rating, where risk is priced differentially in the name of actuarial fairness, whereas community rating falls more under the construct of social solidarity (i.e., “we are all in this together”). Actuarial fairness clearly exists in the insur- ance industry for auto insurance, home insur- ance, and even life insurance. We understand that the parents of an inexperienced teenage driver who buy that teenager a brand-new sports car will be expected to pay a higher pre- mium than a 40-year-old driver of a used mini- van who has never had an automobile accident. That makes intuitive sense to us, as does the expectation that the owner of a large home lo- cated on beachfront property of the Gulf Coast will pay a higher premium for home insurance than a much smaller home located further in- land. That seems fair to us. Furthermore, as an automobile owner and a homeowner, I can choose what make, model, and age of a car I want to drive, as well as choose where I want to live and how large of a home I would like to have — as long as it fits within my budget. Advocates of actuarial fairness in health insur- ance would argue that people can choose to live a healthy lifestyle or not. They might argue that we can choose what foods to eat, how much alcohol we consume, whether to smoke cigarettes, how much exercise we engage in, and so forth. However, one cannot choose their parents or what diseases they are genetically predisposed to developing. Nor do they typi- cally voluntarily choose to have an increased risk of cancer by living near chemical plants that produce known carcinogens. And as you be- come increasingly granular about levels of risk, where do you draw the line? Let us consider a different type of risk: a person who is extremely devoted to physical fitness who decides to run a marathon and suffers from stress fractures or other orthopedic ailments related to over- use injuries. Should society really have to bear their risk of musculoskeletal injury? They didn’t need to run a marathon. The point is that ac- tuarial fairness can become a “slippery slope.” In 1993, Deborah Stone authored an influen- tial paper on this topic called “The Struggle for the Soul of Health Insurance,” which ex- plored the fundamental tension at the heart of health insurance: the conflict between actu- arial fairness and the solidarity principle (also known as social solidarity). 1 Actuarial fairness, a principle rooted in private insurance markets, dictates that individuals should pay premiums based on their personal level of risk — mean- ing those who are sicker or more likely to require more care should pay more. In con- trast, the principle of social solidarity, which underlies public insurance models, holds that health coverage should be a shared social good, with risks and costs spread across the entire population to ensure that everyone, re- gardless of health status, has access to care. Stone argued in favor of social solidarity and community rating, implying that pricing on risk created a slippery slope where the distinc- tion between various levels of risk becomes increasingly fragmented over time. As insur- ers attempt to break down health risks into smaller and smaller categories, they may end up with many tiny “slices” of risk. She argued that as experience rating became more wide- spread, insurers would begin to create increas- ingly detailed subgroups of people based on their health profiles. Instead of having broad categories (e.g., high risk or low risk), there could be multiple levels of risk with increasingly specific criteria. The more finely these distinc- tions are drawn, the more complex it becomes to assign an actuarial price for each level. The Affordable Care Act: An Attempt to Strike the Balance The Affordable Care Act (ACA) of 2010, aka Obamacare, sought to strike a balance be- tween community rating, which promotes social solidarity, and experience rating, which follows actuarial fairness, by implementing a set of rules that aimed to make health insur- ance both accessible and more financially sus- tainable. The ACA limited how much insurers could adjust premiums based on individual risk factors, ensuring that sicker individuals could still afford coverage. First, it introduced the concept of guaranteed issue, where insurers were required to cover everyone, regardless of pre-existing conditions. Second, it introduced modified community rating that restricted variations in premiums. Insurers could now only adjust rates based on age, but with a cap where older adults could only be charged up to three times the rate of younger adults; geographic location, recognizing regional cost differences; tobacco use; and family size. And the ACA prohibited medical underwrit- ing, where insurers could not charge higher premiums based on health status, gender, or past medical history. As mentioned in the last article on the history of health insurance, insur- ers were worried about facing overwhelming losses due to guaranteed issue, where they were forced to cover high-risk individuals that had previously been priced out of coverage (i.e., adverse selection). To address those ac- tuarial fairness concerns, the ACA also put in place risk stabilization measures that would allow insurers to spread their financial risk. The first of these measures — and the one most vilified by ACA critics — was the indi- vidual mandate, which required most Ameri- cans to have health insurance or pay a pen- alty. The mandate encouraged younger, healthier people to enroll, thus balancing the risk pool. But nobody likes the idea of the government telling them they have to purchase health insurance, leading to re- peal of the mandate and its penalty in 2019. The irony of course is that most people understand why mandating auto insurance is necessary, because if we cause a seri- ous automobile accident, we are not only at risk of losing our personal investment in our vehicle but also potentially at fault for dam- ages to another person. We not only have to buy ourselves another car, but we may need to buy the other accident victim one as well, not to mention their medical expenditures. It is the same with health insurance. Failure to purchase health insurance has similar con- sequences, in part because of a law known as the Emergency Treatment and Labor Act (EM- TALA) of 1986, which requires hospitals par- ticipating in Medicare to provide emergency medical care to any patient regardless of ability to pay. EMTALA sees to it that a person com- ing into the emergency room of a hospital re-