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The Individual Insurance Market

Dynamics of Individual Market Reform


Len Nichols, Ph.D., Principal Research Associate, The Urban Institute, Health Policy Research Center, Washington, DC.

This session examined the critical issues surrounding the regulation of health insurance, including why health insurance is regulated, how it is regulated, how insurers respond to regulation, and what research can tell us about the net effects of regulation on the market and levels of coverage.

Len Nichols explained that the fundamental purpose of insurance regulation is to force more pooling than would occur naturally in an unregulated market. Specific regulations can be seen as reactions to insurer behaviors: Guaranteed issue is a response to refusal to sell, benefit mandates are a reaction to benefit exclusions, and premium restrictions are a reaction to aggressive underwriting and rating practices.

After summarizing the Federal and State regulations implemented to date, Dr. Nichols discussed the effects that regulation would have on a market in theory. Regulation will:

  • Force risk-pooling beyond the laissez faire level.
  • Increase premiums for low-risk individuals.
  • Decrease premiums and increase offers of coverage for high-risk individuals.
  • Raise the average premium.

Using simulations based on National Medical Expenditure Survey data, Dr. Nichols then demonstrated how much the average premium might increase under various rate bands.

Dr. Nichols also reviewed the research to date examining the effects of regulation on insurance coverage and pointed out the methodological challenges of isolating marginal effects when baselines differ and many changes occur simultaneously. Several studies have found that individual reforms appear to reduce coverage overall, while high-risk pools may increase private coverage and decrease group coverage. He speculated that such results suggest that people helped by reform are higher risk and fewer in number than people who are adversely affected.


Blumberg LJ, Nichols LM. First, Do No Harm: Developing Health Insurance Market Reform Packages. Health Aff 1996 Fall;15(3):35-53.

Laudicina SS, Yerby JY, Pardo K. State Individual Market Insurance Reform Laws. State Legislative Health Care and Insurance Issues: 1998 Survey of Plans. Blue Cross and Blue Shield Association. 1998 Dec.

Nichols LM. Regulating Non-Group Health Insurance Markets: What Have We Learned So Far? Conference draft paper presented at The Evolution of the Individual Insurance Market: Now and in the Future, sponsored by The Robert Wood Johnson Foundation. 1999 Jan 20; Washington, DC.

Nichols LM. A Different Kind of 'New Federalism'? The Health Insurance Portability And Accountability Act Of 1996. Health Aff 1998 May/Jun;17(3):25-42.

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