Dimensions: 6'' x 9'' 115 pages AEI Press  (Washington) Publication Date: October 1999 Hardcover ISBN: 0844741191 Price: $ 39.95 Add to Cart   Examination Copies

Uncertainty about health risks virtually requires that people have health insurance. But how is the cost of premiums determined? Should rates vary according to some indicators of risk? How much do premiums vary with risk? Should the young and healthy subsidize the old and unhealthy? Do they? Should public subsidies to insurance vary according to economic status and risk?

In Pooling Health Insurance Risks, Mark V. Pauly and Bradley Herring describe how insurance markets actually adjust premiums to risk and they evaluate various proposals for regulating how premiums should vary with risk. They also disprove some common misperceptions about the working of insurance markets--by questioning, for example, the conventional wisdom in insurance-market analysis that large-group insurance pools risk almost completely, while individual insurance sets premiums proportional to risk. They conclude that the problem with risk-pooling in unregulated private health-insurance markets in the United States is less serious than many people think. Relative to premiums paid by the healthy, the premiums actually paid by those with chronic conditions appear not to be significantly higher in either group or individual insurance.

Still, Pauly and Herring believe there are problems with private health insurance for the typical buyer of insurance. But those problems are much more attributable to the high administrative costs of individual and small-group insurance than to risk-rating. High-risk persons with low incomes who work for small firms have a problem obtaining insurance, but those with incomes at the average or above do not. Indeed, the greatest threat to the purchase of coverage by those who do not work for large companies may be the high administrative costs of insurance. The costs make coverage uneconomical for everyone, but for individuals with low incomes, who already find insurance an unattractive alternative because charity care is available, the costs also make coverage unaffordable.

Mark Pauly is the Bendheim Professor of Health Care Systems at the Wharton School at the University of Pennsylvania. Bradley Herring is a Ph.D. candidate at the Wharton School at the University of Pennsylvania.