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Individual health insurance market enters death spiral

More evidence the individual health insurance market segment is entering a death spiral comes from the Los Angeles Times today.  The newspaper reports Blue Shield of California is boosting premium rates in rapid succession, resulting in 193,000 policyholders getting increases averaging 30 to 35 percent as the result of three separate rate hikes since October.  Under a new increase effective March 1, thousands of insureds are could see rate hikes of as much as 59 percent, according to The Times.

The San Francisco-based nonprofit insurer blames rising health care costs and coverage mandates for the increases.  A Blue Shield spokesman says despite the higher rates, the insurer would still lose “tens of millions of dollars” on its individual business segment in 2011.

No surprise there.  When an insurance pool goes into a death spiral, only the highest risks remain in the pool, boosting losses and requiring even higher premiums to cover them. That chases away healthier people who find premiums increasingly unaffordable, leaving behind the least healthy individuals.  And so on goes the unvirtuous cycle.  In the insurance business, it’s called adverse selection and has a terminal prognosis unless reversed.

It’s unlikely the individual market will survive as a viable market segment before the federal Patient Protection and Affordable Care Act (PPACA) requires insurers to end medical underwriting and take all comers in 2014.  That provision combined with the PPACA’s requirement that everyone purchase coverage is aimed at restoring the pool by spreading risk among both healthy and the sick.

However, it appears for the individual market  — with California representing the nation’s largest state market where about eight percent of those 65 and under get their health coverage — the PPACA will come too late to save it.  Whether it the PPACA will provide the foundation for a new individual health insurance market to emerge in 2014 is also an open question if health care costs continue their rapid rise.

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  1. Robynne Whitaker
    January 6, 2011 at 1:36 AM

    Good points!!

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