Tracing the Cycle of Health Insurance

Abstract

Prologue: In November 1991, a new study by KPMG Peat Marwick, international accountants and consultants, documented that the cost of health benefits rose 11.5 percent between 1990 and 1991, the lowest rate of increase in three years. But, like many developments in the unpredictable world of health care finance, the news is neither as good as it might seem at first glance nor as bad as it might become in the next several years. The reason is a phenomenon largely unknown to the health policy community that the industry terms the “health insurance underwriting cycle.” Over the past several decades and largely without fail, private insurers have generally experienced three consecutive years of underwriting gains, followed by three consecutive years of losses in the group health business. The cycle holds for both commercial insurers and nonprofit Blue Cross and Blue Shield plans. Authors Jon Gabel, Roger Formisano, Barbara Lohr, and Steven DiCarlo examine the relationship between the profitability cycle of private insurance and the cyclical nature of premium increases in group health insurance. Gabel is director of employee benefits research at KPMG Peat Marwick. He formerly worked as a senior economist at the Agency for Health Care Policy and Research and as associate director of the Department of Research and Statistics at the Health Insurance Association of America (HIAA). Coauthor Roger Formisano, a professor at the University of Wisconsin's School of Business, studied the underwriting cycle under contract to HIAA. Barbara Lohr, an associate in the Washington, D.C., office of Towers Perrin, was an intern at HIAA in 1989 while pursuing a master of business administration degree at the Wharton School in Philadelphia. Steven DiCarlo was a research associate at HÍAA from 1987 to 1990.