Health Insurance (Pre-ACA)

Before the Affordable Care Act, there were three types of private health insurance markets, which were regulated by the state. There were the large groups, small groups, and individuals.

  • Large Groups – Most large employers do not buy their health insurance, they are self-insured and employ insurance companies to be their administrators.
  • Small Groups – these range from 2 to 50 or 50-99 individuals.
  • Individuals

The largest insurer of the small and individual group market insures more than of those two markets even though there are thousands of insurance companies.

[the_ad id=”8945″]

health insurance

Types of Health Insurance Coverage (non-elderly 2012)

Employer Sponsored58.4%
Medicare, Veterans Administration, Other4.9%

Why is the premium higher for small/individual groups than for the large groups?

  • Premiums of $200-$1000 for small and individual coverage are common even with high deductibles. They also have limited coverage.
  • It is very common for people to be denied coverage or excluded from some coverage.
  • Premiums have two costs – expected costs and a loading fee
  • Loading fee – administrative and marketing costs + payment for bearing risk
  • Economies of scale does play a part in lower premiums for large groups

What are the risks?

[the_ad id=”8945″]

  • Spending could be higher than predicted.
  • Adverse selection – those who want health insurance are likely to need it the most (costly patients for insurance companies). In the individual and small group market, a larger than expected number of people with extremely high costs, share a disproportionate amount of cost.

How did insurance companies reduce the risk of adverse selection pre-ACA?

  • Market segmentation – specialize in small employers or individuals (sell to a target group – far less likely to be sick)
  • Medical underwriting – charge more for people whose medical history correlated with high costs (like old people)
  • Deny coverage
  • Exclusion of coverage for pre-existing condition (like don’t cover some diseases)
  • Use different benefits and cost sharing – attract people who would have lower expenses and discourage people with high costs. For example: Offering a health club benefit is attractive to people who consider themselves healthy versus someone who is old and overweight (discourages them)

Before the ACA, who were the uninsured?

[the_ad id=”8945″]

  • 50 million Americans
  • 1 in 6 people under 65
  • 28% had household incomes above the median household income of $50,000. 90% of the uninsured had incomes less than 400% of the Federal Poverty Level. These households will get premium subsidies under the ACA or Medicaid coverage depending on their incomes.
  • 75% younger than 45 years of age (15% of them were children)
  • Half of them had incomes below $30,000

There has been a decline in employer-sponsored health insurance:

  • Premiums have doubled between 2002 and 2012
  • Premiums for small employers have increased by more than double
You might also like