Public Release: 

Making individual health insurance market work

Renewal mandates keep premium variations in check

Health Affairs

BETHESDA, MD--State lawmakers trying to stabilize the individual health insurance market and protect high risks don't need to look to such regulatory schemes as community rating because most already have in force a strong policy tool, according to a new article published today on the Health Affairs Web site.

Nearly every state requires insurers selling individual policies to guarantee that enrollees can renew their policies at the average premium for their underwriting class, a contract provision known as "guaranteed renewability," write authors Vip Patel and Mark Pauly. Ensuring fair market rules for the individual market are important for a sizable share of the population, since it is the main source of insurance coverage for nonpoor working families whose employers don't offer insurance.

The Health Insurance Portability and Accountability Act of 1996 required guaranteed renewability but did not impose any restriction on premium increases. In regulating the individual insurance market, however, all but four states have followed the textbook definition of guaranteed renewability, which prohibits premium increases based on enrollees' claims history or health status.

The article argues that guaranteed renewability effectively pools risk and protects consumers from price increases without resorting to heavy regulation of the market or reduced consumer choice. It protects insurers against adverse selection because it prevents those who know they are likely to get sick from buying more generous coverage at the guaranteed renewable rate. Community rating, on the other hand, has a history of driving up costs for some insurers who are burdened with the sickest enrollees, and "cream skimming" by other insurers who seek to enroll only young, healthy individuals who won't make many claims, the authors write.

The authors acknowledge, however, that consumers can game guaranteed renewability if they know upon enrollment that they have conditions that could lead to numerous claims. Likewise, insurers could game the system by raising average premiums so much that many lower risks drop out and effectively form a new underwriting class, causing the higher-risk plan to self-destruct. But the authors argue that likely consumer desertion of insurers who repeatedly engage in that practice will guard against such conduct by insurers.


Patel is the founder of eHealthInsurance Inc., which markets individual and small-group insurance products online to the public. Pauly is a health care scholar at the Wharton School, University of Pennsylvania.

Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

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