One of the promised benefits of the health reform bills Congress is considering is that the insurance industry would come under national regulations that prevented them denying you insurance because of age or a prior health condition. There would be "guaranteed issue," in industry parlance.

President Obama has emphasized this reform, repeatedly promising the American people that if they lost their jobs and their insurance, or wanted to start a new business and needed insurance, that they would be able to buy affordable insurance on the exchange, and the insurers wouldn’t be able to exclude you because of age or prior health conditions. This seems a core principle behind the reform efforts.

But the Max Baucus bill gives us a strong clue on one way the insurance industry might evade this critical regulation. On page 2 of the bill [pdf], under the discussion of Rating Rules in the Individual Market, we find this interesting exception (emphasis mine):

Issuers in the individual market would be required to offer coverage on a guaranteed issue basis. Under guaranteed issue, if a plan has a capacity limit and the Secretary determines that the number of individuals who elect that plan would exceed the limit, the issuer would be allowed to limit the number of enrollees according to specified rules. Also, issuers would be required to offer coverage on a guaranteed renewability basis, and rate those policies on the same factors used when initially issuing such policies. Issuers would be prohibited from excluding coverage for pre-existing health conditions and from rescinding health coverage.

What this says is that an insurance company offering insurance plans in the new exchange could set limits on how many enrollees it would accept, and federal regulators would accept those limits. So how would the insurance companies behave under this provision, given their continuing incentive to limit "medical losses"?

– Would the insurers participating in the exchange focus their advertising on those with the lowest health risks, such as younger people, or people whose profiles suggested they were less likely to come with pre-existing conditions?

– Would individual insurers use their flexibility in setting ratio’s for premiums to discourage high risk, especially older enrollees from signing up with them?

– Would the insurers adjust the "limits" of how many people they would accept based on the risk profiles of the communities they were advertising in?

– When confronted with applications from higher-risk potential customers, would they adopt procedures to slow down their acceptance process for these customers, compared to other customers with lower risks, to increase the chances their "limit" would be met by lower risk customers?

– When each private plan filled up to its "limit," where would the uncovered people go? Wouldn’t they be pushed towards higher cost plans, thus resulting, over time, in different premiums depending on prior health conditions and risks?

– If the regulator sought to discourage the above behavior through a risk-sharing mechanism (included in [all] bills) that moves revenues from plans with low risk people to plans with higher-risk people, won’t that mean that the cost-sharing rules will be subjected to enormous political pressure to favor the strongest dominant insurers, who, after all, are likely to be those who engage in the discriminatory practices?

– Wouldn’t the number of private competitors in the exchange be severely limited by market concentration and the inability of new entrants to line up provider networks to make them competitive (see Hacker video from yesterday’s House hearing)?

– Aren’t these all strong reason why, if we’re stuck with this framework, customers need the choice of a nation-wide public option that can access the Medicare provider network — as a backstop against these entirely predictable practices of the insurance industry?

The media and Congress should be pounding Max Baucus, and Congress generally, as well as the White House, with questions like these.