HA415 Unit 4 Individual Market Analysis Example

One Insurer Leaves, Two Raise Premiums and Few Members Notice: An Insurance Market Analysis of a Composite Individual Market Rating Area, Following Pooling Rules, Adverse Selection and a Subsidy That Moves With the Benchmark

[Student Name]

Purdue University Global

HA415: Health Care Policy and Economics

Unit 4 Insurance Market Analysis

[Instructor Name]

[Date]

The rating area, the insurers and every figure are composite and bracketed; subsidy rules have changed over time and should be checked against current law for any real year.

The Market

The rating area has [38,000] people enrolled through the marketplace, about [85] percent of them receiving premium tax credits. Three insurers sold plans last year. [Insurer C] paid claims of about [118] percent of its premiums for two plan years and announced it would leave. [Insurers A and B] raised their silver plan premiums by [22] and [27] percent.

The Rules

1. Guaranteed issue: insurers must sell to anyone who applies during open enrollment.

2. Modified community rating: premiums may vary only by age, within limits, tobacco use, family size and geographic area, not by health status.

3. Essential health benefits: plans must cover a standard set of services.

4. Risk adjustment: insurers with healthier enrollees pay into a program that transfers money to insurers with sicker enrollees.

5. Premium tax credits: subsidized enrollees pay a set share of their income toward the benchmark plan, the second-lowest-cost silver plan in their area, and the credit covers the rest (26 U.S.C. § 36B, 2024).

Enrollee Behavior

Under guaranteed issue and community rating, a healthy person pays the same premium as a sick one of the same age. Healthy people who are not subsidized may decide the premium is not worth it and go without coverage, while sick people buy. When the pool's average health worsens, premiums rise, which pushes out more healthy people. This is adverse selection: when buyers know more about their risk than insurers can price, insurance markets may unravel or settle on coverage that suits only high-risk buyers (Rothschild & Stiglitz, 1976). Community rating protects sick enrollees from being priced out, but it also gives healthy unsubsidized enrollees a reason to leave, and that is the tension the market lives with.

Insurer Behavior

Insurers choose where to sell and at what price. [Insurer C] entered with low premiums to win members and attracted a pool that turned out sicker than expected. Risk adjustment transferred some money to it, but not enough to cover its losses. Leaving was a rational response. The remaining insurers now expect to take on [Insurer C]'s members, whose risk they cannot fully predict. Raising premiums protects them against that uncertainty.

Why Most Members Did Not Leave

The subsidy explains it. Because subsidized enrollees pay a fixed share of income toward the benchmark plan, a rise in the benchmark premium raises the credit, not the enrollee's payment. For [85] percent of the market, the premium increases were largely absorbed by the federal government. The [15] percent without subsidies bore the full increase. They are the group most likely to drop coverage, and if the healthiest of them leave, the pool becomes sicker and next year's premiums rise again.

A Worked Example

A subsidized [40]-year-old earning [$35,000] whose expected contribution is about [$150] a month pays about [$150] for the benchmark plan whether its premium is [$480] or [$600]; the credit rises from [$330] to [$450]. An unsubsidized [40]-year-old earning [$70,000] sees a [$120] monthly increase.

Competition and Choice

With two insurers instead of three, enrollees have fewer choices, and the remaining insurers face less pressure to keep premiums down. Research on employer plans found that when employers made employees pay the full difference between plans, adverse selection drove up the cost of the most generous plan and pushed employees toward cheaper ones, showing the trade-off between price competition and stable pools (Cutler & Reber, 1996).

What the Departing Insurer's Members Face

[Insurer C]'s [9,000] members must choose a new plan during open enrollment or be placed automatically in a similar plan from a remaining insurer, where the state's rules allow it. Those who do nothing risk a plan with a different provider network, which matters most to members in the middle of treatment. Navigators and brokers will carry much of the burden of explaining the change, and the state's outreach budget for the year should reflect that.

Implications for the State

The state could: seek a third insurer with a time-limited reinsurance program; strengthen outreach to enroll healthy people during open enrollment; or study whether a public option would add competition. Each has costs and uncertain effects.

Limits

Subsidy rules, including the share of income enrollees pay, have changed in recent years and may change again, which would alter the analysis for unsubsidized and middle-income enrollees.

Conclusion

The insurer exit and premium increases followed from the market's rules. Guaranteed issue and community rating create a risk of adverse selection, the departing insurer drew a sicker pool than it priced for, and the benchmark-linked subsidy shielded most enrollees from the increases, leaving the unsubsidized minority to carry the risk of another round.

References

Cutler, D. M., & Reber, S. J. (1996). Paying for health insurance: The tradeoff between competition and adverse selection (NBER Working Paper No. 5796). National Bureau of Economic Research. https://doi.org/10.3386/w5796

Rothschild, M., & Stiglitz, J. (1976). Equilibrium in competitive insurance markets: An essay on the economics of imperfect information. The Quarterly Journal of Economics, 90(4), 629-649. https://doi.org/10.2307/1885326

26 U.S.C. § 36B (2024). https://www.law.cornell.edu/uscode/text/26/36B