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It’s time for Congress to actually fix the individual health insurance market

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ObamaCare didn’t create the individual insurance market — that existed long before the Affordable Care Act (ACA) was enacted. ObamaCare tried and failed to fix-it with intrusive government mandates and bureaucracy.

{mosads}Individual insurance has long suffered from habitual market failure because it is not a true market. Buyers of individual health insurance defy the law of averages and know more about their cost than do the sellers. The Kaiser Family Foundation reported that 7-percent of the total U.S. population had individual health insurance coverage compared to 49-percent covered by employer group health plans in 2015.


In her rigorous 2006 examination of why more middle-class people are uninsured, entitled Reinsuring Health, Harvard economist Katherine Swartz outlined an effective, permanent federal reinsurance plan for the individual market — insurance for insurers.

The federal program she outlines would cover the costs of individuals whose medical expenses place them in the top 1 percent of health claims. These reinsured individuals could be those with specified conditions but structured to continue making the original insurer responsible for managing costs.

Swartz notes that this group accounts for about 28-percent of all medical expenses and the reinsurance program would induce insurers to lower their premiums by the percent of expense the reinsurance covers.

Lower premiums, she notes, would make health insurance more affordable to younger, healthier adults, who are newly entering the workforce. These same newly employed are currently forced under the ACA to purchase unaffordable coverage or face tax penalties.

Claims of health-care providers are what drive up health insurance premiums.

These claims rise fast with the cost of healthcare that consists of millions of daily charges from hospitals and physicians. These hospital and physician costs account for 85-percent of each dollar of rising insurance premiums under the ACA’s medical loss ratio rules.

These costs run unabated under the ACA, the AHCA, the BCRA and the alternative proposals by Republicans and Democrats alike. Existing regulations and benefit mandates under the ACA are also cost contributors.

The AHRQ has estimated that 5 percent of those insured account for 50 percent of the health claims costs. Reinsurance would spread extreme risk more broadly by taking all or a portion of the 5 percent of high risk claims and pay for them separately, leaving less shared expense for the remaining 95-percent of insureds in this market.

Swartz believes that federal reinsurance would directly address insurers’ fears of adverse selection, and with the highest costs shifted to the federal reinsurer then affordability could replace onerous government mandates and penalties with fairer and more attractive pricing of private individual insurance.

This would not be a bailout of health insurers. Federal funding of reinsurance would be the equivalent subsidy for the individual insurance market as the income exclusion is for those in the employer group market.

As Swartz notes employment is shifting to small firms and self-employed independent contractors who all depend on individual insurance. Federal reinsurance would radically transform the individual insurance market, while leaving private insurance and consumer choice in place.

With a permanent federal reinsurance program for the individual market there would be no need for a forced march back to the ACA’s punitive mandate and penalties. A continuous coverage requirement may be a necessary backstop. HIPAA in 1996 established continuous coverage requirements to build on.

Individuals could shop for and purchase affordable health coverage directly from competing insurers, and it would encourage insurers to participate in an individual market where medical underwriting is no longer allowed.

The prohibition on medical underwriting was adopted in the ACA, and this prohibition continues as national policy under the AHCA, the BCRA, and alternative proposals. As a result the federal reinsurance program to fix this market must also be a federal program to implement this national policy.

Federal reinsurance would be a public partner that strengthens the ability of the private market to meet the needs of millions of people who lack access to employer-sponsored group insurance. Insurers would no longer fear the unexpected adverse selection, eliminating the need for 6-month waiting periods or screening for and excluding pre-existing conditions otherwise required for a functioning individual health insurance market.

It is a bipartisan solution. Rep. Gary Palmer’s (R-Ala.) thoughtful and courageous March 23, 2017 proposal entitled a Federal Invisible High Risk Pool would have created a federal reinsurance mechanism. Sen. Tom Carper (D-Del.) has introduced the Individual Health Insurance Marketplace Improvement Act.

The Palmer amendment was eventually adopted into the AHCA, but the governing details were so diluted that the program basically became a $15 billion black hole.

Under the original Palmer amendment, insurers marketing medical insurance in the individual market would pay a reinsurance premium established by HHS. This approach, however, would prevent lowering premiums by the reinsurance premium amount.

The Palmer amendment provided reinsurance for designated conditions and required coverage to include care management. Provider claims were compensated at Medicare payment rates – yes, finally an element of real cost control for hospital and doctor charges that drive the claims that drive up premiums.

The fundamental dynamic of the current individual insurance market requires a more permanent solution. Federal reinsurance would provide that necessary long-term sustainability.

Republicans, this is your moment. Don’t blow it.

William G. Schiffbauer is a health insurance law expert and former staffer for Sen. J. James Exon (D-Neb.)

Tags Actuarial science American Health Care Act Finance Healthcare reform in the United States Insurance Internal Revenue Code Internal Revenue Service Medical underwriting Money Patient Protection and Affordable Care Act Reinsurance Tom Carper Types of insurance

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