Expert Voices: Community Rating and Guaranteed Issue in the Individual Health Insurance Market

January 2011

In this essay Dr. Anthony Lo Sasso provides empirical evidence of the adverse selection that resulted when states adopted community rating and guaranteed issue requirements in their individual health insurance markets but did not implement complementary mechanisms to keep lower risk individuals in the insurance risk pools. Such adverse selection can raise premiums, destabilize markets and even lead to market failure through the following cycle of events:
 

• Community rating prohibits differential premiums based on health status, effectively lowering premiums for individuals in poorer health and increasing them for healthier individuals.

• Guaranteed issue allows people to purchase coverage when they get sick, decreasing the need to maintain insurance coverage.

• Healthy individuals respond by dropping coverage and entering the market only when they need coverage, thus the pool of enrollees becomes increasingly older and sicker. 

• This adverse selection pushes premiums for all remaining enrollees higher, provoking further departures by those at the healthier end of the spectrum.

• Premiums increase again to reflect the ever-worsening risk pool of enrollees. 

• The cycles continue, further destabilizing the market and potentially leading to complete market collapse. 

Dr. Lo Sasso’s findings highlight the importance of providing effective mechanisms to protect the integrity of the risk pool in conjunction with the community rating and guaranteed issue provisions contained in the Patient Protection and Affordable Care Act.
 

Other recent Expert Voices essays include:

• Mireille Jacobson, RAND, and Joseph P. Newhouse, Harvard University, “Expect the Unexpected? Physicians’ Responses to Payment Changes”  (November 2010)

• Austin Frakt, Department of Veterans Affairs and Boston University, “The Future of Health Care Costs: Hospital-Insurer Balance of Power” (November 2010)

• Robert Berenson, Urban Institute, “Out of Whack: Pricing Distortions in the Medicare Physician Fee Schedule” (September 2010)

• Maya MacGuineas, Committee for a Responsible Federal Budget and the New America Foundation, “Our Unsustainable Budget Situation” (May 2010)

• Jonathan Gruber, MIT, “Taxing Sin to Modify Behavior and Raise Revenue” (April 2010)