NCPA - National Center for Policy Analysis

Putting the "Insurance" Back in Health Insurance

May 23, 2012

The adjustment of health insurance premiums, based on the risks of each policyholder, is called medical underwriting.  In nearly all types of insurance, without underwriting, insurance would be prohibitively expensive, says Avik Roy, a senior fellow at the Manhattan Institute.

If the price of insurance for low-risk individuals is unfairly high, the low-risk types will sit on their hands and only high-risk individuals will buy insurance.  Because high-risk individuals have higher average costs, the costs of premiums will go up: a process called adverse selection.  And in the United States' current health care debacle, adverse selection plays a pivotal role.

  • Older Americans are much more likely to be insured, because they get a great deal: the cost of their insurance is heavily subsidized by the young.
  • Meanwhile healthy people, in the first halves of their lives, elect to go without insurance because it is far too expensive relative to their current health status.
  • According to the U.S. Census, 55 percent of Americans without health insurance are under the age of 35, and 72 percent are under the age of 45.
  • Thus, fewer and fewer young, healthy people are staying in the system to help pay for the treatment of their older counterparts.

This phenomenon, strikingly, has been exacerbated by government policies.

  • Community rating -- these provisions prevent insurers from varying premiums on the basis of a policyholder's age, gender or health status, equalizing premium rates for low-cost and high-cost consumers and discouraging the participation of the prior entirely.
  • Guaranteed issue -- forcing insurers to cover everyone with pre-existing conditions drives premiums upward because it encourages consumers to only pay into the system when they are sick and then drop out when they've recovered.
  • Benefit mandates -- by setting minimum standards of coverage (often the result of lobbying by those with a financial interest), consumers are discouraged from participating if coverage is allotted for procedures they view as unnecessary.
  • Any willing provider -- because the government restricts plans' ability to exclude certain providers, it undermines their ability to negotiate lower prices.
  • Contractual breakdown -- the ability of consumers to cancel their coverage at any time discourages plan operators from writing long-term policies.

On the whole, therefore, government involvement has the net effect of driving up prices while doing little to expand coverage relative to an intervention-free market.

Source: Avik Roy, "Putting the 'Insurance' Back in Health Insurance," Forbes, May 21, 2012.

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