The Rise of Commercial Insurance

Recognition of the profits to be made in health care led commercial insurance companies to enter the field in large numbers. Whereas the early insurance pro- grams were mostly nonprofits, commercial insurance programs by definition are organized on a for-profit basis and so must focus on earning a profit for their investors. To do so, they use actuarial risk rating rather than community rating. Under actuarial risk rating, insurers maximize their profits by doing whatever they can to avoid signing up individuals who are likely to have expensive medical bills. For example, until recently commercial insurers charged higher premiums to those who had back strain, kidney stones, or ulcers, and they typically denied coverage to those who had diabetes or ulcerative colitis or who worked as airline pilots or in construction. (The ACA changed this at least partly, as we will see later in this chapter.) Similarly, commercial insurers charged especially low rates to low-risk individuals. As a result, these insurers lured many low-risk individuals away from nonprofit insurers, leaving the nonprofits with a sicker clientele overall. To avoid having to raise their rates for all members to cover the bills of their sicker members, many nonprofit insurers have switched to actuarial risk rating or even become for-profit corporations.