Posting date: October 23, 2002

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Health Affairs, 10.1377/hlthaff.w2.325
Copyright © 2003 by Project HOPE

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The Nongroup Insurance Market: Short On Facts, Long On Opinions And Policy Disputes

¹ Mark Pauly, an economist, is the Bendheim Chair and Professor, Health Care Systems Department at the Wharton School, University of Pennsylvania in Philadelphia.
² Len Nichols, an economist, is the vice-president of the Center for Studying Health System Change in Washington, D.C.

^*Corresponding author.

Abstract

Individual health insurance is more administratively costly and more prone to adverse selection (especially in the presence of community rating) than group health coverage is. In this paper we show that the individual market has been shrinking over time but that it might be stimulated if tax credits for such insurance were made available. The primary areas of factual disagreement have to do with the frequency with which individual insurers charge some applicants higher premiums than others (based on health risk), and the effect that premiums related to risk have on the likelihood of insurance purchase at different income levels. The primary area of policy disagreement concerns the value of offering insurance at lower premiums to higher risks relative to the value of making voluntary insurance attractive to lower risks. We argue that a major market failure for individual coverage may be caused by insurers’ inability to distinguish some truly low risks. We conclude that the individual market works acceptably well for about 80 percent of potential buyers, but its performance for the remaining 20 percent of low-income or high-risk persons is controversial.

Key Words: Insurance Coverage, Access To Care, State/Local Issues, Chronic Care, Health Reform

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