The case for changing the structure of the private insurance market

Ethan DeWitt’s article in the Monitor on Oct. 1 correctly identified the risk that the market for individual health insurance in New Hampshire could collapse if premium subsidies under the Affordable Care Act are discontinued. If premiums are no longer subsidized, young and healthy people might choose not to obtain […]

Ethan DeWitt’s article in the Monitor on Oct. 1 correctly identified the risk that the market for individual health insurance in New Hampshire could collapse if premium subsidies under the Affordable Care Act are discontinued.

If premiums are no longer subsidized, young and healthy people might choose not to obtain health insurance and, if only old and sick people buy individual insurance, premiums will rise.

It might, however, be possible to alleviate the risk of collapse by changing the structure of the private insurance market. This would require the state Legislature to enact a law that essentially combines the three separate markets that exist today: large group, small group, and individual.

In order to understand why this might work, it’s important to understand a few things about insurance and premium pricing.

First, insurance is technically the transfer of risk from the insured (the purchaser or beneficiary of the insurance) to the insurer that something might happen in the future that would otherwise cost the insured money to fix or resolve. For example, when you buy car insurance, you are transferring the risk that your car would be damaged by a crash.

Second, the larger the pool of insureds, the more reliable will be the insurer’s estimate of likely costs it will pay when it prices the insurance premium. While an insurance company can’t know if any individual person is going to get cancer (or any other disease or injury), insurers maintain their own data about frequency of disease and costs, and there are published statistics regarding the population as a whole. For example, the American Cancer Society reported that New Hampshire had 483.5 cancer diagnoses per 100,000 residents and estimated that there would be 8,060 new cases in 2020.

What this means as a practical matter is that when an insurer is creating premiums for a large group, it can have more confidence that the amount of disease, and therefore its costs, will be closer to the average. For small groups, and especially for individuals, the will have less confidence about the amount of costs it is likely to incur. As a result, the insurer will include a larger “risk charge” to reflect the greater variability of the potential costs.

Because the individual market has the most variability in the cost to insurers, and also because the prohibition against limitations for exclusions for pre-existing conditions creates an incentive for people to wait until they are sick to buy insurance, the risk charge in the individual market is high, greater than it is in group markets, especially large group. The size of the risk charge can make individual premiums especially high.

However, there is no particular reason that individual markets need to be rated separately from large or small group markets. Essentially, this is a favor that the Legislature or regulators have granted to employer groups to reduce their premiums. It doesn’t have to be this way.

The state could enact a law requiring that all health insurance premiums be “community rated.” Community rating of premiums basically means that the insurance company takes account of all costs in a particular community and charges the same premium for everyone, or at least everyone in similarly situated circumstances.

Most community-rated systems allow adjustment for age or behavior, like smoking. Rates might also be adjusted based on geographic location if, for example, health care providers in a particular community charged higher rates than those of other communities.

If a community-rated or adjusted-community-rated premium system was required by state law then the individual market would be protected because the premium rates would be based on the entire community and not just on the experience of people who purchased insurance through the individual market.

People who didn’t receive a government subsidy might still not buy insurance – that’s a different problem – but at least people buying insurance directly would not be charged higher premiums simply because they bought insurance in the individual market.

Large groups and self-funded plans have enjoyed the benefits of lower health insurance rates under the present system long enough. It’s time they paid their fair share so that coverage will be more affordable for everyone.

(Robert Moses of Concord has spent much of his legal career working in and around the health care industry.)

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