While most purchases the average American makes involves a level of risk, health care is a risk that is very hard to predict and is also one that can be impossible to afford, but often necessary. Third party payers in the form of insurance companies are utilized to help spread this risk, and thus the cost of healthcare, throughout a larger population, often spread across several states. The insurance company is not paying for the health care costs, but rather collects a premium as entry into this risk pool. Thus when an adverse situation occurs, everyone at a lower cost in the risk pool shares the burden. What must be kept in mind is that these insurance companies operate just as any other business. They must offer insurance plans at a cost that is profit maximizing. If their healthier consumer pool decreases, they must increase their rates to remain in business. If the risk pool becomes primarily high-risk consumers, sharing the burden becomes increasingly more difficult.
In an article published by the Chicago Tribune, journalist Peter Frost commented on the recent issues involving health insurance rate increases for small insurance companies. With the onset of a new year, and with the economy still experiencing stagnant growth, many small business insurance companies have been losing money. In order to remain in the game, they have had to increase their rates between 12.9 and 23.2 percent. Due to the implications in the Affordable Care Act, passed in 2010, when an insurance company raises their premium rates above 10%, the Department of Health and Human Services has a right to step in to determine if these increases are justified. While Health and Human Services cannot restrict these increases, they can make the public aware of them, potentially hurting the appeal of these companies to consumers. This type of intervention can be related to an attempt to fix what is known as a market failure. The government is attempting to give the consumer more information to make more informed decisions. However, this strategy also has the risk of promoting potential monopolies or oligopolies. If the small insurance companies have no choice but to raise rates in order to stay alive, but the government insists on “public shaming” when this occurs, consumers are likely to switch their insurance plans to a larger company that has the ability to reduce their rates because the risk pool is much larger. Smaller companies can be sunk with just one large claim, especially if their customer pools continue to decrease.
This poses the dilemma of how an insurance company should act in the current and future markets. On one hand these companies need to remain competitive in order to turn a profit and to be able to afford the risk they currently bear among their consumers. On the other, government intervention make the insurance company feel pressure to act in a social insurance type of manner. It is likely that within the next few years, a majority of these smaller insurance companies will need to align themselves with the protocols of health insurance exchanges and continue to appeal to small business owners within their area. Ultimately the current climate in healthcare is treacherous for small insurers and undoubtedly will require new strategy on their end in order to remain in the market at all.
Works Cited
Frost, P. (2012, January 22). Health Reform Law Has Small Insurers on Edge. Retrieved January 24, 2012, from Chicago Tribune: http://www.chicagotribune.com/business/ct-biz-0122-insurance-reform-20120122,0,204779,print.story
Kaiser Commission on Medicaid and the Uninsured . (2012, January 18). Establishing Health Insurance Exchanges: An Update on State Efforts. Retrieved February 10, 2012, from Kaiser Family Foundation: http://www.kff.org/healthreform/8213.cfm
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