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Perspective: Young Web Exclusive, Oct 23, 2002
P E R S P E C T I V E :
N O N G R O U P M A R K E T
W E B E X C L U S I V E
23 October 2002
Expanding Coverage:
Maintain A Role For The Individual Market
The individual market
protects millions of Americans from unexpected
high medical bills, at surprisingly affordable premium prices.
Donald A. Young and Thomas
F. Wildsmith
ABSTRACT:
When most Americans think about health insurance, their frame of reference is
employer- or government-sponsored health plans. But individual health insurance
differs from these models. Most importantly, while individual insurance provides
protection against unexpected medical expenses, it is limited in its ability
to subsidize the expenses of people who already have serious health conditions
when they enter the market. Nevertheless, it remains a vital part of our health
care system, protecting millions of Americans against unexpected expenses at
lower premium levels than many might assume.
Nine out of ten Americans with private health insurance receive it through their
employer. We believe that the employment-based health insurance system is, and
will remain, the most effective way to cover most nonelderly Americans.1
However, a strong, competitive individual market is critical for those who aren’t
offered coverage at work.
Strengths of the individual
market. Individual
health insurance serves people of all ages and income levels. Young adults and
the near-elderly represent a much larger share of the individual health insurance
market than of the group insurance market. This makes sense, as adults in their
prime working years—ages 25–54—are the most likely to have employer-sponsored
coverage. Moreover, low-income persons, who are least likely to be offered coverage
at work, make up a surprisingly large share of the individual market, given
the common assertion that even a relatively large tax credit would not enable
them to buy coverage. Clearly, individual health insurance is not just for the
young and the wealthy (Exhibit
1).
A recent survey of Health Insurance Association of America (HIAA) member companies,
with data covering 691,615 single policies and 422,952 family policies, found
that the average annual premium for a nongroup policy was $2,070 for single
coverage and $4,009 for family coverage (Exhibit
2).2 A smaller survey by eHealthInsurance reported
an average annual premium of $1,908 for single coverage.3
Another study found that many of the nonpoor uninsured forgo coverage because
they assume that it costs more than it really does.4
The HIAA survey was designed to answer the question, “How much are consumers
paying for individual health insurance?”—not “What benefits are
they buying?” It was limited to comprehensive major medical policies, however;
by including cost data on approximately two million of the sixteen million Americans
with individual health insurance, the study represents a broad cross-section
of the coverage consumers in this market are actually choosing to buy.5
The smaller eHealth Insurance survey included benefit data and found that 44
percent of the plans had deductibles of $500 or less, 69 percent had deductibles
of $1,000 or less, and 85 percent of comprehensive major medical plans included
prescription drug coverage.
Unique nature of the individual
market. The market
for individually purchased health insurance is fundamentally different from
that for employer-group coverage.6 There is no employer
subsidy, and for those consumers who are not self-employed, there is no tax
preference; that is, premiums are paid with pretax dollars. Marketing is done
separately for each individual or family, rather than as part of an employee
benefit package; individual insurance contracts must be executed and delivered;
billing is to the individual, rather than through a payroll system; and there
are no human resources professionals to facilitate customer service. All of
these factors lead to higher administrative costs.
Consumers in the individual market tend to be price-sensitive. The purchase
is completely voluntary, and each consumer must pay the entire cost of coverage,
deciding whether the potential benefits justify the premiums. Because people
tend to make financial decisions that are in their own best interests, there
is a natural limit on the effectiveness of any market rule that raises the premiums
of some so that others can pay less.7 This characterizes
all voluntary, individual markets—not just health insurance but also life
insurance, disability income insurance, and long-term care insurance.8
(It is the employer-sponsored health insurance system that is unique in its
ability to cover both the healthy and the sick in a single private program,
which is why it remains such a vital component of the American health care system.)9
Limitations.
Some states have attempted to use market rules, such as guaranteed issue and
community rating, to generate more risk pooling, subsidizing high-risk persons
by asking low-risk persons to pay more. (Guaranteed renewal provisions help
to pool unexpected future costs without creating the same subsidies at the time
of purchase.) Coverage is then no longer equally financially attractive for
all. For low-risk persons, the additional cost does not bring additional value,
and many will choose to forgo coverage. States’ experience with guaranteed
issue and community rating confirms this, with increased average premiums and
a decrease, rather than an increase, in individuals covered by health insurance.10
Depending on the extent of the regulatory restrictions and other factors, the
market may or may not reach equilibrium at a higher premium level. A complete
market collapse is not necessary to harm consumers—higher prices and reduced
coverage levels are enough.
State high-risk pools, in contrast, have proved to be effective at ensuring
access, funneling a subsidy to persons who could afford to pay a fairly large
premium but who, because of a preexisting health condition, cannot afford coverage.
When supported by a broad-based funding source, such pools can make coverage
more affordable for high-risk enrollees without making voluntary participation
less attractive for everyone else. More than half of the states have a high-risk
pool, and most have been operating successfully for years.11
High-risk pools have been criticized for their small enrollments (compared with
the individual health insurance market).12 However,
this is because most states look to Medicaid and the State Children’s Health
Insurance Program (SCHIP) to cover low-income uninsured persons, and, as survey
data suggest, less than 5 percent of the uninsured have been denied coverage
because of poor health.13
Risk pools have the potential to guarantee access to insurance and place a limit
on the premiums that persons with serious health conditions must pay, without
harming existing markets. We believe that adequately funded risk pools, combined
with appropriate mechanisms for low-income persons, are a far better formula
for guaranteeing access than are attempts to “fix” the individual
market through guaranteed issue and community rating.
Continued role.
The individual health insurance market is not a replacement for the employment-based
system, but it is a vital complement to that system. Making individual coverage
more affordable could help millions of Americans who lack access to employer-sponsored
coverage. While there is vigorous debate over the optimum size of a subsidy,
and the likely impact, the amounts under debate would dramatically reduce the
marginal cost of health insurance. For instance, a $1,000 tax credit for the
purchase of health insurance would, on average, cut the cost of coverage in
half—a significant move toward making it more affordable.
Americans with family incomes below $20,000 are more likely to buy health insurance
on their own than any other income group, because they do not have an employer
buying it for them. Five million of them are already making the financial sacrifices
necessary to buy their own insurance. Health insurance tax credits, such as
those proposed by President Bush and others, have the potential to reduce that
burden. In addition, we know that affordability is the primary barrier to coverage
for the uninsured. Tax credits represent a commonsense tool for breaching that
barrier and bringing cost of coverage within the financial reach of millions
more low-income Americans.
NOTES
1. W. Custer, C. Kahn, and T. Wildsmith, “Why We Should
Keep the Employment-Based Health Insurance System,” Health Affairs
(Nov/Dec 1999): 115–123.
2. We surveyed all HIAA member companies; twelve responded with
data. Most HIAA members do not sell individual coverage, and not all that do
responded. Participating companies tended to be those for which individual coverage
is a major product line and included several of the largest individual coverage
writers. Any response bias would most likely be toward commercial carriers and
companies focused on the individual market. We do not believe that either would
significantly skew the results. The next- largest survey of individual market
premiums, by eHealthInsurance Inc., included only 20,000 policies, all purchased
through its Web site.
3. eHealthInsurance Inc., “The Costs and Benefits of Individual
Health Insurance Plans,” Fact Sheet, 13 February 2002, ehealthinsurance.com/ehealthinsurance/expertcenter/ExpertCenter.html
(22 August 2002). A more recent study produced comparable results; however,
the data were limited to 2,500 policies, and only estimated premiums were reported.
J. Hadley and J. Reschovsky, Tax Credits and the Affordability of Individual
Health Insurance, Issue Brief 53 (Washington: Center for Studying Health
System Change, July 2002).
4. California HealthCare Foundation, To Buy or Not to Buy:
A Profile of California’s Non-Poor Uninsured (Oakland: CHCF, 1999),
15–18.
5. T. Musco, Individual Medical Expense Insurance Affordable,
Serves Old and Young (Washington: HIAA, July 2002).
6. American Academy of Actuaries, Risk Classification in
Individually Purchased Voluntary Medical Expense Insurance (Washington:
AAA, February 1999), 2–4.
7. “Human beings can be expected to act on their perception
of their own best interests, and to select against any system that permits choices.”
C. Trowbridge, Fundamental Concepts of Actuarial Science, rev. ed. (Schaumburg,
Ill.: Actuarial Education and Research Fund, 1989), 53. See also K. Swartz,
Markets for Individual Health Insurance: Can We Make Them Work with Incentives
to Purchase Insurance? (New York: Commonwealth Fund, December 2000), 2–6;
and AAA, Risk Classification, 4, 6–7.
8. AAA, Risk Classification in Voluntary Life Insurance
(Washington: AAA, Spring 1997), 2–4; and AAA, Risk Classification in
Voluntary Individual Disability Income and Long-Term Care Insurance (Washington:
AAA, Winter 2001), 4–7.
9. Custer et al., “Why We Should Keep the Employment-Based
Health Insurance System.”
10. L.M. Nichols, “State Regulation: What Have We Learned
So Far?” Journal of Health Politics, Policy and Law (February 2000):
175–196; W. Custer, Health Insurance Coverage and the Uninsured
(Washington: HIAA, December 1999), 13–14; F. Sloan and C. Conover, “Effects
of State Reforms on Health Insurance Coverage of Adults,” Inquiry
(Fall 1998): 280–293; and J. Marsteller et al., Variations in the Uninsured:
State and County Level Analyses (Washington: Urban Institute, 11 June 1998),
ii. For a perspective from the front lines, see Maine Bureau of Insurance, “White
Paper: Maine’s Individual Health Insurance Market” (Augusta: Maine
Bureau of Insurance, 11 January 2000), 7–8.
11. Communicating for Agriculture, Comprehensive Health
Insurance for High-Risk Individuals, 13th ed. (Fergus Falls, Minn.: Communicating
for Agriculture and the Uninsured, 1999), 5–12.
12. L. Achman and D. Chollet, Insuring the Uninsurable:
An Overview of State High-Risk Health Insurance Pools (New York: Commonwealth
Fund, August 2001), 4.
13. E.R. Brown et al., The State of Health Insurance in
California (Los Angeles: University of California, Los Angeles, Center for
Health Policy Research, June 2002), 29; K. Donelan et al., “Whatever Happened
to the Health Insurance Crisis in the United States?” Journal of the
American Medical Association (23/30 October 1996): 1326–1350; and K.
Beauregard, Persons Denied Private Health Insurance Due to Poor Health,
Pub. no. 92-0016 (Rockville, Md.: Agency for Healthcare Research and Quality,
December 1991), 4.
Donald Young is president
and Thomas Wildsmith, policy research actuary, of the Health Insurance Association
of America in Washington D.C
©2002 Project HOPE–The
People-to-People Health Foundation, Inc.
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