Uwe E. Reinhardt, PhD, is the James Madison professor of political economy and of economics at Princeton University, where he teaches health economics, comparative health systems, general microeconomics, and financial management. Dr Reinhardt is also the codirector of the Griswold Center for Economic Policy Studies at Princeton University. The bulk of his research has been focused on health economics and policy, both in the United States and abroad. He is a member of the Health and Medicine Division of the National Academies of Sciences, Engineering, and Medicine (formerly the Institute of Medicine) and served on its Governing Council in the 1980s. He is past president of AcademyHealth, the Foundation for Health Services Research, and the International Health Economics Association. He is also a member of JAMA‘s editorial board.
The contributions individuals make out of their paychecks toward employer-sponsored health insurance are community rated, which means that they are the same for all employees of the firm, regardless of their health status and even age. So healthy employees are forced to subsidize less healthy colleagues through the premiums they pay. With the ACA, the Obama administration sought to provide the same deal for US individuals purchasing health insurance in the individual market.
For health insurers, however, this approach can be called an unnatural act, because it forces them knowingly to issue policies to very ill people at premiums evidently far below these individuals’ likely claims on the insurer’s overall risk pool. Actuaries and health policy analysts understand that this approach can work only if all individuals, healthy and ill, are mandated to purchase coverage for a defined, basic package of benefits, at the community-rated premium—thereby forcing young and healthy individuals to subsidize with their premiums the health care of individuals with medical conditions in the insurer’s risk pool.
However, for purely political reasons, the ACA mandate for all person in the United States to be insured was rather weak, leading many younger or healthier individuals simply to forgo purchasing health insurance and paying the relatively low fines for doing so. Over time, this practice naturally will drive up the community-rated premiums, inducing even greater numbers of young and healthy individuals to forgo insurance coverage, leaving private insurers with ever-more expensive risk pools.
The result of this adverse risk selection (the scenario in which sicker-than-average people purchase insurance while young and healthy people do not) has been that some private health insurers underpriced their policies on the ACA exchanges, perhaps to gain market share early on or because they simply did not anticipate quite the adverse risk selection that occurred.
HENRY KOTULA 