Mark V. Pauly, Ph.D.

Mark Pauly, Ph.D., and colleagues at the University of Pennsylvania have been studying how private markets function to help consumers cope with rising medical care costs, while maintaining access to new beneficial technology. Since the majority of insured people obtain employment-based group insurance, while most of the uninsured are likely to use the individual market if they have insurance at all, the comparative performance of the two types of markets has been a focus of his research.

That research, partially funded by the HCFO program, demonstrates that both sources of insurance have advantages and disadvantages. Therefore, Pauly contends that public policy needs to consider how the two compare, and needs to take care not to bias choices inappropriately in one direction or the other. Tradeoffs are most relevant to the problem of the uninsured in families where someone is employed at a small firm. On the one hand, obtaining group insurance in a small firm is supported by the current tax subsidy that excludes from income and payroll taxes compensation received in the form of employer-paid insurance premiums, and is moderately less costly than individual insurance. On the other hand, consumers who use the individual insurance market have a much wider choice of portable and stable insurance options, ranging from HMOs to PPOs with low point-of-service cost sharing to indemnity insurance with high deductibles (but low premiums). A small firm usually offers only one option, which the employee can lose if he or she changes jobs or if the owner of the firm decides not to continue to offer compensation in this form. People who work for large firms can usually expect relatively low administrative cost and some choice of plans, but large firm employment is not as common among uninsured households as among insured ones.

Some of Pauly's work provides descriptive evidence on how the group and individual markets work. Other research, supported in part by HCFO, looks at an additional important difference between the two markets, and one which often tips the balance toward the group insurance option: the belief that group insurance "pools risk" substantially more effectively than does individual insurance. Two practices that give the appearance of this difference are: uniform employee premiums for group insurance for all employees who choose a given insurance option; and underwriting of new coverage by individual insurers, where higher premiums are charged to those who are higher-than-average risk. Pauly's work suggests that these differences, in reality, are much smaller than is commonly believed.

For group insurance, there is evidence that employees who pay by accepting reductions in cash wages are not uniform risks. In particular, older workers who obtain group insurance appear to sacrifice larger amounts of money wages (to reflect their higher insurance costs) than do younger workers. Wage offsets do not vary with the presence of chronic health conditions or self-reported poor health. However, lower risk workers (in small and large firms) are more likely to end up without coverage (controlling for income and other factors). This apparent adverse selection, though modest, does limit the degree of risk pooling.

For individual insurance, "guaranteed renewability at class average premiums" is a mechanism to spread "reclassification risk," the risk that a person who is in average health when insurance is purchased incurs the onset of or detection of a chronic condition and is then classified as a higher risk and charged a higher premium. Most individual insurers initially offered this policy provision voluntarily, but now state and federal law requires it. With guaranteed renewability, an insurer promises not to single out people who become higher risk for higher than average premium increases. While there are cases in which insurers avoid this obligation, analyses of large data sets by Pauly and colleagues find evidence in the relationship between risk and insurance premiums that is consistent with guaranteed renewability producing substantial risk pooling. Specifically, premiums do not increase with age at the same rate that risk (or expected expenses) increases with age, exactly the behavior that would be expected as insurers "front load" the charge for guaranteed renewability. Moreover, depending on the risk measure used, premiums vary little, or not at all, with health status and when they do increase with poorer health, the increase is much less than the increase in risk. Similarly, obtaining individual insurance is (at worst) only slightly less likely for higher risks than for lower risks.

While more research is needed to spell out clear messages for policy, Pauly's findings may indicate that strong government intervention (such as pure community rating) is not needed to generate a substantial amount of risk pooling in individual insurance. He suggests that more modest steps like establishment of a high risk pool or rigorous enforcement of the guaranteed renewability requirement might suffice. Health services research is able to offer insights that sometimes clarify impressions drawn from anecdotes or even from industry "impressions." It is always desirable to look at markets as a whole and how they actually work. Other work by Pauly on the effects of insurance subsidies (such as tax credits) on insurance markets suggests that extending such subsidies to individual insurance may reduce insurer incentives to engage in aggressive underwriting even of new business. According to Pauly, "this research suggests that the most serious problem with individual insurance is its high administrative cost for all insureds, rather than high premiums for the high risk minority."

Pauly is the Bendheim Professor of Health Care Systems, Business and Public Policy, Insurance and Risk Management, and Economics, at the University of Pennsylvania. He has been at the Wharton School since 1983. Before that, he was on the faculty at Northwestern University. He has served as Executive Director of the Leonard Davis Institute of Health Economics and Vice Dean for Doctoral Programs at the University of Pennsylvania. He also has served on state commissions to study insurance and on Institute of Medicine panels looking at accountability in Medicare, vaccine financing, and substance abuse treatment. He was commissioner on the Physician Payment Review Commission, and twice served as a member of a technical review panel to study methods for forecasting Medicare's future costs.

His current research, in addition to continuing investigation of private insurance markets, includes study of the prospects for private health insurance in developing countries, exploration of the business case for employer efforts to improve health, and examination of economic causes for inefficiency in medical care markets.

Pauly received his Ph.D. in economics from the University of Virginia, an M.A. in economics from the University of Delaware, and an A.B. in classical languages from Xavier University.