Health Insurance Medicare

2016 ASSA: Effect of guaranteed issue and community rating on health insurance premiums

How should insurance be regulated? Should insurance plans be able to price premiums based on health conditions? The drawbacks of this approach is that it is not equitable as sicker patients will pay higher premiums. Should all people pay the same cost? Although more equitable, using a single price would incentivize healthy people to avoid buying insurance as the cost will be more likely to be higher than the cost.

At the 2016 ASSA meetings, Vilsa Curto presents “Pricing Regulations in Medigap” to examine how differences in Medigap regulation affects premiums and market composition. Medigap covers the cost sharing portions of Medicare including about $1000 inpatient deductible and 20% coinsurance for Part B cost and other costs. She examines a ban on differential pricing (i.e., community rating ) and a ban on rejections (i.e., guaranteed issue). For Medigap, when patients turn age 65 they all can purchase Medigap insurance at the same cost. However, some states also impose a single cost with guaranteed renewal. Other states ban differential pricing and also do not allow patients to be rejected based on their health status.  Many of these state-level Medigap insurance regulations were imposed in the 1990s.

Vilsa Curto compares regions in similar ZIP codes located on either side of a state boundary where there are different Medigap regulations. She finds that a ban on differential pricing leads to cross-subsidization from young to old. THe youngest pay $240 more annually.  A ban on rejections (i.e., guaranteed issue) and single pricing makes premiums higher for all individuals. Whereas a ban on differential pricing undoes consumer incentives to buy insurance early among younger individuals, a ban on differential pricing and rejections undoes consumer incentives to buy insurance early among all consumers.  Further, the increase in premiums among the young is $640 if both guaranteed issue and community rating are in place.

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