In some states, there has been enactment of community rating ordinances that seeks to restrain the degree to which insurance premiums in the health insurance markets can change with an individual’s health status. The state passed laws that sought to increase insurance accessibility for individuals who have high-risk health conditions. This was a smart move; however, it is emerging that these laws might lead to untoward selection. In some instances, these laws led to risk segmentations in some states where the regulation is not yet effected. Despite the fact that most of individuals in the United States of America are privately insured through employment-based mass market, research indicates that there are over 13 million individuals insured through the individual health insurance market. Nevertheless, there is incertitude on the modalities through which these markets operate especially with respect to premiums paid by the minorities in poor health conditions because of inveterate health conditions.
Fundamentally, medical compensation by insurers discourages high health-risk individuals from getting insurance premiums. Most of these high health-risk individuals are poor, meaning that, they have elevated needs for insurance covers. Consequently, due to these prohibitive policies by most insurers, these minorities end up getting the insurance cover at a higher cost. Moreover, the occurrence of risk segmentation in unregulated health insurance markets is not known, as there is no empirical data to support it. Additionally, many people lack insurance covers at all and some people feel that government intervention would save the situation. In the wake of these events, several states moved in to reduce the disparities and harmonize health insurance premium services, to make it affordable for high health-risk poor individuals to access insurance cover. This paper looks into both short-term and long-term effects of this state intervention.
The state has implemented several regulatory measures that would ensure premiums are available to all people. The first regulation is community regulation. This regulation demands underwriters to give equal premiums to all people irrespective of health status, gender, or age. The effect of this move is adverse selection, whereby, the premiums become prohibitively costly for the healthy persons (Sloan and Conover 290). Secondly, the state has imposed guarantee issue regulation. This move seeks to regulate the extent to which insurers can abnegate insurance coverage to existing or new customers. This is a smart move; however, the only way to guarantee coverage to customers is through offering high premium rates to high health-risk individuals; a fact overlooked more often in policy implementation. It will be difficult to offer quality coverage through cheap premiums. The anticipated coverage should match the cost of the premiums for sustainable services.
The third move is to regulate ‘any willing provider’ policy. This regulation will restrain insurers from omitting doctors and hospitals from their operation. If this move goes through, consumers will have more choice and tractability; however, insurers may not be able to meet and contain the coverage cost. Finally, the state seeks to regulate mandated benefits. These regulations expect underwriters to cover specific treatments. All these moves muzzle the insurance sector and they do not only reduce competency of these firms, they also price away many people from accessing health insurance. Moreover, the anticipated results may not be empirically viable; instead, the results may lead to increased premium costs and this contradicts the expectations of many people.
The Current System
To examine the effects of state regulations on health insurance premiums, it is important we look at the current system and compare it with literature to note the effects of this intervention. According to New, health insurance premiums are highly regulated by the state (1). The aforementioned four regulation policies have been fully implemented across several states. Most of these policies are set to counter some specific issues like rising healthcare costs or elaborating healthcare accessibility especially to the poor high health-risk individuals.
This state intervention on health insurance has both positive and negative effects in both short-term and long-term duration. In the short-term, this regulation enables the poor high health-risk individuals to get insurance costs at a relatively cheap cost. Moreover, the minorities who may not have high health-risk also need insurance covers and through these regulations, they can now access that. Doctors and other healthcare providers can now access individual health insurance market. Moreover, underwriters will give equal premiums to all people irrespective health status, age, or gender. This move eliminates bias in terms of insurance coverage. The implication here is that, individuals will get the same package regardless of wealth or health. This will work for the benefit of the poor who have been marginalized for a long term in health insurance cover. The regulation that seeks to limit the extent by which insurance companies can deny coverage to new or existing customers will now ensure that consumers have guarantee for coverage (Sloan and Conover 280). Above all, the most anticipated move is to ensure that premium rates come down to a level where everybody can access them.
On the other hand, the positive results may be short-lived. According to New, offering low cost insurance covers to the high health-risk individuals or older people, without screening out special medical conditions, will only happen at the expense of the young and the healthy (2). For the companies to meet the cost, they will have to strike a balance between income and expenditure. This means that, the healthy and the young, who have no complicated health conditions, will pay more for services they are not enjoying. The surplus money brought in by the healthy, will then be used by the high health-risk individuals who will spend more than what they bring in. This is true because companies cannot offer what they do not have. The resulting effect in such a case would be obvious; the young and the healthy people will withdraw from the premium business. Due to the absence of these key players, there will be mounting pressure on premiums and those left behind may not be able to sustain the sector.
Interestingly, the people who remain in the insurance business are the poor, the high health-risk, the sicker, and the poor; ironically, these groups are the same people the state seeks to protect. Therefore, the long-term implications are far reaching. The ultimate result would be collapse of individual health insurance market. This is because the poor cannot afford to pay for expensive premiums and the companies cannot operate under losses. This will render more people uninsured, which is catastrophic for citizens. An ailing nation cannot be productive and this affects the economy generally. It is important to note that, not all people can achieve employment-based insurance covers. Moreover, these employment-based insurance covers are the last option for many people because they do not offer competitive packages and services to consumers.
Research indicates that, despite the state regulation on premiums, the expected low rate premiums are, and may not, be realistic. Studies show that, even though the government has been regulating premiums, the desired results have not been achieved. For instance, Herring and Paul examined the relationship between low rates premiums and accessibility of the same, and found that, high health-risk individuals and the aged still paid more money compared to the healthy people (23). In another research, Davidoff and Blumberg also found that, those with chronic health conditions parted with high amounts of money in purchasing premiums (725). This brings out the issue of how effective the implementation of this state control has been.
In a research carried out by Herring and Paul titled “The Effect of State Community Rating Regulations on Premiums and Coverage in the Individual Health Insurance Market”, they established that, state regulation does increase premium costs in the long-term (24). Herring and Paul used data from National Health Interview Survey (NHIS), which samples over 40,000 families annually. Moreover, the available data dates back to 1997. The other source of data was Community Tracking Study Household Survey (CTS–HS), a national representative. The importance of this is to certify the credibility of this research work. There have not been many studies to determine the effects of state-regulated premiums and even the few available ones have been associated with bias and lack of enough information.
These results indicated that, despite the heavy regulation on premiums by different states, many poor people still relied heavily on charity care while households with decent education obtained insurance covers regardless of the type; whether employment-based group insurance or individual health insurance plans. The research also determined that people who obtain premiums in uncontrolled states purchased them at relatively lower prices (Herring and Paul 26). Interestingly, there is enough evidence that chronically sick and older people would spend 50% more on premiums. This is ironical given the fact that the primary purpose of government intervention is to help these people.
On the risk guarantee regulation, Herring and Paul established that there is no significant relationship between state regulation on premiums and the risk (25). This is in contrast to the expected government intervention. The common wisdom was that, if the government regulated insurance firms, then consumers would be guaranteed of the security of premiums. However, these regulations have some positive results. Herring and Paul established that, while there was increased number of high-risk individuals under insurance cover in regulated states, this number was outstandingly reduced in unregulated states (26). Even though, the increased number of high-risk individuals under insurance cover happened at the expense of the low-risk people, the regulation seems to achieve one of its purposes; accessible insurance cover for the high risk individuals.
These regulations have helped to implement renewability provisions and this seems to work for the benefit of consumers. The guaranteed renewable (GR) insurance allows individuals inside a similar initial category of coverage to renew their insurance policies under the pretext of “class average” rates (Frick 271). This pooling helps the poor to access insurance covers at relatively low prices. It also prevents insurers against barring certain people from accessing premiums. However, these results are insignificant and one questions the need of state intervention. Firstly, there is no outstanding segmentation risk in unregulated markets and this disqualifies the initial plan of state intervention of cutting down this segmentation risk. There appears to be two big problems with the current system of regulation. One, the intense administrative regulation results to high rate premiums for both low-risk and high-risk individuals. This is mostly in individual health insurance markets. It is important to note at this point that, the government has allocated employment-based insurance some tax subsidies; a factor not enjoyed by individual market. This disparity only fuels instability in the employment-based market because many people opt to take cover under the individual scheme.
Some states have enacted regulation of health insurance premiums. These regulations include demanding underwriters to give equal premiums to all people irrespective of health status, gender, or age, regulating the extent to which insurers can abnegate insurance coverage to existing or new customers, restraining insurers from omitting doctors and hospitals from their operation and regulating mandated benefits which expects underwriters to cover specific treatments. However, these regulations do not seem to have any outstanding benefits for either consumers or insurers. The overall effect in the long-term is increased premium rates for both low-risk and high-risk individuals. This beats the very purpose of this regulation. In comparative studies carried out, it is clear that consumers in regulated states have no clear-cut benefits over those in unregulated states. Actually, it appears that the regulatory measures put in place are counterproductive. Consumers may have positive results in the short-term; however, in the long-term the measures prove to be retrogressive.
Davidoff, Loeb and Blumberg, Nichols. “State Health Insurance Market Reforms and Access to Insurance for High-Risk Employees.” Journal of Health Economics 2005, 24(4); 725-750.
Frick, Keith. “Consumer Capital Market Constraints and Guaranteed Renewable Insurance.” Journal of Risk and Uncertainty 1998, 16(4); 271-278.
Hadley, Joel and Reschovsky, Coel. “Health and the Cost of Nongoup Insurance.” Inquiry 2003, (4)3; 65-68.
Herring, Bradley and Paul, Mark. “The Effect of State Community Rating Regulations On Premiums and Coverage in the Individual Health Insurance Market.” National Bureau of Economic Research 2006, 32(6); 23-26.
New, Michael. “The Effect of State Regulations on Health Insurance Premiums.” The Heritage Foundation 2006, 13(2); 1-18.
Sloan, Friedriech and Conover, Caroll. “Effects of State Reforms on Health Insurance Coverage of Adults.” Inquiry 1998, 35(9); 280-293.