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As contemplated in the Senate and House health care bills, the rules around pricing for individual health plans is very restrictive and will result in insurers exiting the market and/or dramatic price increases. Starting in 2014, health plans will no longer be able to adjust prices for health status and gender and will have limited ability to charge different prices depending on a person’s age. We don’t need the big Accenture or Towers Perrin report to predict what will happen. New York state introduced similar rules in 1993: no age, gender, or health status price adjustments. All health insurers exited the market, and with small exceptions, the only products left are required to be offered by health plans if they participate in the group market. A typical individual PPO plan in New York City costs $1200 per month. A family plan costs over $4000 per month. Thirty miles away in Connecticut, an individual plan could be available for as little as $100 to $150 per month.

What happened? People seeking health insurance want a competitively priced product that fairly reflects the cost of insuring against a future medical illness or injury. When you ask a ten year old healthy boy to pay into a pool that reflects the cost of much older (and more expensive) people, that might also be smokers with illnesses, the boy will conclude that the price is too high, and he may forego insurance. When a young healthy person opts out of the pool, prices go up for everyone and it begins a cycle of “adverse selection” where only the people that are in fact ill will purchase the insurance.

Congress has proposed a $750 penalty for people not purchasing health insurance. The likely effect is for people to self insure for routine services, and pay the annual penalty. If in fact they have a major illness, they can then go buy health “insurance” which will no longer exclude pre-exiting conditions.

Interestingly, these pricing rules do work in the employer, or group marketplace. This is due to the employer subsidy which is typically 50-80% of the cost of an individual health policy. The employee cost is then usually viewed as fair by the employee, regardless of age or health status.

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