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Restrictions Affect Coverage
and Market Concentration
Paper not ready for distribution
In a free market, price is the mechanism by which goods and services are rationed. In the United States however, people do not purchase medical services directly. Instead, they purchase health insurance coverage, which subsidizes the price of a visit to a physician, the price of surgery, etc.
Therefore, in the United States, an individual's ability to afford medical services depends on his/her ability to afford health insurance coverage.
But -- from a social policy perspective -- what price should older and sicker workers pay for health insurance coverage? If health insurance premiums were actuarially fair, the people who need medical care the most would not be able to afford it.
Strictly speaking, most Americans do not purchase health insurance coverage directly. Instead they obtain coverage through their employer, which forces younger and healthier workers to subsidize the coverage of their older and sicker colleagues.
Since the early 1990s, many states have sought to expand the subsidization pool by restricting insurers' ability to set premium rates on the basis of health status and other factors which predict a group's future medical needs.
The risk associated with such subsidization however is that younger and healthier individuals will reduce their coverage, thus reducing health insurance coverage rates and pushing average premium rates upward.
As coverage rates fall, the number of insurers may also fall, reducing competition in the insurance industry. In fact, the empirical evidence presented in my paper suggests that the market share of the five largest insurers is lower in states with higher employment-based coverage rates.
The results also indicate that tighter restricting on insurers' ability to rate on the basis of health status is associated with lower employment-based health insurance coverage rates and higher market concentration.
Regulation may have some positive effects however.
Restricting insurers' ability to rate on the basis of group-size and shortening the length of time during which insurers may deny coverage of pre-existing conditions is associated with higher employment-based coverage rates. States with tighter restriction on the ability to rate on the basis of industrial classification also tend to have lower market concentration.
Before drawing conclusions about the relative desirability of regulating insurers' rating practices however, it is important to remember that employment-based coverage rates tell us nothing about who is covered by insurance. As a matter of social policy, tighter health-status rating restrictions may be desirable -- despite the fact that they reduce coverage rates -- if the restrictions enable the people who need insurance the most -- the old and the sick -- to obtain coverage.
To address the question of how rating restrictions affect the ability of older and sicker groups to obtain coverage, future research should analyze individual-level data on health insurance coverage, health status, place of employment and the state in which the individual lives.