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Unformatted text preview: The Effects of Rate Regulation on Demand for Supplemental Health Insurance By M. K ATE B UNDORF AND K OSALI I. S IMON * Many developed countries have a market for private health insurance that supplements pub- licly funded, universal coverage. Government regulation of the supplemental market, includ- ing the extent to which insurers are permitted to adjust premiums based on individual character- istics such as age, sex, and health status, varies across countries (OECD, 2004). Proponents of rate regulation argue that the resulting cross- subsidization from low to high risks is neces- sary to maintain the affordability of coverage for high risks. Economic theory, however, raises the concern that the inability to adjust premiums to reflect individual risk could create adverse selection by driving low risks from the market (Michael Rothschild and Joseph Stiglitz, 1976). Little empirical evidence exists to deter- mine the optimal role of rate regulation in pri- vate, supplemental insurance markets. Existing studies of the consequences of rating restric- tions focus on markets for primary health insur- ance and find that these laws have had surprisingly little effect on overall rates of cov- erage (Simon, 2004). In this paper, we study the effects of rate regulation in supplemental health insurance markets by examining the market for individu- ally purchased coverage that supplements Medicare among the elderly in the United States. While the publicly financed Medicare program provides nearly universal coverage of a standard set of benefits for those 65 and over, beneficiaries are exposed to significant financial risk due to the cost sharing associated with covered services and a lack of coverage for some important services. The vast majority of Medicare beneficiaries obtain supplemental coverage through a complex system of publicly and privately funded sources. State Medicaid programs provide publicly financed supplemen- tal coverage for low-income and disabled ben- eficiaries, and employers provide highly subsidized retiree supplemental health insur- ance for other beneficiaries, but the remainder rely on highly regulated, private insurance mar- kets. Medicare’s Part C managed care plans are a voluntary, private replacement for traditional Medicare, while “Medigap” coverage is a pri- vate policy, bought by about 30 percent of Medicare beneficiaries, that provides only sup- plemental benefits (Franklin J. Eppig and George S. Chulis, 1997). Our study examines the effects of regulations limiting the informa- tion on individual characteristics insurers can use in setting premiums for Medigap coverage. I. Premium Rating Restrictions in Supplemental Health Insurance Markets The Medigap market is regulated at both the federal and state levels. At the federal level, the 1990 Omnibus Reconciliation Act (OBRA) lim- ited Medigap policies to ten standardized plans....
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- Spring '08
- Economics, community rating, high risks