Improving the Individual Health Insurance Market

People purchasing health insurance in the individual market face double-jeopardy: Unless they are eligible for the self-employment tax deduction, they must pay for coverage with after-tax dollars, and they also face the full plethora of state insurance mandates and regulations. Despite these encumbrances, the individual market functions much better than conventional wisdom assumes. Lifting burdens on the individual market - rather than adding new ones - could enable it to become an important base for expanded health coverage.

Policy changes that are needed include allowing the purchase of health insurance across state lines to create a more competitive market, strengthened guaranteed renewal protections, and new purchasing arrangements to help those with pre-existing conditions obtain coverage. In addition, new tax subsidies to help the uninsured buy coverage could, if properly structured, power-boost the purchase of more affordable, portable coverage.

A reality test: Before policymakers attempt to fix the individual health insurance market, it is important to get a clearer picture of what is actually happening in this sector where an estimated six percent of privately-insured people obtain coverage. Prevailing wisdom holds that "there is agreement that the market for buying health insurance as an individual doesn't work well," and some argue that this market is hopelessly expensive and dysfunctional.

However, actual research demonstrates otherwise. Mark Pauly and Brad Herring1 looked not just at hypotheticals, as some surveys have done, but at actual people shopping for and purchasing insurance in the individual market. They find there is more pooling of risk in the individual market than commonly believed: "Analysis of new data.shows that actual premiums paid for individual insurance are much less than proportional to risk, and risk levels have a small effect on obtaining coverage." They also found that the premiums that higher-risk people actually paid were only, on average, about 1.6 times those of lower-risk people.

Caution ahead: Policymakers should be very cautious about adding more regulatory burdens to this market. We can look at the evidence in states that have tried various levels of regulation of their health insurance markets, especially with community rating and guaranteed issue, to see the impact. Efforts by state legislators to "fix" the individual market often backfire.

Community rating, for example, means that lower-risk purchasers pay a higher price for insurance than people with greater risks. This is a formula for adverse selection, especially in a guaranteed issue environment. People have an incentive to wait to purchase health insurance until they need medical services rather than pay an artificially high price for continuous coverage they may not use. This leads to an increase in the number of people without health insurance, the opposite of the desired result. Pauly finds that, "The effects of adverse selection in nongroup markets are most severe in states with community rating and guaranteed-issue rules for the individual market." Others argue that these problems could be mitigated if an individual mandate for purchasing health insurance were to be imposed, but that would be a very heavy political lift in the current environment.

Three recommendations to improve the individual health insurance market:

A national market for health insurance: Giving people more options to purchase coverage across state lines would generate a much more competitive market so people are not trapped by the expensive mandates and regulations in their states.

University of Minnesota economist Steve Parente and colleagues showed2 that opening up competition among the states for health insurance would mean an additional 12 million people could get health insurance without any new spending by the federal government (an important consideration in the current fiscal climate). This would allow people trapped in states with community rating, guaranteed issue, and excessive mandates to shop for policies in other states where premiums are more affordable and policy options are more flexible. Some may select a high-deductible plan, but people should have a range of options to find the ones that best suit their needs.

Critics charge, however, that this would open up the Wild West of unregulated health insurance where people would be faced with policies that don't cover even the most basic medical needs. But every state regulates its health insurance markets to assure, not only the solvency of companies offering the coverage, but that the policies actually offer responsible insurance coverage.

Allowing interstate commerce in health insurance would lead to larger pools and more competition among companies offering coverage, spreading risk and reducing costs. Health insurance companies are worried about disrupting their current books of business if healthy individuals can opt out of their current pools to find more affordable coverage elsewhere. But bringing millions more people into the market will expand their pools. Further, new programs to give those with higher-health risks better options for coverage will further stabilize the market.

Guaranteed renewal protections: After the initial purchase, almost all individual insurance is "guaranteed renewable" at class-average rates. That means that insurers cannot increase premiums differentially based on health risk for people seeking to renew their policies. Pauly and others have shown that people in individual markets are largely protected against future reclassification risk. Guaranteed renewability stabilizes markets by providing an incentive for people to purchase health insurance when they are healthy and to maintain continuous coverage. This HIPAA protection should remain in force and be strengthened where necessary.

Expanding access: At least two groups have developed plans that would enable people with pre-existing conditions to enter the insurance market and obtain coverage at affordable rates. America's Health Insurance Plans3 and the National Association of Health Underwriters4 have developed plans that would allow more people to obtain private insurance by cross-sharing risk among companies participating in a specified market. In addition, federal funds could supplement state funds to create more functional high risk pools in the states. When properly structured, these risk pools, coupled with a mechanism for guaranteed access to insurance, could produce a more stable health insurance market.

Some people will need special assistance because their health risks are above normal, their incomes are low, or both. A guaranteed access program also could be a mechanism to provide additional subsidies to them.

The individual market for health insurance is more functional than commonly believed. The challenge for policymakers is not to repeat the mistakes of states that have been overly aggressive in regulating their individual insurance markets. Rather, they should allow more flexibility, more competition, and sensible protections. This means allowing people to buy coverage across state lines, allowing all policies to be guaranteed renewable at reasonable rates, and creating new guaranteed access programs. Combine this with new subsidies to individuals for the purchase of health insurance in the form of refundable tax credits and we could open a new interstate highway to expand access to health insurance in the individual market.

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Complacency over wrongly-dosed children at an Australian public hospital

Health officials and the State Government have again been forced to admit potentially harmful mistakes in the treatment of patients - this time involving children. Eleven children suffering cancer were overdosed with chemotherapy, a failure caused by human and computer error and perpetuated for at least three years. The fault was only picked up by a "nervous" new staff member who double checked a reading at the Women's and Children's Hospital.

The systematic failure is the second of its kind revealed this year, and comes amid doctors' claims that South Australia's health system is dangerously overburdened and understaffed.

The latest bungle, discovered in October, was only revealed yesterday, the day after State Parliament rose for the year, raising questions of a cover-up. Eleven of 72 patients treated at the WCH since 1998 received too much of the chemotherapy drug etoposide phosphate. The children were aged from one to 15 years, and the average overdose was 13.6 per cent. One child has since died from cancer and one family is yet to be contacted about the overdose.

'An independent review by Sydney Children's Hospital paediatric oncologist Associate Professor Marcus Vowels found that although it was "unlikely", it was an "open question" whether the overdose could increase the risk of secondary cancers.

In an incident earlier this year, 869 Royal Adelaide Hospital cancer patients were underdosed with radiotherapy, which could have cut five lives short. Staffing problems were found to be the main contributing factor to that calibration error. The latest mistake has prompted Opposition calls for State Health Minister John Hill to be sacked.

Etoposide phosphate is an alternative form of the more common etoposide. When it was first used at the WCH in 1998, a computer program adjusted the dosage to take into account the fact it was a slightly different drug. In 2005, manual adjustments were introduced as well, so the dose was adjusted twice, giving a higher-than-planned dose.

"Over the . . . years from 1998 (to) 2004, `corporate knowledge' in the Oncology Unit was lost, with three senior members of staff leaving senior roles," Professor Vowels reported. "Oncology staff continued using etoposide phosphate and dose calculations were made by the oncologists in the clinic, not being aware that a computer program was already performing this task."

WCH chief executive officer Gail Mondy said a "very novice staff member" who was "very nervous about the system" double checked the calculations at the end of October. Ms Mondy was notified on November 17 and an investigation began on November 25. SA Health chief executive officer Tony Sherbon said the error would have been discovered anyway "in due course", and the fact that it was discovered in a random check showed the system was working. He said the mistake was "a team error".

Cancer Voices SA executive Ashleigh Moore was one of the people who was underdosed at the RAH. He said the system must be fixed "so this never, never happens again". "You expect to get what your clinician has planned. You don't expect to get less or more than that," he said.

Opposition health spokeswoman Vickie Chapman said Mr Hill and Mr Sherbon should be sacked for covering up a major scandal. "It is disgraceful an investigation into the incorrect treatment of 11 children in a public hospital was conducted while the Parliament was sitting and the Government failed to inform South Australians," she said. "Children receiving incorrect treatment at the WCH is bad enough. "To then conceal the matter is unforgivable."

Mr Hill said that when he heard about the mistake two weeks ago, he ordered an investigation and review. He has now referred the matter to the SA Safety and Quality Council. "We have an excellent health care system in SA. It's one of the best in the world," he said. "We've seen two errors . . . one in relation to radiotherapy and one in relation to chemotherapy. They're not related in any way at all. "The only thing that makes them noticeable is that awareness of the errors occurred within a few months, but that demonstrates a system that is open about it. We've made no attempt to hide it." He said telling the public about the investigation before it was complete would have panicked many and "would have been an appalling thing to do".

Mr Hill, Mr Sherbon, and Ms Mondy said no parents should be concerned, but if anyone wanted further information they should phone the WCH Chemotherapy Info Line on 8161 6180.

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