Of magic wands and kaleidoscopes: fixing problems in the individual market

Incentive-compatible guaranteed renewable health insurance premiums

Theoretical models of guaranteed renewable insurance display front-loaded premium schedules. Such schedules both cover lifetime total claims of low-risk and high-risk individuals and provide an incentive for those who remain low-risk to continue to purchase the policy. Questions have been raised of whether actual individual insurance markets in the US approximate the behavior predicted by these models, both because young consumers may not be able to "afford" front-loading and because insurers may behave strategically in ways that erode the value of protection against risk reclassification. In this paper, the optimal competitive age-based premium schedule for a benchmark guaranteed renewable health insurance policy is estimated using medical expenditure data. Several factors are shown to reduce the amount of front-loading necessary. Indeed, the resulting optimal premium path increases with age. Actual premium paths exhibited by purchasers of individual insurance are close to the optimal renewable schedule we estimate. Finally, consumer utility associated with the feature is examined.

Health and the cost of nongroup insurance

This analysis estimates a selection-adjusted model of the premium for nongroup insurance to measure the effect of health status on the cost of nongroup insurance. Using data from two recent national surveys, the probability of buying nongroup insurance is about 50% lower for people in fair or poor health compared to similar people in excellent health. Correcting for selection, premiums are about 15% higher for people with modest health problems, and 43% to 50% higher for people with major health problems compared to those in excellent health. We use the selection-corrected premiums to simulate the effects on the price and affordability of nongroup insurance for the uninsured under two recent tax credit proposals.