Free market and healthcare don't mix

In a state whose motto is ''Live Free or Die," it is not surprising that people would believe a dose of free-market capitalism is the answer to a problem that afflicts small businesses everywhere: the skyrocketing cost of health insurance. Well, I've got some bad news for the people of New Hampshire. It isn't going to work -- not if free-market reforms wind up making insurance far more expensive for the old and sick.

A little background is in order.

Until about 10 years ago, American health insurers selling to small companies, those with fewer than 50 employees, could basically pick and choose their customers. They might sell a policy to Harry's Garage, but decide not to offer insurance to Joe the mechanic who happened to have cancer. Because they could medically underwrite -- vary their prices based on the health of the workers -- insurers could jack up rates dramatically when illness struck. Nancy Turnbull, once an insurance regulator in Massachusetts, recalls a case where a small firm's premiums rose eightfold after one employee had a heart attack.

In response, most states, including Massachusetts and New Hampshire, changed the rules of the game in the 1990s. In insurance jargon, they moved toward community rating -- putting everyone in the small-group market into the same risk pool.

Insurers could still charge some groups more based on the age of workers or industry type, but medical underwriting disappeared.

The result was a mixed bag. The big variation in premiums paid by small firms shrank. What did not shrink were the premiums themselves. Health insurance kept getting more expensive.

''It is not surprising people started looking for some other answer," said Michael Miller, an executive with Community Catalyst, a Boston advocacy group for the uninsured.

In New Hampshire, a group of lawmakers decided the answer was more competition. If more insurers could be lured into the market, they reasoned, prices would fall, or at least rise more slowly. That was the thinking behind Senate Bill 110, which went into effect this January.

To be fair, the law isn't a complete return to the bad old days. But it is close. Medical underwriting is back, and insurers have a lot more leeway in how they price their policies.

Greta Cocco, an insurance broker in Manchester, has watched the fallout on her own small business customers. She says they fall into three roughly equal-sized groups: the first has seen rates stabilize and in some cases drop; the second has experienced normal rate increases; the third has been hit with rate hikes of 20 to 135 percent.

Customers also have complained about another feature of the new system: the requirement to fill out forms in which individuals have to spell out their private medical histories. Insurance companies need the information to figure out how much to charge.

The insurers are not the bad guys here. Birds fly. Insurers underwrite. In most fields of insurance, we accept the fact that different customers have different risk profiles and will be charged accordingly. In auto insurance, for example, bad drivers pay a lot more than good drivers. But do we really want a health insurance system that treats sick people like bad drivers? Life has already divided the healthy and sick into winners and losers. Should medical insurance make a bad situation worse?

Turnbull, who now teaches at the Harvard School of Public Health, says the New Hampshire experiment violates the basic principle of health insurance: to have the healthy help pay the cost of caring for the sick. ''We've been down this road before," she said. ''It is not one we want to revisit." The free market may yet have a role to play in fixing America's broken health insurance system.

But the market can only work if we find a way to make sure everyone has insurance and the system doesn't discriminate against the sick. Tinkering with the rules won't get the job done. There is no free lunch in healthcare. Not even in the ''Live Free or Die" state.

Charles Stein is a Globe columnist. He can be reached at stein@globe.com.