The Basketball of Health Care Reform

With the Cavs set to take on the Celtics in Boston in a little while, I'll pose a question that may be interesting to some of you: what does the NBA have to teach us about the mechanics of the new health care law?

The NBA has a salary cap ($57.7 million for this season) to keep the big market teams from buying up all the talent, a la the Yankees in major league baseball. But the NBA's cap is a soft cap, meaning teams can go over it. But if a team pulls in two big-money stars and their team payroll exceeds the cap by a certain amount, they have to pay the luxury tax (although there are enough exemptions and special cases to make the IRS blush). For this season, the luxury tax kicks in $69.92 million. If your payroll hits that, you have to pay the league a tax on every dollar above the salary cap you've gone. That money then gets distributed to teams whose payrolls come in below the cap. A little bit of redistribution to achieve an extra degree of parity between high-revenue and low-revenue teams.

What does this have to do with health care? The new law institutes the very same principle for health insurance companies. Starting in 2014, insurance companies will be subject to guaranteed issue and community rating rules. This means they can't turn people away (as in, for pre-existing conditions) and, except for certain exceptions, they can't charge people more for things that are out of their control, like gender or medical history. That's all well and good for the consumer but suppose you're an insurance company that by sheer luck of the draw ends up getting a disproportionate share of the less healthy, more expensive customers? You can't turn them away and you generally can't charge them more to make them help cover the added expense of covering them.

Never fear. The new law contains risk adjustment mechanisms, to be implemented by the states. Insurance plans with lower than average actuarial risk--that is, a healthier and cheaper than average pool--have to pay a fee. This then gets distributed to insurance plans that have a higher than average actuarial risk--the disproportionately unhealthy, more expensive pools. So no insurer gets unduly penalized for accepting sicker people into its pool.

If lower than average actuarial risk plans were NBA teams, they'd be the ones that luck out and get multiple superstars on their team, hitting the luxury tax threshold. Of course, in the world of health insurance that translates into fewer sick people drawing benefits. Higher than average actuarial risk plans are those teams whose payrolls check in under the cap, garnering them luxury tax payments.

All right, it's tip-off. Go Cavs.