NCPA - National Center for Policy Analysis

Health Insurance Was Not a Free Market Prior to ObamaCare

January 29, 2014

The American health insurance market prior to the Affordable Care Act (ACA) was not a free market system, says Rituparna Basu, an analyst at the Ayn Rand institute.

Many Americans believed that the U.S. health care system was a mess because health insurance companies had too much freedom -- that a free market health insurance market did not work. To remedy this, the Obama administration implemented the Affordable Care Act.

But Basu challenges the assumption that the health care market prior to the ACA was actually a free market. In fact, the U.S. health insurance system was one of the most government-controlled systems in America. From licensing requirements to finance restrictions to price dictates to coverage mandates, the health insurance market in America was hardly free:

  • Prior to the ACA, 36 states imposed a "rate band" in the small group market and 11 states imposed them in the individual market. Rate bands limit the degree to which health care premiums can be based on your health status. A rate band of 20 percent, for example, means that an insurer cannot charge a premium higher or lower than 20 percent of the average premium offered. These laws mean that the young and healthy end up paying more so that older or less healthy individuals can pay less.
  • States that impose community ratings do not allow insurers to take health status into account at all when charging a premium. Before the ACA, a version of community rating existed in seven states for the individual market and 11 states for the small group market. This just raises premiums for everybody, because insurers are forced to accept all applicants.
  • Governments -- both state and federal -- also required coverage of certain benefits. Pennsylvania began requiring osteopathy and dentistry coverage as far back as 1949. There are more than 2,000 benefit mandates in effect today.

A real, free market for health insurance would not have included these types of controls, which only drive up costs. It was not the free market that was responsible for so many problems in our health care system, but government regulations.

Source: Rituparna Basu, "The Broken State of American Health Insurance Prior to the Affordable Care Act," Pacific Research Institute, 2013.


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