|
Perspectives
on the article by Jon
Gabel et al. are available by clicking the author's name below:
Donald A. Young and Thomas F. Wildsmith • Thomas
R. Hefty
H E A L T H A F F A I R S : P E R S P E C T I V E
W E B E X C L U S I V E
17 April 2002
Individual
Versus Employer Insurance Markets:
Digging Deeper Into The Differences
A voluntary individual insurance
market is not an employee benefit program
and should not be expected to look like one.
Donald A. Young and Thomas
F. Wildsmith
The paper by Jon Gabel and colleagues criticizes the individual health insurance
market for providing coverage that is less generous than that of employer-sponsored
health plans. Others have suggested that the employment-based system results
in overinsurance. But there is no simple answer to the question, "How much
coverage is enough?" Moreover, employer-sponsored plans are not the standard
by which to measure the appropriate level of coverage for a consumer to purchase
in a different market: A voluntary individual insurance market is not an employee
benefit program and should not be expected to look like one.
In the employment-based system, workers are insulated from the cost of coverage
because of the employer subsidy, which makes participation more attractive.
In the individual insurance market, however, there is no employer subsidy; for
most, there is not even a tax preference-premiums are paid with pretax dollars.
In consequence, the consumer is price- sensitive, with each individual in that
market making a direct and personal decision about the most appropriate balance
to strike between coverage and cost.
Purchasers in the individual market may well be selecting coverage that is less
generous than that provided by employers, but not because more-comprehensive
coverage is not available. Nor are these consumers irrational: Given the cost
differential between individual and group health insurance, purchasers in the
two markets are striking a different balance between retaining and insuring
risk.
The study addresses a critical issue: How does individual health insurance coverage
differ from that provided by employers? In particular, its survey of what is
available on the Internet contains valuable information on the range of available
individual health insurance products. It also shows how difficult it can be
to draw valid comparisons between the two markets. Unfortunately, because of
data limitations (which the authors acknowledge), the study does not tell us
which products consumers actually choose to purchase, nor does it explain why
consumers in the individual market might make purchasing decisions that are
different from those of employee benefit plan sponsors.
Methodological limitations.
As the authors
correctly note, the primary limitation of the study is the lack of information
about how many consumers purchase particular policies in the individual market.
In an attempt to overcome this limitation, the authors assume that all products
are equally popular, an unusual assumption to make in any consumer market. (Few
of us would assume that all breakfast cereals, or all makes of automobile, are
equally popular.)
In the case of individual health insurance, strong evidence suggests that all
products are not equally popular. A study of 20,000 policies purchased through
eHealthInsurance.com recently found that 75 percent were PPO products, 16 percent
were HMO products, and only 5 percent were indemnity plans. POS and MSA products
accounted for the remaining 3 percent.1 Others
have found that the individual health insurance market is highly concentrated;
in each state only a few insurers account for most of the policies sold.2
Clearly, some products are much more popular than others. Rather than "simulated
extrapolations," the results of this study should be seen for what they
are: a sample of the products available.
Unfortunately, this limitation invalidates all of the averages calculated for
the individual market. For instance, while the authors report a wide range of
"actuarial values" among the individual products, the absence of information
on which products people are actually buying makes it impossible to determine
the mean value for the individual market. Calculating such a mean without enrollment
information is the equivalent of estimating what the typical television viewer
watches by scanning through a program guide and "averaging" a random
sample of the program listings.
The data on the individual health insurance market are also limited to a single,
relatively new distribution channel. If Internet purchasers are younger and
more price-conscious than are those using such conventional channels as agents
and brokers, and if the products offered reflect their preferences, the results
will likely understate the amount of coverage the average individual policy
provides. Evidence does suggest that Internet purchasers are younger. In 1996
the U.S. General Accounting Office found that the median age for individual
purchasers was thirty-five, while those buying individual coverage through eHealthInsurance.com
are thirty, on average.3
Interpretive limitations.
The most serious interpretive limitation of the study is the assumption that
the percentage of medical expenses reimbursed measures the "performance"
of an insurance policy, rather than the amount of financial protection consumers
choose to buy. Determining the appropriate amount of coverage to purchase is
a risk-management decision. (An automobile policy with a $200 deductible for
collision coverage does not necessarily "perform" better than one
with a $500 deductible; the same is true of medical expense insurance.)
The two policy features critical to catastrophic protection are the out-of-pocket
limit and the maximum benefit level. In their discussion of catastrophic protection,
the authors focus on the top 25 percent of users, who have average expenses
falling below many typical out-of-pocket limits. This is not an adequate test
of protection against truly catastrophic expenses or of the financial impact
of different out-of-pocket limits.
In addition, their calculation includes all medical expenses, not just those
above a certain threshold. Purchasers must balance the degree of up-front risk
they are willing to bear against the premiums they are willing to pay. Paying
a higher percentage of routine costs does not lessen a policy's catastrophic
protection. If routine expenses are to be included in a measure of catastrophic
protection, premiums should be included also. By failing to include premiums,
this study fails to recognize the trade-off between upfront protection and the
cost of coverage. The key fact is that both individually purchased and employer-sponsored
plans include out-of-pocket limits, and those limits are chosen by purchasers.
There are many reasons that an individual purchaser might select less coverage
than is typical among employee benefit plans. The authors allude to one of these:
that administrative expenses are much higher for individually purchased insurance.
Since each dollar of health insurance protection costs more in the individual
market, it is not surprising that consumers in that market buy less of it. For
many consumers, differences in the tax treatment between individually purchased
and employer-provided coverage will be an additional factor.
Finally, the authors find not only low-cost plans available in the individual
market, but also plans with higher "actuarial values" than those typical
in the group market. Any significant tax credit would effectively reduce the
cost of health insurance, and many consumers would then likely buy more coverage
than they do now. Whether benefits in the individual market would ever become
as generous as those offered by employers would depend on the size of the credit
and the value consumers placed on the coverage.
NOTES
1. V. Patel, "Analysis of National Sales Data of Individual
and Family Health Insurance," eHealthInsurance.com
(June 2001).
2. D.J. Chollet, A.M. Kirk, and M.E. Chow, Mapping State
Health Insurance Markets: Structure and Change in the States' Group and Individual
Health Insurance Markets, 1995-1997 (Washington: Academy for Health Services
Research and Health Policy, December 2000).
3. US General Accounting Office, Private Health Insurance:
Millions Relying on Individual Market Face Cost and Coverage Trade-Offs,
Pub. no. GAO/HEHS-97-8 (Washington: GAO, November 1996); and Patel, "Analysis
of National Sales Data."
Donald Young is president
and Thomas Wildsmith a policy research actuary at the Health Insurance Association
of America in Washington, D.C.
©2002 Project HOPE–The
People-to-People Health Foundation, Inc.
|
