Last week, the Maine Supreme Judicial Court heard oral arguments concerning the ability of Anthem Health Plans of Maine to increase insurance premium rates for individual and nongroup (e.g., nonemployer) health insurance policies. Anthem is appealing an earlier Superior Court decision that upheld the state’s rejection of Anthem’s proposed rate increase for the current annual period. In rejecting Anthem’s proposal, the Maine Bureau of Insurance cut Anthem’s proposed rate increase by nearly half.
There is a central issue that underlies this dispute. That issue is the nature of the cross-subsidization of individual health insurance premiums that takes place in Maine and how it contributes to the affordability and availability of health insurance coverage.
The current dispute between Anthem and the bureau is a classic one over the balance between the affordability and availability of insurance that many believe to be a necessity. Affordability refers to the extent to which consumers are able to pay the premiums charged for coverage. Availability refers to the amount of insurance offered by insurance companies when it can be sold at premiums that at least cover the insurers’ claims costs and expenses. Low claims costs are the single largest contributing factor to insurance being both affordable and available. As claims costs increase, insurance should become less affordable as premium rates increase to reflect larger expected future claims payments. If society determines that the insurance should be affordable, subsidies of some kind must exist to help those who can no longer afford it. The kind of subsidies used can significantly affect how well the private insurance market functions.
In 1993, the Maine Legislature passed a modified community rating law that placed severe limitations on the ability of health insurance companies to charge risk-adjusted premiums for individual health insurance policies. That is, health insurance companies are not able to charge premium rates commensurate with the health risks of policyholders. In addition, health insurance companies are required to accept all applicants regardless of health risks, a practice called guaranteed issue. The community rating and guaranteed issue law essentially created a subsidy through the insurance pricing mechanism whereby the insurance premiums for the least healthy members of the individual health insurance pool are subsidized by the healthier members of that pool.
A problem with such a subsidy is that over time the healthy members of the insurance pool paying a community rate that exceeds what they should be paying on a risk-adjusted basis choose to no longer participate in the pool. The least healthy members remaining in the insurance pool continue to generate claims costs and drive up individual health insurance premiums, making it even more unlikely that healthier individuals return to the market. As this process, known as adverse selection, plays out, individual health insurance becomes less affordable for more and more consumers. Also, individual health insurance becomes less available as claims costs climb, providing a partial explanation for Anthem being the only insurance company participating in Maine’s individual health insurance market.
The unaffordability of individual health insurance created by Maine’s adverse selection problem brings us back to the current dispute between Anthem and the bureau. The bureau’s attempt to achieve some semblance of health insurance affordability is through suppression of Anthem’s premium rate increase. While suppression makes the health insurance premiums marginally more affordable in the short run, it masks the problem of growing claims costs that are reflected in otherwise higher premium levels. It also removes incentives for society to address the underlying problems that have caused claims costs to rise. To the extent that insurers believe the rate suppression will prevent them from earning income that sufficiently covers future claims costs and expenses, insurance availability also will continue to suffer.
This is not an indictment of health insurance premium subsidies. There are, however, better ways to design them. If subsidies for individual health insurance are deemed worthwhile, then society would be better served providing them through a scheme other than insurance rate regulation, such as through our general tax system. It would more directly benefit those who cannot afford insurance because of lack of means rather than increased risk. As it is, there are likely many healthy, low-income policyholders who should be the recipients of health insurance subsidies but who are now subsidizing the health insurance costs for relatively unhealthy, higher-income individuals who could otherwise afford the coverage. Disconnecting subsidies from the underwriting risk also would reduce potential availability problems that arise from inadequate insurance pricing vis-a-vis the risks being insured.
Dr. Dana Kerr, CPCU, ARM, is an assistant professor in the University of Southern Maine’s School of Business, where he teaches courses in risk management and insurance. He previously served for nearly a decade in the risk management and insurance industry and has published extensively in the field.