Health Insurance.

• Author: Van Doren, Peter

* "Long-Term Health Insurance: Theory Meets Evidence," by Juan Pablo Atal, Hanming Fang, Martin Karlsson, and Nicolas R. Ziebarth. March 2020. NBER #26870.

Support for the Affordable Care Act (ACA) relies on the conventional wisdom that private individual health insurance policies don't and can't "work" given the skewness and concentration of health care expenditures. The lowest 50% of the population in terms of health care expenditures had average annual spending of $276 per person and accounted for only 2.8% of aggregate health care expenditures in 2016. The top 10% of the population, in contrast, had average annual spending of $33,053 per person and accounted for 66% of aggregate spending.

Many conclude from these facts that in the individual market, the healthy will obtain coverage at low rates while the "sick" will be unable to obtain coverage or only at prohibitively high rates. Thus, they argue, individual insurance coverage must be mandated to ensure "pooling" of healthy and sick so that the price is simply the population average, with limited variability by age (community rating).

Bradley Herring and Mark Pauly demonstrated in a 2006 Journal of Health Economics paper that markets could provide guaranteed renewable individual health insurance contracts because high-cost conditions are rare and do not persist. However, though such contracts...