Commentary: An Insurer's Perspective on Reform

The case studies of Individual Health Insurance reform in Kentucky, Massachusetts, New Jersey, New York, Vermont, and Washington point out the complexities and the problems of implementing significant changes in a short period of time in the individual health insurance market. Of particular note is how different the environment was in each state prior to implementation.

The differences in environment point to the need for state-by-state solutions for health insurance reform that address each state's particular environment and needs. For instance, currently over half the states have a risk pool that addresses the needs of high-risk individuals. And in Virginia, Trigon Blue Cross Blue Shield has not experienced the problems of being a guaranteed-issue, open-enrollment insurer that were outlined in the New Jersey, New York, and Vermont case studies as one of the reasons leading to reform. This is because in Virginia, the structure of the laws and regulations governing open enrollment allows Trigon Blue Cross Blue Shield to offer guaranteed-issue coverage in open-enrollment products, while also offering medically underwritten products that compete very favorably with indemnity carriers and with the few HMOs that offer individual products in the state.

The differences in the individual health insurance markets in each state go beyond the laws and regulations that have governed this market and include differences in how health care providers operate, how the Medicaid program is structured, and how the small group health insurance market is regulated. Given the differences in environment from state to state, it might be of value to look at some of the key issues surrounding individual health insurance reform from an insurer's perspective and the resulting conclusions.

Adverse Selection

Unlike the employer health insurance market, the person who will bear 100 percent of the cost of the coverage usually makes the purchase decision in the individual health insurance market. As Len M. Nichols explains in his contribution to this issue, the purchase decision for individual health insurance coverage is an economic decision based on the cost of the coverage and the purchaser's perception of the value received. In other words, people will do what they believe is in their own best interest based on the information they possess at that time. So changes in the laws governing individual health insurance coverage that significantly impact the price-value equation for specific segments in the individual health insurance market should be expected to result in changes in the number of persons in that segment who continue to purchase coverage. For example, changes that restrict the premiums an insurer can charge for younger versus older persons or lower-risk versus higher-risk persons will impact the number of persons who remain in each of these segments. And since these segments do not have the same health care cost, the overall cost of health care, and ultimately the price, will change for those who remain.

As an insurer who has had to implement changes as a result of individual reform in states other than these in the case studies, we spend a considerable amount of time attempting to understand the impact the changes will have on the purchase decision of individuals and on health care costs. This includes analyzing appropriate segments of our customer database and modeling expected outcomes. It also includes looking at what happened in other states where the changes have already occurred.

We do this is to develop appropriate implementation strategies that allow us to minimize adverse selection. We want to avoid adverse selection because when it occurs, it is usually the lower-risk/cost individuals who leave. As a result, we see less of a decline in our claims cost than in our revenue. Ultimately, if adverse selection occurs, additional price increases could be necessary and additional adverse selection could result. This can become a vicious cycle that we try to keep from...