The Role of Gender in Individually Purchased Health Insurance
You Should Know:
Health insurance is designed to protect people against the financial costs they could incur should they need to access health care (whether preventive or unexpected care). The system is designed to work in a way that encourages people to access insurance before they know how much health care they will use. Tailoring premiums according to health risk and expected costs and utilization is an important tool for encouraging people to purchase insurance before they know how much health care they will use. But it is also a key approach health plans use for keeping insurance as affordable as possible for all customers. The vast majority of states have allowed different “rating factors,” like age, family size, geographic region, health status and gender, to be used to determine expected utilization of services, allowing health plans to set prices in a way that accurately reflects the amount of health care a person is expected to use.
Allowing health plans to use rating factors ensures that individuals pay the appropriate amount for their expected use of health care services and helps keep coverage as affordable as possible for all policyholders. Eliminating or limiting health plans’ ability to use individual rating factors would result in lower-use (and therefore lower-cost) individuals paying more than they otherwise would – these individuals would, in essence, be subsidizing the costs associated with higher-use (and higher-cost) individuals. For example, eliminating gender as a rating factor would mean that for younger individuals, men would subsidize women, and for older individuals, women would subsidize men. Importantly, this type of cross subsidization has been shown to lead lower-use individuals to opt out of coverage and to increase average rates for all covered individuals.
The Aetna Difference
The competitive nature of the marketplace demands that health plans deliver quality products and services at a good value to all customers, or risk losing cost-conscious customers. Aetna’s principal goal is to deliver the most valuable products to as many individuals as possible, irrespective of gender or other personal or demographic characteristics. While some would contend that current rating practices challenge women’s access to affordable health coverage, we have been highly successful at developing products that are appropriate and affordable to women. In fact, women make up the majority of our membership for most of our products in three of our five largest regional markets.
Questions and Answers:
Q: Would eliminating gender as a rating factor level out premium costs for men and women?
A: Though it may seem counterintuitive, eliminating gender rating would likely have the unintended consequence of raising average community rates for everyone. Individuals who voluntarily purchase insurance in the individual market typically pay the entire cost of coverage, making them more sensitive to price changes. If individuals who are less likely to use services are asked to subsidize the premiums of those who are more likely to use services, then purchasing coverage becomes less attractive for lower-use (and lower-cost) individuals. These individuals may choose not to purchase insurance altogether. As the lower-use individuals start to opt out of coverage, the market is left with one large pool of individuals who are, on average higher-use (and higher-cost) individuals. This in turn creates higher premiums for everyone left within the pool – both men and women. So, while eliminating gender rating might initially lower premiums for women at younger ages and men at older ages (at the expense of their counterparts), eventually, the community as a whole would likely experience higher individual premium costs.
Q: What has been the impact on the individual health insurance market in states that do not allow rating adjustments for age, gender, or health status?
A: There are a few states that limit or eliminate health plans’ ability to use age, gender, or health status in setting premium prices for people in the individual market. In states where none of these individual rating factors are allowed, individual premiums are based on the entire community’s (or geographic area’s) utilization, cost and risk profile, and all individuals – whether lower-use or higher-use – pay the same average rate associated with this community profile. In states where some individual rating factors are allowed, individuals will pay a little more or less than the average premium for their community profile, depending on what rating factors are allowed (e.g., gender, age, etc.). However, under each scenario, many individuals who know they will use fewer services will avoid obtaining individual coverage rather than pay an inflated individual premium. This dynamic drives up the average community rate for everyone.
Q: Don’t employers offer affordable coverage despite not using gender or other rating factors?
A: Yes. When an employer offers coverage, premiums typically are based on the aggregate of all participating employees’ health care costs and utilization. Those costs are then divided evenly among all participating policyholders, and as a result, the lower-use employees pay just as much as the higher-use employees. Coverage remains affordable for most, however, because employers normally subsidize most of the cost of premiums (84 percent for singles and 72 percent for families),1 making coverage attractive and affordable to even the lowest-use employees. Such premium subsidies do not exist in the individual market. It is also worth noting that most large employers generally attract and retain a wide and diverse array of people, a key dynamic for creating a balanced pool that leads to stable premium prices – and a feature that is uncharacteristic of most voluntary individual markets.
Moreover, people who obtain coverage through an employer enjoy tax benefits not available to individuals who purchase coverage in the in the individual market, which not only burdens those already in the individual market, but also produces an individual market that is smaller than it could be if tax incentives for purchasing coverage existed. Aetna supports equalizing the tax treatment of health insurance for those who obtain coverage through an employer and those who purchase it directly in the individual market by extending favorable tax treatment to both sets of individuals, without changing the favorable tax treatment employers currently receive for offering health benefits to their employees.
Q: How does gender rating fit into the broader discussion of health care reform?
A: The impact of gender on individual health insurance premiums is complex and is one of many factors we think about within the broader context of health care reform. Achieving universal access to affordable coverage is an important goal, and we believe the most sensible approach for achieving that goal is to require everyone to possess coverage. This requirement should promote the idea that when individuals maintain their insurance coverage, regardless of health status, they make insurance more affordable for everyone by contributing to the general pool. Importantly, government subsidies should be available to low-income individuals who truly cannot fully afford the cost of coverage. To be workable, subsidies for low-income individuals should be paid for through a broad-based funding mechanism.
An individual coverage requirement would also ensure that even if gender rating were eliminated, both lower-use and higher-use individuals would continue participating in the insurance pool, thereby countering some of the negative consequences associated with lower-use individuals exiting the market.
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Questions & Answers
1 “Employer Health Benefits: 2008 Annual Survey,” Kaiser Family Foundation and Health Research and Education Fund. Accessed online: http://ehbs.kff.org/images/abstract/7791.pdf