So Wonks Anonymous is feeling pretty good lately since other people have begun to notice the problem of adverse selection in insurance markets. For more on this check out a discussion thread in Economix.

Wonks Anonymous basic argument is that when people are allowed to choose between plans with more or less complete coverage and plans that require high out of pocket spending, young healthy people will opt for the bare bones plans. This will leave the comprehensive plans with most of the sick and unattractive people, further increasing the costs of these plans.

Now Wonks Anonymous would be unfair to his readers if he did not point out that the proponents of choice have an answer, of a sort, to this problem. Which answer - form the thread mentioned above - would be:

I believe Ron Wyden’s plan has infrastructure to deal with the event that some insurance groups have sicker people than others - a reinsurance allocation. (This is how it works in Germany.)

A Reinsurance Allocation would work like this: From a health insurance point of view, everyone has a different actuarial value. That would be the average cost of providing health insurance for a person of a certain age, sex and health status. Plans with below average actuarial value per member would pay a tax that would fund subsidies for plans with above average actuarial value per member.

For sake of argument Wonks Anonymous will ignore the political difficulties of making insurance companies pay any taxes. He will also ignore the practical difficulties of measuring and documenting the actuarial value of an insurance company's book of business. He will note, however, that he has worked the data for a Medicare Advantage payment system that required such documentation. It was not a picnic.

Wonks Anonymous will instead move directly to the impact of reinsurance on the availability of comprehensive health insurance for geezers, a topic near to his heart.

Now if we were in Germany the process would be simple.

Take a typical geezer: over 55, overweight but not clinically obese, treated high blood pressure and somewhat elevated cholesterol. For purposes of exposition let the geezer have expected medical expenditure of $8,000 per year. That would mean that, on average, people with his characteristics spent $8,000 per year.

Because German Health insurance law is rather restrictive, health plans must offer pretty uniform coverage. Wonks Anonymous does not the exact figure but, for sake of example, he will say that they are required to pay 90% of medical expenses. The actuarial value of the geezer - the expected cost to provide him with health insurance - is $7,200. That would be 90% of his expected medical expenditures.

For each geezer of this sort avoided the total calculated cost of the health plan would fall $7,200. For each geezer that a plan is forced to take on its total calculated cost would rise. Reinsurance would calculate the average costs of various health plans and then transfer funds to make these costs equal. Each excess geezer brings the plan some fraction of $7,200 in reinsurance income.

But here in the US we are special. For various reasons we feel that it is a good idea to have health insurance policies with very high deductibles. For sake of example say $5,500 per person per year. Which gives us two different measurements for actuarial value.

The actuarial value of the geezer with comprehensive insurance - 90% of medical expenses covered - is still $7,200. The actuarial value of the geezer with a $5,500 deductible plan is $1,800. Which value do you use?

Wonks Anonymous is pretty sure that our betters are convinced that High Deductible Health Plans are the wave of the future so he expects that they would base their reinsurance scheme on the $5,500 deductible. The actuarial value of our particular geezer would be $1,800 and, in general, the actuarial value of all other geezers would be quite low.

Remember here that very few people actually make it to $5,500 annual medical expenditures and the $5,500 represents a significant share of the medical expenditures even these people.

Even as our high deductible plan pushed geezers into the more comprehensive plans, the compensation paid for these geezers would not be equal to the additional costs of providing comprehensive insurance. The problem that Wonks Anonymous continues to rant about would continue. If we allow choice of plans, comprehensive insurance - insurance that does not leave a family ruined in the event of illness - will become an unattainable luxury for most people.

Now Wonks Anonymous supposes that we could not strictly call this adverse selection if we had reinsurance. Indeed some would claim:

This in’t about choosing to be under insured when young, it has to do with how much you want to pay in premiums, versus how high a deductible you want, versus what percentage of your medical bills you want insurance to pay.

But, curiously enough, the people who chose the high deductible plans would tend to be young people and others who happened to have low expected medical expenses. These young people, even if they happened to land in a high deductible plan that insured our geezer, would still not be forced to bear only $1,800 of our geezer's $8,000 medical costs.

In other words those who had little reason to expect illness for themselves would have chosen to avoid sharing most of the financial burden of illness in the community.

Funny how these things work out.