Premium Variation and Insurance Demand in the Individual Insurance Market

What effect does prior risk have on the premiums faced by purchasers in the non-group health insurance market? Researchers at the University of Pennsylvania’s Wharton School analyzed the extent to which premiums paid for non-group health insurance vary with the purchaser’s prior risk, and how this relationship varies with income, family size, presence or absence of strong individual insurance product community rating laws, managed care competition and penetration, and provider competition. Using the Community Tracking Study Household Survey, along with data from the Medical Expenditure Panel Survey (MEPS), the Area Resource File and the InterStudy Survey, they examined whether purchases in the individual market were affected by these factors differently than purchases in the group market. Part of this analysis involved constructing measures for each individual’s projected health care expenses, based on known predictors of health spending. The study’s objectives were to: 1) look at the extent to which non-group premiums vary with individual characteristics such as age, gender, family size, and poor health status; 2) examine the overall variation in non-group premiums for various population subgroups; 3) assess how local market conditions or community rating laws affect the variation of risk selection along the premium scale; 4) examine how much variation exists in benefit design and other plan characteristics within the non-group market; and 5) examine if otherwise similar families choose differently from a choice of non-group plans than from a choice of group plans.