November/December 2004
Health Affairs
, Vol. 23, No. 6
Joy M. Grossman, Paul B. Ginsburg
Business executives,financiers,and the markets abhor uncertainty as much as nature abhors a vacuum. The boom-and-bust pattern in the health insurance markets known as the “underwriting cycle” has been studied sufficiently enough to understand its basic characteristics. Historically, the underwriting cycle has consisted of three years of profitability followed by three years of losses. Higher profits attract new entrants and drive more intense price competition, which in turn leads to losses as premiums fall below costs. As plans exit the market, the remaining plans raise premiums above costs, driving a return to higher profits and a repeat of the cycle.
After twenty-five years of a consistent health insurance underwriting cycle, the pattern of insurer profitability changed greatly in the 1990s, raising speculation about the future. This article concludes, from interviews with industry experts, that health plan competition and limits on plans’ability to predict costs will continue to drive a cycle, albeit one even more muted than it was in the 1990s because of changes in industry structure and forecasting improvements. Plans will price closer to cost trends and forgo the more heated price competition that drove major losses in the past, reducing premium volatility but possibly leading to higher average premiums.
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