The Principles of Pricing Health Insurance
America’s Health Insurance Plans (AHIP)
Equity
Some insureds make more claims than others, and consequently the cost of providing coverage is different for different insureds. The premium amount each insured pays must reflect the expected cost of providing coverage to that insured. Why? Suppose an insurer charged some insureds less than the expected cost of providing coverage to them. That insurer would have to charge other insureds an extra amount to make up for those paying less than cost. Those insureds paying extra would go to other insurers that would not charge them extra. The original insurer would be left only with insureds paying less than costs and could go out of business.
http://www.ahiphiwire.org/HealthInsurance/LearningCenter/Feature.aspx?doc_id=159743
Comment:
By Don McCanne, MD
What is “equity,” as the term would apply to our health care system?
The American Heritage Dictionary defines equity as “something that is just, impartial, and fair.” Merriam-Webster defines it as “something that is equitable,” and equitable as “dealing fairly and equally with all concerned.”
In an article from the Journal of Epidemiology and Community Health (2003;57:254-258), P. Braveman and S. Gruskin define equity in health as “the absence of systematic disparities in health (or in the major social determinants of health) between groups with different levels of underlying social advantage/disadvantage — that is, wealth, power, or prestige.”
And how does the private insurance industry define equity in the pricing of health insurance premiums? The premium that “EACH insured pays must reflect the expected cost of providing coverage to THAT insured,” but not “an extra amount to make up for those paying less than cost.”
So let’s see how that would work in a system that finances health care for everyone. The 80 percent of individuals (243 million people) who use 20 percent of our national health expenditures ($479 billion) would each be responsible for $1970 in an equitable system, according to the insurance industry’s version. The other 20 percent of individuals (61 million people) who use 80 percent of our national health expenditures ($1,915 billion) would each be responsible for $31,400 in AHIP’s version of equity.
So the private insurance industry, in order to establish equity, would set their premiums based on health care costs of $1970 each (plus administrative costs and profits, less cost-sharing) for four-fifths of us. But what about the one-fifth with health care costs averaging $31,400 each? They simply avoid that market.
Thus the insurance industry’s definition of equity is making premiums fair by excluding the costs of those needing health care, which equates with excluding them from coverage under their plans. Those with high costs can use their wealth, power, or prestige to obtain care. But what about those without? Doesn’t that stretch the definition of equity to well past the breaking point?
