Lecture 13A - A free unregulated health insurance market
The focus is on affordable individual health insurance, irrespective whether this is in the
context of a voluntary or mandatory health insurance.
Selection → actions (not including risk-rated pricing by insurers) by insurers and
consumers to exploit unpriced risk heterogeneity (there are a lot of different
risks which are unprised due to the same premium, insurers won’t accept the
high risk, the consumers won’t buy insurance when their risk is low, they are not
willing to pay expensive insurance) and break pooling arrangements (pooling
arrangement → low risk and high risks are together in one pool). Selection
threatens solidarity.
Examples of selection:
● Selection by insurers:
○ Denial of coverage
○ Exclusion of pre-existing medical conditions
○ Waiting periods
○ No renewal of contract
● Selection by consumers:
○ Within each premium risk group the high-risks are more inclined to buy
insurance than the low-risks.
No long term insurance:
● There is no market for insurance against the risk of becoming a high risk in the
future.
● In a free market the premium for an insured who developed AIDS, cancer of heart
disease has to be raised in the next contract period. Or the insurer may not renew
the contract.
Conclusions:
● Without restrictions on free competition a system of implicit cross-subsidies, for
example community-rated premiums, can not be sustained because unrestricted
competition minimizes the predictable profit per contract.
● Without any external intervention individual health insurance may be unaffordable for
the (low-income) high risks in a competitive insurance market.
Premium regulation in health insurance markets
Premium regulation:
● Community rating per insurance
plan → same premium for everyone
in the same insurance plan.
● Rate restrictions for particular risk factors
● Premium bandwidth → flexibility to
differentiate premiums but only
within a certain range.
, Risk selection by insurers
Premium regulation confronts insures with the incentives for risk selection.
In a free unregulated market risk selection can simply mean that insurers reject high risk
people. Social health insurance market typically operates on the basis of open enrollment.
Risk selection:
● Via health plan design → insurers design their health plan in such a way
that these are relatively unattractive to unprofitable people. This might
discourage health care providers to have the highest reputation →
downward pressure on quality.
● Via marketing → insurers try to get the insurance plan under the attention
of low risk people only.
Risk equalization in health insurance markets
Risk equalization means that insurers are compensated for differences in expected costs.
Risk indicators based on:
● Demographic information
● Socioeconomic variables
● Specific diagnoses
● Use of specific pharmaceuticals
● Use of specific treatments
● Levels of spending
Bad indicators → indicators that are not available for the entire population,
indicators that can be manipulated by insurers.
Risk sharing in health insurance markets
Because some limitations, risk equalization is unlikely to fully eliminate risk selection
incentives. Supplementary tools might be needed to.
Risk sharing → insurers share the actual costs to some extent. Typically takes
place among insurers or between the insurers and the regulator.
Typical forms of risk sharing:
● Proportional risk sharing → insurance share in a proportion of actual costs,
a part of the insurers revenues is fixed while the other part depends on
the insurance actual costs.
● Reinsurance/excess-loss compensation → insurers are responsible for the
costs up to a certain threshold.
● Risk corridor → insurers are responsible for profits and losses in between a
certain range.
The focus is on affordable individual health insurance, irrespective whether this is in the
context of a voluntary or mandatory health insurance.
Selection → actions (not including risk-rated pricing by insurers) by insurers and
consumers to exploit unpriced risk heterogeneity (there are a lot of different
risks which are unprised due to the same premium, insurers won’t accept the
high risk, the consumers won’t buy insurance when their risk is low, they are not
willing to pay expensive insurance) and break pooling arrangements (pooling
arrangement → low risk and high risks are together in one pool). Selection
threatens solidarity.
Examples of selection:
● Selection by insurers:
○ Denial of coverage
○ Exclusion of pre-existing medical conditions
○ Waiting periods
○ No renewal of contract
● Selection by consumers:
○ Within each premium risk group the high-risks are more inclined to buy
insurance than the low-risks.
No long term insurance:
● There is no market for insurance against the risk of becoming a high risk in the
future.
● In a free market the premium for an insured who developed AIDS, cancer of heart
disease has to be raised in the next contract period. Or the insurer may not renew
the contract.
Conclusions:
● Without restrictions on free competition a system of implicit cross-subsidies, for
example community-rated premiums, can not be sustained because unrestricted
competition minimizes the predictable profit per contract.
● Without any external intervention individual health insurance may be unaffordable for
the (low-income) high risks in a competitive insurance market.
Premium regulation in health insurance markets
Premium regulation:
● Community rating per insurance
plan → same premium for everyone
in the same insurance plan.
● Rate restrictions for particular risk factors
● Premium bandwidth → flexibility to
differentiate premiums but only
within a certain range.
, Risk selection by insurers
Premium regulation confronts insures with the incentives for risk selection.
In a free unregulated market risk selection can simply mean that insurers reject high risk
people. Social health insurance market typically operates on the basis of open enrollment.
Risk selection:
● Via health plan design → insurers design their health plan in such a way
that these are relatively unattractive to unprofitable people. This might
discourage health care providers to have the highest reputation →
downward pressure on quality.
● Via marketing → insurers try to get the insurance plan under the attention
of low risk people only.
Risk equalization in health insurance markets
Risk equalization means that insurers are compensated for differences in expected costs.
Risk indicators based on:
● Demographic information
● Socioeconomic variables
● Specific diagnoses
● Use of specific pharmaceuticals
● Use of specific treatments
● Levels of spending
Bad indicators → indicators that are not available for the entire population,
indicators that can be manipulated by insurers.
Risk sharing in health insurance markets
Because some limitations, risk equalization is unlikely to fully eliminate risk selection
incentives. Supplementary tools might be needed to.
Risk sharing → insurers share the actual costs to some extent. Typically takes
place among insurers or between the insurers and the regulator.
Typical forms of risk sharing:
● Proportional risk sharing → insurance share in a proportion of actual costs,
a part of the insurers revenues is fixed while the other part depends on
the insurance actual costs.
● Reinsurance/excess-loss compensation → insurers are responsible for the
costs up to a certain threshold.
● Risk corridor → insurers are responsible for profits and losses in between a
certain range.
