Destroying Insurance Markets: Introduction to a Series

Published February 1, 2004

During the early 1990s, state legislators and insurance regulators faced growing public concern over two health insurance problems. The first was rising insurance premiums threatening to price middle- and low-income consumers out of the private insurance market. The second was “job lock,” the inability of people to take their health insurance with them when they changed jobs.

Each state adopted a different package of legislation and reforms. Some created high-risk pools that subsidized the premiums of people with health problems that made them uninsurable; some passed tort reform to reduce the cost of unnecessary litigation; some offered tax credits to the uninsured and unemployed.

Many states adopted regulations requiring health insurance companies to accept anyone who applied for coverage and charge everyone within each group the same rates regardless of their age, gender, lifestyle choices, or health status. These regulations, called guaranteed issue and community rating (see sidebar), were intended to force healthy people to subsidize less-healthy people, and to make it easier for people without health insurance to get back into the system.

Eight states–Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, New York, Vermont, and Washington–imposed community rating and guaranteed issue on health insurance companies that sell to individuals as well as to groups. Their decisions, controversial at the time, have had a major impact on the health insurance marketplaces in those states.

Early Warning

In 1993, when community rating and guaranteed issue were first imposed on the individual health insurance markets in New Jersey, New York, and Vermont, a study produced for the Council for Affordable Health Insurance (CAHI) warned the mandates would make the problems of high insurance premiums and lack of access to insurance worse, not better.

“Most of today’s uninsured are young and do not have much money,” the CAHI report said. “Community rating forces them to subsidize the cost of the middle-aged, who are at the peak of their earning power. Forcing the young to pay more will drive them out of the insurance market, raising costs for everyone.”

Using a sophisticated health database called SimuCare, the authors showed how community rating would work in practice. Starting with a normal population of 100,000 people, the study predicted that eventually 31,500 people–mostly younger and lower-income people–would drop their insurance coverage because of higher prices. Approximately 10,000 older and less-healthy people would buy insurance. With fewer people to share the cost and with higher expected health costs, premiums would have to go up … by about 25 percent, according to the SimuCare model. That increase would come on top of the rate increases caused by inflation, cost-shifting, increased utilization, and other trends.

The CAHI report did not address guaranteed issue. If it had, it would have found similar results. Guaranteed issue laws increase the average age of the insurance pool and attract sicker people to it. Insurance premiums have to go up to subsidize the newcomers because they tend to have (sometimes serious) medical conditions, just as community rating forces the young to subsidize the middle-aged and elderly.

“Community rating will not work to extend coverage” to the currently uninsured, the CAHI study concluded, “because, as predominantly young, low-income people, they have difficulty allocating scarce dollars to insurance premiums. Additionally, it is precisely this population that experiences the biggest premium increases from going from risk-based premium rates to community-rated premiums.”

Ten Years Later

Today, some 10 years later, it is possible to put CAHI’s predictions to the test. What has happened to individual insurance markets in the eight states that adopted community rating and/or guaranteed issue beginning in 1992 and 1993? The data tell a grim story:

  • Between 1992 and 2001, the share of the population in these eight states covered by individual health insurance plans fell to 18.8 percent below the average of the other 43 states and the District of Columbia.
  • The eight states have seen a massive exodus of private insurance companies that had been selling individual health insurance policies. Some 45 insurers, for example, left Kentucky between 1994 and 1997.
  • Premiums for individual insurance have soared. In Maine, for example, the monthly premium for a family policy for someone aged 25 ranges from $1,116 to $4,337.
  • By contrast, premiums in states that did not adopt guaranteed issue and/or community rating have seen much smaller rate increases. For example, typical monthly insurance premiums for families in rural counties in Vermont are approximately five times as much as they are for families in rural counties in Illinois.

An Eight-State Series

Starting with New Jersey in this issue, Health Care News will present a monthly series of case studies documenting how community rating and guaranteed issue have destabilized and sometimes destroyed the private individual insurance markets in states that adopted such legislation. Each case study will offer an overview of legislative activity since 1992 (or the year the legislation was adopted), data on uninsured rates and participation in the individual insurance marketplace, and premium costs for typical families.

The case studies will also provide comments from people in the states–individuals, small business owners, business and civic leaders, elected officials, and regulators–giving their own perspectives on what has happened during the past decade. We also will report on alternatives to community rating and guaranteed issue where they’ve been tried.

As this introduction suggests, the lesson from this series is already clear: Imposing community rating and guaranteed issue on the individual health insurance market causes premiums to rise, not fall, and makes it more difficult, not easier, for the uninsured to find affordable coverage.

Joseph L. Bast is president of The Heartland Institute and publisher of Health Care News. His email address is [email protected].