Access to coverage for high-risks in a competitive individual health insurance market: via premium rate restrictions or risk-adjusted premium subsidies?

A competitive market for individual health insurance tends to risk-adjusted premiums. Premium rate restrictions are often considered a tool to increas e access to coverage for high-risk individuals in such a market. However, s uch regulation induces selection which may have several adverse effects. As an alternative approach we consider risk-adjusted premium subsidies. Empir ical results of simulated premium models and subsidy formulae are presented . It is shown that sufficiently adjusted subsidies eliminate the need for p remium rate restrictions and consequently avoid their adverse effects. Ther efore, the subsidy approach is the preferred strategy to increase access to coverage for high-risk individuals. (C) 2000 Elsevier Science B.V. All rig hts reserved. JEL classification: I10; I11; I18; G22.