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Analysis: Health Insurance Premium Inflation and How Government Caused the Problem

During the early 1990s, many states adopted regulations requiring health insurance companies to accept anyone who applied for coverage and charge everyone within each group the same rates regardless of their age, gender, lifestyle choices, or health status. These regulations, called guaranteed issue and community rating, were intended to force healthy people to subsidize less-healthy people, and to make it easier for people without health insurance to get back into the health insurance system.


Guaranteed Issue

Guaranteed issue (GI) laws forbid health insurance companies from denying coverage to anyone who applies for health insurance, including those individuals who apply for insurance after the onset of a chronic health condition or who have made lifestyle choices known to be unhealthy. Adopted to help end "job lock," GI has the unintended consequence of encouraging people to wait until they get sick before buying health insurance, which increases the number of uninsured and the premium costs for those who remain insured.


Community Rating

Pure community rating (CR) laws require health insurance companies to charge the same premium to everyone, regardless of age, sex, health history, lifestyle choices, and regional demographics. This one-size-fits-no-one rate results in charging young and healthy people higher premiums than their expected medical expenses would otherwise justify in order to subsidize premium costs for middle-aged, older, and less-healthy people. Under "modified" CR, some premium variations are allowed to compensate for certain risk characteristics such as age, sex, and family size, but not for others such as health status or lifestyle choices. There remains a component of premium inflation even with a modified approach.


While not an inclusive analysis of all states, eight states--Kentucky, Maine, Massachusetts, New Hampshire, New Jersey, New York, Vermont, and Washington--imposed community rating and guaranteed issue on health insurance companies that sell to individuals as well as to groups. Their decisions, controversial at the time, have had a major negative impact on the health insurance marketplaces in the states examined.

The following case studies document how community rating and guaranteed issue have destabilized and sometimes destroyed the private individual insurance markets in states that adopted such legislation.

These mandates are not merely poorly crafted laws: They represent fundamentally bankrupt ideas in what should be a voluntary, consumer-driven insurance marketplace. They have succeeded only in making individual insurance less available and more expensive than it otherwise would be; hundreds of thousands of people have been shut out of the health insurance market in these states.

A major consequence is in how premium inflation blocked access to affordable health insurance for millions of residents and forced hundreds of thousands to drop existing insurance and apply for benefits in a state Medicaid program — a safety-net originally intended for the genuinely indigent. Today, Medicaid is a major budget-buster in most states and is no longer financially sustainable.

With the exception of Kentucky and New Hampshire, where policymakers are currently attempting to restore the free market and individual choice, the states profiled here have done little to address the serious damage their 1990s' interventions have caused.

It remains to be seen whether elected officials in Maine, Massachusetts, New Jersey, New York, Vermont, and Washington State will seek to repair the damage caused by bad legislations and move in the direction of a more consumer-driven health care marketplace.

Quick Links

The New Jersey Car Wreck

Health Insurance Meltdown in Vermont

New York Health Insurance: "Consumers Are Outraged"

Kentucky Governor Fletcher Seeks Insurance Reform

Washington Hopes to Recover from Failed Reforms

Massachusetts Will Try Anything ... Except Markets

New Hampshire: Valiantly Seeking Market Reform

Maine Health Insurance: Out of the Frying Pan, into the Fire

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