I would like to thank you for providing me with the opportunity to testify about the characteristics of group and nongroup health insurance markets, and how any federal legislation might impact those markets. I have been privy to numerous discussions on health policy issues affecting the insurance markets across the country. Without commenting on the adequacy of any particular tax credit to buy such a product, I think it is important that Congress understand the differences between and characteristics of group and nongroup markets before deciding on whether tax policy will be effective as a method of addressing our nation's uninsured problems. By creating larger pools, insurers reduce the uncertainty of the occurrence of insurable events and can more accurately predict the losses the group will suffer. Groups are better able to absorb increased claims costs of individuals within the group among the group as a whole.
Insurers manage risk through pricing policies and underwriting.
Higher risks are priced at higher levels, and particular risks, individuals with particularly costly diseases, may be declined by insurers seeking to manage their risk. Large groups, because of the law of large numbers, have never been a particular regulatory problem in group health insurance. However, in the late 1980s and early 1990s, small group reform was initiated in the states to combat the aggressive pricing and underwriting practices insurers were using. These techniques included long pre-existing condition limitations, large annual rate increases, and nonrenewal of policies due to claims experience, also called claims underwriting. State reforms included making small group policies guaranteed renewable, requiring insurers to issue policies to all small groups, limiting or doing away with any preexisting condition exclusion when a job is changed but coverage is seamless, and limits on preexisting condition exclusions, typically six or 12 months, or less.