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Bartlett, "Attempts to Socialize Insurance Costs in Voluntary Insurance Markets: The Historical Record," Journal of Insurance Regulation – SK

Then guaranteed benefits arose – catering to more affluent markets w/ high cost policy forms.  This developed into “traditional life insurance companies”.

First formal assessment life insurance: Ancient Order of United Workmen (AOUW), which in 1869 adopted the practice that everyone pays $1 into the insurance fund when a member died.  This was to provide for a funeral benefit and a death benefit not to exceed $2000.  This attracted many members, especially where traditional life failed to attract the less affluent segment of society.

Emergence of Adverse Selection

At first, assessment life insurance was meant to be part of a package, but as it was successful, it attracted for-profit companies that sold it exclusively.

This competition brought on guaranteed benefits.

However, the benefits required actuarial sound pricing, which in turn requires the reflection of differences in mortality rates by attained age.  Assessment life was offered independent of age.

Younger members realized the cross-subsidies and went elsewhere.

First, the for-profit companies perished, and then the cooperative societies.

Changing Practices

Community Rating by Blue Cross Organizations

Early History

Ideal – health care should be accessible and affordable to as many people as possible w/o relying on govt intervention.  This meant spreading health care costs throughout the community w/o regard to past experience or current risk factors.

Almost everyone paid the same charges regardless of age, sex, occupation, etc.

Six characteristics of Blue Cross prepaid hospital expense plans:

1. Sponsorship by a hospital(s) w/in a community;

2. Not-for-profit status w/ certain tax exemptions;

3. Limited choice of benefit options to subscribers;

4. Direct writer distribution through salaried field personnel;

5. Low admin expense due to size, distribution method, limited plan choice;

6. Community rating pricing techniques.

This all worked in the past before competition arose.

Competitors Emerge – beginning in 1930s.

At first, traditional insurers offered indemnity packages (subject to copays/deductibles).

Then they started using experience rating and risk factors to determine premiums.

These companies were also very large and national in scope.

They had pricing flexibility that Blues couldn’t justify.

Health Insurance Rating

Some aspects of Blues pricing were not purely community rating.

They charged different rates by family composition.

Then they started charging for individuals in addition to groups, and they charged higher subscription charges for higher risks.

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