Lecture 7 - 9/23/99

Table 6.1

Self-(Adverse) Selection

• Why it arises
• Role of experience rating, risk classification, underwriting, structuring benefits
• Phelps diagrams 11.1 and 11.2
• Case in which insurer cannot risk classify
• Phelps diagram 11.3 for separating equilibrium (Rothschild & Stiglitz 1976)

State Strategies to Reduce the Growing Number of Persons Without Health Insurance

Frank Sloan, Christopher Conover, Mark Hall

Why So Many Uninsured?

• Medical underwriting
• High cost premiums (including role of tax subsidy, lack of economies of scale in individual coverage)
• "Crowding out" of private coverage

Reform Strategies

• Expansion of public coverage (probably not a reform as such)
• Policies aimed at increasing affordability of coverage
• Policies aimed at increasing availability of coverage
• Rate compression (community rating)

Roles of Community Rating

• Mandatory community rating.  What it is.
• Phelps diagram 11.4
• Summary
• Community rating in employee groups -- job lock

 Expansion of Public Coverage

• Effect of fedearal subsidy on states' Medicaid decisions
• Federal coverage mandates, such as for pregnant women and children up to 6
• Medicaid expenditures up to 4X 1987-1998, but number of uninsured up

Policies Aimed at Increasing Affordability of (Private) Coverage

• High risk pools for medically uninsurable
• Exceptions for small firm group and/or individuals from state-mandated benefits
• Medical savings accounts
• Purchasing cooperatives

Policies Aimed at Increasing Availability of Coverage

• Guaranteed issue
• Guaranteed renewability
• Limitations on pre-existing conditions
• Portability requirements
• Community rating (see rate compression below)

Rate Compression

• Pure community rating
• Rating bands
• Adjusted or modified community rating

Possible Unintended Consequences of Reform

• Public insurance may crowd out private insurance
• Subsidies to reduce premiums may be insufficient
• Restrictions on medical underwriting may cause increased premiums
• Community rating may encourage low-risk persons (groups) to drop coverage

Empirical Analysis

• Sloan/Conover 1998 analysis of probability of being uninsured using Current Population Survey data for adults 1989-94
• Hall 1999 interviews with agents, insurers, and regulators (1997-8) and literature review

Findings: Promoting Affordability

• Some crowiding out private coverage by Medicaid although overall probablility of having public or private coverage increased
• Only affordability policy that increased probability of being insured
• Failures: selective removal of benefit mandates; offering bare bones policies; employer tax credits and other means of subsidizing coverage
• Public purchasing cooperatives very slight positive effect: <10% of groups eligible