Private Health Insurance: Millions Relying on Individual Market Face Cost and Coverage Trade-Offs
Released: 1996-11-25T00:00:00

Letter

Introduction

Most Americans rely on employer-sponsored health plans or government programs like Medicaid and Medicare to help them select and finance their family’s health insurance coverage. But about 10.5 million Americans rely exclusively on their own resources to select and pay for their family’s coverage. These participants in the market for individual health insurance must make important decisions affecting their family’s health and welfare without the same supports provided to the majority of Americans who obtain their health coverage through employer-sponsored or government plans.

Who Relies on the Individual Market for Comprehensive Health Insurance Coverage?

Most participants in the individual market do not currently have access to an employer-sponsored plan or a government insurance program. Those under 65 who may participate in the individual market include self-employed people; people whose employers do not choose to offer health insurance coverage to workers and their families; part-time, temporary, or contract workers who are not eligible for health insurance coverage through their employers; early retirees without employer-sponsored coverage and not yet eligible people not in the labor force, including people with disabilities, who are not eligible for Medicare or Medicaid coverage; college students who are no longer eligible for coverage under their parents’ health plans; unemployed people who are not eligible for Medicaid; people between jobs who have exhausted or are ineligible for continuation of their employer-sponsored coverage; and children, spouses, and other dependents ineligible for coverage or too costly to cover under an employer-sponsored plan.

Some individuals falling into these categories can rely on spouses or other family members to include them under the family coverage options of their employer-sponsored plans. Many others, however, do not have this alternative.

The Individual Market Is an Important Source of Transitional Coverage for Some and the Permanent Source of Coverage for Others

The individual market often provides a short-term source of health insurance coverage for people during transition points in their lives. Many people initially confront the individual market while they are in college or at an entry-level job and discover that they are no longer eligible for coverage under their parents’ employer-sponsored health insurance plan. They may have the option to obtain individual coverage through plans marketed through their schools or training programs, or they may obtain policies through insurance plans or health maintenance organizations (HMO) that operate in their home or school communities.

Transitional employment in part-time or temporary jobs or periods of unemployment between jobs are other cases in which the individual market is used. In many entry-level jobs, employers do not provide health insurance, requiring those who wish to obtain coverage to access the individual market. For some, the lower paying entry-level jobs become their permanent source of employment, transforming the individual market into their permanent source of coverage.

For self-employed people, the individual market is often the only viable source of coverage throughout their careers. For example, family farmers and those in other professions in which self-employment is common often rely on the individual market as a long-term source of health insurance coverage.

Early retirees may rely on the individual market for transitional coverage until they are eligible for Medicare. Of course, many early retirees benefit from continuation of coverage under their former employers’ plans. A growing number of employers, however, have increased retirees’ contributions toward premiums, increased their deductibles and copayments, or in some cases, entirely phased out their financial support for health benefit plans for current and future retirees. Indeed, a recent study by the Employee Benefit Research Institute suggests that the availability of a retiree health benefit may become an increasingly important factor in an employee’s decision to retire early.

Insurance Premiums Loom Larger as Individuals Pay Full Premium Costs Out of Pocket

For the typical person with employer-sponsored coverage, health insurance premium payments are shared by the employer and the worker. The typical employer pays about 80 percent of premiums (70 percent for family coverage). Participants in the individual market must pay their entire premiums out of pocket. Thus, an individual’s ability to pay for coverage largely determines which type of insurance product is purchased or whether the individual can purchase coverage at all.

Those in employer-sponsored plans also benefit from the tax treatment of these plans. While health benefits are generally not considered income to the employee, employers may deduct the expense of providing such benefits to their workers. Employers, who often pay 70 to 80 percent of the cost of their employees’ health plans, typically may deduct all of that contribution. In contrast, participants in the individual market generally cannot. Self-employed individuals may deduct a percentage of their expenses, ranging from 40 percent in 1997 to 80 percent in 2006 and thereafter.

The Consumer Confronts a Diverse and Confusing Market for Individual Health Insurance Coverage

Employers and benefit managers often provide participants in employer-sponsored plans with help in identification, selection, assessment, and enrollment in plans as well as with the negotiation of benefits and premiums. In contrast, individual market participants must access the market on their own.

To help guide them through the broad range of insurance offerings available to eligible individuals in most states, individuals often enlist the assistance of professional insurance agents and brokers. In some states, Blue Cross and Blue Shield plans and other carriers serve as direct writers of insurance. Other individuals turn to organizations such as trade associations, professional associations, or farm cooperatives as access points to the health insurance market.

In most states, a wide variety of carriers operates in the individual market, offering a broad range of products. Indeed, most healthy individuals have a broader choice of offerings than those in employer-sponsored plans. But all consumers may not be fully aware of their choices or of the avenues to access the market. To many consumers, insurance terms and options are easily misunderstood. In response, some states have issued consumer guides to help consumers better understand the market.

Unique Characteristics of Individual Market Participants Can Lead to Higher Premiums

While most individuals have a broad range of individual insurance options available, a significant minority have few if any affordable options. An individual’s health status can lead to sharply higher premiums or result in outright rejection under many plans. Medical underwriting—through which preexisting health conditions or an individual’s health status may result in denial of coverage, permanent exclusion from coverage of a preexisting condition, or higher premiums—is still fairly common in the individual markets of many states.

Several states have attempted to deal with the effects of medical underwriting by creating special insurance pools for high-risk individuals or through state individual market reforms (see ch. 5). At the federal level, the Health Insurance Portability and Accountability Act of 1996 recently passed by the Congress may reduce the potential effects of medical underwriting and preexisting condition exclusions for those making the transition from an employer-sponsored plan to the individual market.

The Role of the Individual Market in Attempts to Improve Access and Affordability of Health Insurance

States have been cautious or reluctant to extend many of the protections incorporated into their small business reforms to the individual health insurance market. Extension of insurance portability to the individual market was one of the most controversial issues debated in recently passed insurance reforms at both the state and federal levels. In large measure, the continuing debate reflects the paucity of reliable information on the individual health insurance market.

The interaction between the goals of improved access and affordability of insurance takes on a magnified importance in the individual market. On the one hand, the individual market serves a significant share of older people who are not yet eligible for Medicare and individuals with poor or declining health who are most concerned about access to health insurance without medical preconditions. On the other hand, the individual market is also an important source of coverage for a significant number of younger and often healthier individuals just entering the labor force or in lower wage jobs that often do not provide employer-sponsored coverage. For most of them, premium costs are an important barrier to health insurance coverage. Yet some initiatives that improve access for the older and sicker group might result in higher premiums for the younger and healthier group, thus potentially pricing them out of the market.

The interaction between expanding access and improving affordability varies among states and depends largely on the structure and relative size of the insurance market, characteristics of its participants, and its regulatory structure. Numerous states and the federal government have already introduced incremental reforms in the individual health insurance market, but many legislators and other observers believe that further adjustments may be needed.

Objectives, Scope, and Methodology

The Chairman of the Senate Committee on Labor and Human Resources asked us to report on the size of the individual health insurance market, recent trends, and the demographic characteristics of its participants; the market structure, including how individuals access the market, the prices, other characteristics of health plans offered, and the number of individual carriers offering plans; and the insurance reforms and other measures states have taken to increase individuals’ access to health insurance.

Scope

Our review included both national and state-specific data. Our estimates of the size and demographic characteristics of individual market enrollees were based on nationally projectable data sets as were data concerning individual market insurance reforms, high-risk pools, and insurers of last resort. Because other aspects of individual insurance markets can vary significantly among states, we relied on case studies of the individual insurance markets in seven states. Although findings from these states cannot be projected to the nation at large, we believe they are reasonably representative of the range of individual insurance market dynamics across the country. Our confidence is based on the criteria we used to select the seven states as well as our contact with representatives of large, national insurance carriers, trade groups, and regulatory bodies (discussed further under methodology). Finally, our report focused on comprehensive major medical expense and HMO plans. Therefore, references to individual market products do not include more limited benefit products unless specifically noted.

Methodology

To determine the size and demographic characteristics of individual insurance market participants nationwide, we analyzed data from the Bureau of the Census’ March 1995 Current Population Survey (CPS), a national random survey of about 57,000 households. We also analyzed the 1993 National Health Interview Survey (NHIS) conducted by the Bureau of the Census for the National Center for Health Statistics. The findings of these two surveys were generally similar. Unless otherwise noted, we report CPS findings because the results were available for a more recent year, the number of individuals surveyed was greater, and state-level data were available. Appendix I contains more details on the methodology we used in our analyses.

To understand the structure and dynamics of the individual insurance market, we visited seven states—Arizona, Colorado, Illinois, New Jersey, New York, North Dakota, and Vermont. We selected these states judgmentally on the basis of variations in their populations, urban/rural compositions, and the extent of individual insurance market reforms implemented. In each state, we interviewed and obtained data from representatives of the state insurance department and at least one of the largest individual market carriers. From insurance department representatives, we obtained information concerning the regulation and, where applicable, reform of the individual insurance market and the number and market share of individual market carriers in the state. From carriers, we obtained information concerning products offered, including their benefit structure, cost-sharing alternatives, eligibility, and prices. In some states, we also interviewed health department officials, insurance agents, and representatives of insurance industry trade associations, consumer groups, and insurance purchasing cooperatives.

To supplement state-specific data, we interviewed representatives or obtained information from national insurance carriers and trade and industry groups, including the American Academy of Actuaries, American Chambers Life Insurance Company, the Blue Cross and Blue Shield Association, the Health Insurance Association of America, Mutual of Omaha Companies, Time Insurance Company, and Wellpoint Health Networks, Inc. We also reviewed published literature on the individual insurance market.

To identify states that passed, from 1990 through 1995, individual insurance reforms or, as of year-end 1995, other measures designed to expand access to coverage in the individual market, we obtained summaries compiled by various industry and trade groups, including the Blue Cross and Blue Shield Association and the Health Insurance Association of America. We then obtained and reviewed each state’s individual insurance reform legislation and, when necessary, supplemented this review with telephone interviews of state officials to clarify certain provisions.

Our work was performed between February and September 1996 according to generally accepted government auditing standards.

Individual Market Important Source of Health Insurance Coverage for Millions of Americans

Although most Americans obtain their health insurance through employment-based health plans, individual insurance provides coverage for many Americans who may not have access to employment-based coverage. We estimate that about 10.5 million Americans under 65 had individual insurance as their only source of health coverage during 1994, with another 8.6 million having individual insurance as well as some other type of health insurance. While those with individual insurance only represent a relatively small share of the nonelderly population— 4.5 percent in 1994—individual insurance is a more prominent source of health coverage in the Plains and Mountain states and among self-employed people, agricultural workers, and early retirees.

For About 10.5 Million Americans, Individual Health Insurance Was Their Only Source of Health Coverage in 1994

On the basis of our analysis of the March 1995 CPS, we estimate that about 10.5 million Americans under 65 years of age (4.5 percent of the nonelderly population) received health coverage through individual health insurance as their only source of health coverage during 1994. That is, the health plan was purchased directly by an individual, not through a current or past employer or union. An additional 8.6 million Americans (3.7 percent) had individual health insurance in addition to employment-based coverage, Medicare, Medicaid, or coverage through the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) at some time in 1994.

Many people purchase individual health insurance for only a short period, such as when they are between jobs and without group insurance coverage. For example, a representative of one carrier told us that 30 percent of enrollees maintain individual insurance for less than 1 year. Thus, the 8.6 million people who had individual insurance coverage and another type of health insurance during 1994 could either have (1) had individual health insurance for part of 1994 and another type of health insurance for the remainder of the year or (2) had both individual health insurance and another type of coverage—employment-based or government-sponsored—at the same time for part or all of the year. In the latter case, it is possible that the other type of health insurance would have been the primary source of health coverage with the individual insurance being a supplemental policy. It is not possible, however, to identify how many people would be in either of these groups. For this reason, we focused our analysis on the 10.5 million nonelderly Americans who had private individual insurance as their only source of health coverage at any time in 1994.

Individual Health Insurance Relied on More in Mountain and Plains States

While 4.5 percent of the U.S. nonelderly population had individual health insurance as their only source of health coverage in 1994, the importance of the individual insurance market varied considerably among states. (See fig. 2.1.) In some Mountain and Plains states, individual insurance is relied on much more as a source of coverage. For example, we estimate that about one of every seven people under 65 in North Dakota has individual health insurance as his or her only source of health coverage. North Dakota is the only state where our estimates of the number of participants in the individual health insurance market exceed the estimated uninsured population. Iowa, Montana, Nebraska, and South Dakota also have estimated participation rates in the individual insurance market that are at least twice the national rate. Appendix II presents rates of individual health insurance enrollment by state.

Overall, individual insurance enrollment tends to be slightly lower in metropolitan areas than in nonmetropolitan areas. (See table 2.1.) In particular, individual health insurance is common among people living on farms. Nearly 30 percent of people indicating that their residence was a farm had individual health insurance in 1993, according to our analysis of the National Health Interview Survey.

The pattern of higher enrollment in rural areas is not uniform throughout the country. The Southern region, for instance, has a relatively large nonurban population, but the proportions of the populations that had individual health insurance were lower than the national average in 12 of its 17 states. Florida is an exception; the large number of retirees under age 65 there may help explain the fact that a relatively large proportion of Florida’s nonelderly population has individual insurance (6.4 percent).

In Hawaii, the only state with mandated employer-sponsored health insurance, only 1.8 percent of the nonelderly population had individual health insurance as the sole source of coverage in 1994. In several other states—Alaska, Arizona, Delaware, Kentucky, Nevada, New Mexico, Virginia, West Virginia, and Wisconsin—less than 3 percent of the population relied on individual insurance as the only source of coverage.

Individual Health Insurance Enrollees Are Generally Older and Have Lower Incomes Than People With Employment-Based Coverage

The individual insurance market is an important source of health coverage for people in their fifties and early sixties, particularly early retirees and people who have been widowed. The relative importance of the individual insurance market to people of different ages is illustrated in table 2.2. Those in the 60 to 64 age group are more than two-and-a-half times as likely to be covered by individual insurance than those in their twenties (9.6 percent versus 3.4 percent). The median age of people with individual insurance is 35, compared with 32 for people with employment-based coverage and 28 for uninsured people.

The individual insurance market is becoming increasingly important for early retirees because fewer employers are providing health coverage for them. In 1994, nearly 10 percent of retirees aged 64 or younger had individual health insurance as the sole source of health coverage. A disproportionate share of people who had been widowed (9.2 percent) also had individual insurance as the only source of health coverage.

The likelihood of having individual health insurance also varies widely by race and ethnicity. Whites are more than twice as likely to have individual health insurance as are blacks or Hispanics. Blacks and Hispanics are also less likely to have employment-based coverage and are more likely to be uninsured. (See table 2.3.) The higher median income of whites makes the potentially high cost of individual health insurance more affordable for this group.

The individual market is not a viable option for many of the nation’s low-income families. As shown in table 2.4, those with income below the federal poverty level are much more likely to be uninsured and slightly less likely to purchase individual insurance. For this group, the cost is an important deterrent to purchasing health insurance. Moreover, Medicaid and other government programs are potential alternatives for these lowest income households.

Above the poverty level, the individual market becomes a more important health insurance alternative. Participation in the individual insurance market exceeds the national average for families with incomes between about $10,000 and $40,000. (See fig. 2.2.) Participation dips below the national average as income rises above about $40,000, perhaps reflecting greater availability of employment-based insurance. For those with incomes above about $90,000, participation is again at or above the national average. Overall, people with individual health insurance have a lower median family income ($34,422) than people with employment-based coverage ($48,015) but higher than people who are uninsured ($20,014).

Individual Health Insurance More Common in Some Segments of Labor Force, Including Self-Employed, Contingent Workers, and Farm Workers

About three-quarters of those aged 18 to 64 with individual health insurance are employed, and some parts of the labor force depend more extensively on the individual insurance alternative. For example, self-employed and contingent workers, including part-time and temporary employees, are more likely to have individual health insurance. (See table 2.5.) These groups are often ineligible for employer-sponsored health plans. Furthermore, as shown in figure 2.3, individual insurance is more prevalent the smaller the employee’s firm is. Employees in smaller firms are also less likely to have employment-based coverage.

The inverse relationship between individual and employment-based coverage is particularly evident for selected industries. (See table 2.6.) In particular, farm workers (17 percent), personal services workers (8 percent), and construction workers (7 percent) are more likely to have individual insurance than the national average and are less likely to have employment-based coverage. Among people employed in industries in which large firms predominate, including manufacturing, government, and transportation, individual insurance is not very common. Agricultural, personal services, and construction industries tend to be dominated by smaller firms, and individual insurance plays a more important role in these workers’ health coverage. Self-employment is also particularly common among agricultural workers, contributing to the high share of these workers who have individual health insurance.

Self-Reported Health Status of Individual Health Insurance Enrollees Mirrors That of Employment-Based Enrollees

Most participants in the individual market (75 percent) rated their health condition as excellent or very good. Only about 6 percent rated their health as fair or poor. This pattern is nearly identical to the self-reported health status of those with employment-based health coverage. Individuals who report poor health status are disproportionately enrolled in government-funded health insurance programs or are uninsured. While 5.1 percent of those who assess their health as excellent have individual insurance coverage, only 2.5 percent of those who believe they are in poor health have individual health insurance. (See table 2.7.)

Reflecting the pattern for people reporting poor health, individuals who are unable to work because of disabilities are less likely to be covered only by individual insurance. This low rate reflects this group’s greater reliance on government-sponsored health insurance programs and may reflect their higher cost for private coverage and more tenuous attachment to the labor force. Medical underwriting and preexisting condition limitations are also more common with individual insurance policies, making them unappealing for those with disabilities.

The Structure and Dynamics of the Individual Health Insurance Market

Fundamental structural differences exist between the individual health insurance market and the employer-sponsored group insurance market. These differences can have significant implications for consumers. Individuals without employer-sponsored coverage usually access the health insurance market on their own and face a variety of ways of doing so. Individuals must choose from among a multitude of complex products that are often difficult to compare. Once a product is chosen, individuals must select from a wide range of cost-sharing arrangements and pay the full price of coverage. In contrast, employees eligible for group health coverage do not face the task of accessing the insurance market—this is done for them by the employer. And because employers typically offer only one or a few health plans, the task of identifying and comparing products is greatly simplified or eliminated. Finally, the burden of selecting cost-sharing options and paying for the products is significantly eased by employer contributions and payroll deductions.

Consumers Can Access the Individual Insurance Market Through a Variety of Routes

One common approach consumers take is to purchase insurance through an agent. Agents may sell products from only one insurance carrier or offer products from several competing carriers and assist consumers in identifying the product that best meets their needs. Agents may also assist consumers in the application process.

Consumers may also purchase insurance by contacting carriers directly. In many states, dominant carriers have high name recognition and may focus marketing activities directly on individual consumers. Representatives from several Blue Cross and Blue Shield plans and large HMOs we visited such as Kaiser and FHP told us they regularly use television, radio, or print advertising to target individual consumers. Consequently, most of the individual market business for these carriers is generated through direct contact with applicants. Indemnity carriers, like Mutual of Omaha and Time Insurance, rely on agents to generate most of their individual market business.

Another important access route for individual consumers is through a business or social organization. Organizations such as chambers of commerce, trade associations, unions, alumni associations, and religious organizations may offer insurance coverage to their members. Through the pooled purchasing power of many individuals or small employers, associations can negotiate with carriers for competitively priced products that they then offer their members. For example, a small-employer health care purchasing group in Arizona offers its products to the self-employed.

Through this program, self-employed people have access to coverage on a guaranteed-issue, community-rated basis with premium adjustments permitted only for age and geography. Other arrangements make use of individuals’ common affiliation to increase access to health insurance for individuals. For example, Blue Cross and Blue Shield of North Dakota has made arrangements with essentially all the banks in the state to allow depositors to obtain coverage by having their premiums deducted directly from their bank accounts. In operation since the 1960s, this bank depositors plan covers about 76 percent of the carrier’s individual enrollees in the state.

Individuals leaving most employer-sponsored group plans have access to two different types of coverage. First, federal law requires carriers to offer individuals leaving group coverage the option of continuing to purchase that coverage at no more than 102 percent of the total policy cost for up to 18 months. Required by the Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, the law applies to employer groups of 20 or more. Some state laws extend similar requirements to groups of fewer than 20. Secondly, several states require carriers to offer individuals a product comparable to their group coverage on a guaranteed-issue basis. Conversion coverage tends to be very expensive, however. Because those who elect to purchase conversion coverage tend to be in poorer health than those who do not (a situation known as adverse selection), the premium prices are generally higher than for comparable individual market products.

Finally, those determined by carriers to be uninsurable in the insurance market may be able to purchase coverage through a state high-risk program. Many states offer high-risk programs that provide subsidized coverage to uninsurable individuals at rates generally about 50 percent higher than what a healthy individual would pay in the private market. These programs cover a very small percentage of the insured population and are sometimes limited by the availability of public funding.

Some Consumers Face a Broad Range of Product Choices Driven by Consumer Demand and Market Segmentation

Purchasing insurance through the individual market can be a complex process for even the most informed consumer. In addition to the multiple ways consumers can access the market, consumers are confronted with products offered by dozens and sometimes a hundred or more different carriers. Once a carrier and product are chosen, consumers must then select among a wide range of deductibles and other cost-sharing options.

Multiple Carriers Offer Individual Insurance Products

In each of the seven states we visited, individuals could choose among products offered by multiple carriers. Consumers could choose from plans offered by no fewer than 7 to over 100 carriers. Generally, HMO coverage was available in addition to traditional fee-for-service indemnity plans or preferred provider arrangements. Table 3.1 shows estimates of the number of individual market carriers in each state’s individual market. Unless otherwise noted, carrier estimates include only carriers that offer comprehensive coverage.

While some states have fewer carriers than others, it is important to note that fewer carriers do not necessarily equate to fewer choices for consumers. For example, although 145 carriers in Illinois may offer individual products, these products are not available to all consumers in the state because of medical underwriting. In addition, some of these carriers may not actively market their products or may sell only limited benefit products. In contrast, New Jersey has 26 carriers offering one or more comprehensive products to which every individual market consumer in the state has guaranteed access.

The mix of carriers participating in the individual market also differs from that of group insurance markets with respect to the role of Blue Cross and Blue Shield (Blues) plans, the extent of HMO penetration, and the size of carriers. Blues plans continue to be relatively important in the individual markets of many states. In six of the seven states we visited, the Blues were the largest single carrier in the individual market. In North Dakota and Vermont, the Blues had a 76 and 58 percent share, respectively, of the market for comprehensive individual market products. Nationally, about a quarter to a third of all individual enrollees obtained their coverage from a Blues plan in 1993.

The HMO share nationally in the individual market is about half of what it is in the employer-sponsored group market, although it is increasing. In New York, for example, the HMO share of the individual health insurance market has increased from about 7 percent in 1992 to 40 percent in 1996. Partly in response to insurance reforms enacted there, at least one large individual market carrier withdrew its indemnity products altogether and replaced them with an HMO product, according to a New York trade association official. The trend in New York is expected to continue in response to recent state measures designed to encourage HMO participation in the individual market. In Illinois, a representative of one of the largest individual market carriers told us the carrier soon expects to introduce its first individual HMO product. In Colorado, an HMO plan is now the most popular product sold in the individual market.

Finally, whereas the group market is dominated by large, national carriers such as Aetna and Prudential, carriers in the individual insurance market tend to be smaller or regional in focus. Blues plans are typically a dominant force in state individual markets. Also, few of the largest individual market carriers in the states we visited were among the 100 largest U.S. life and health insurance carriers.

Through Choice of Cost-Sharing Options, Consumers Can Lower Premiums but at Increased Financial Risk

In contrast to employment-based group insurance, individuals may choose from multiple cost-sharing arrangements and are generally subject to relatively high out-of-pocket costs. Under employer-sponsored coverage, the range of available deductibles is narrower, and total out-of-pocket costs are capped at a lower level than under most individual market products. For plans offered by medium and large employers, annual deductibles are most commonly between $100 and $300, while limits on total out-of-pocket expenses are $1,500 or less for most employees. In the individual market, annual deductibles are commonly between $250 and $2,500, while limits on total out-of-pocket costs typically start at $1,200 and may exceed $6,000 annually.

Insurance contracts require policyholders to contribute to the cost of benefits received. Under traditional, major medical expense plans, consumers must pay annual deductibles and coinsurance up to a specified total limit on out-of-pocket expenses. HMOs typically require consumers to make copayments for each service rendered until an annual maximum is reached. The cost-sharing arrangement selected by the consumer is a key determinant of the price of an individual insurance product. The more potential out-of-pocket expenses the consumer could incur, the lower the premium will be. To illustrate, table 3.2 shows how premiums for a comprehensive major medical expense policy offered by one Colorado carrier decrease as annual deductibles increase. Premiums shown are for a healthy 30-year-old, nonsmoking male living in a major metropolitan area of the state.

Products offered in the states we visited typically included a wide range of cost-sharing alternatives. Most commonly selected by consumers were deductibles from $250 to $2,500, although deductibles of $5,000, $10,000, $50,000, and even $100,000 were also available. (Under the recently enacted national Health Insurance Portability and Accountability Act of 1996, high-deductible plans to be used in conjunction with medical savings accounts are defined as those with deductibles of between $1,500 and $2,250 for individuals.) HMO copayment requirements were typically $10 or $15 for a physician office visit and $100 to $500 per hospital admission.

Total annual limits on out-of-pocket costs were most commonly between $1,500 and $6,000. Table 3.3 illustrates examples of cost-sharing options available for selected commonly sold comprehensive products.

Because consumers pay the entire cost of coverage, affordability is often of paramount concern. Consequently, consumers who perceive their risk of needing medical care to be minimal but want coverage in case of an accident or catastrophic illness may choose very high cost-sharing provisions to obtain the lowest possible premium. Other consumers, regardless of their health status, may only be able to afford insurance with very high cost-sharing provisions. Consumers who anticipate a greater likelihood of requiring medical care may be willing to pay higher premiums to protect themselves from large out-of-pocket expenses for coinsurance, deductibles, or copayments.

Carrier and insurance department representatives with whom we spoke suggested that the level of consumer cost-sharing has been increasing in recent years, reflecting consumers’ goal of keeping premiums affordable. One national carrier representative said that deductibles seem to be increasing every year. Among the carrier’s new enrollees in 1995, 40 percent chose $500 deductibles, 50 percent chose $1,000 deductibles, and the remaining 10 percent chose deductibles from $2,500 to $10,000. A representative of another national carrier said that the premiums for its $250- and $500-deductible products had become too expensive and are thus no longer offered.

State regulation also influences the range in cost-sharing options available to consumers. For example, under individual market reforms enacted in New Jersey, carriers are limited to offering only standard plans with prescribed ranges of cost-sharing options. All individual market products sold in the state are limited to deductibles of $150, $250, $500, or $1,000 for an individual enrollee. In contrast, one carrier in Arizona, where cost-sharing arrangements are not subject to state regulation, offers deductibles ranging from $1,000 to $100,000.

Benefits Covered Under Most Individual Comprehensive Products Are Generally Comparable

Comprehensive individual coverage includes major medical expense plans—traditional fee-for-service plans and preferred provider organization (PPO) arrangements—and standard HMO plans. While our study focused on comprehensive individual insurance market products, it should be noted that a wide range of less comprehensive, or limited benefit products, are also sold in the individual market. These products, which are sometimes confused with comprehensive products, are discussed in figure 3.1.

Under most major medical expense plans a wide range of benefits is covered, including in- and outpatient hospital, physician, and diagnostic services; specialty services, such as physical therapy and radiology; and prescription drugs. Standard HMO plans typically cover an equally or more comprehensive range of benefits and are also more likely to offer a broad range of preventive care, such as periodic examinations, immunizations, and health education. Moreover, these benefits were generally comparable with benefits covered under employer-sponsored group plans.

We reviewed the benefit structure of commonly sold comprehensive products in the states we visited. These products included traditional indemnity or fee-for-service, PPO, and HMO plans. Most of the plans covered a wide range of benefits, as shown in figure 3.2. Five benefits—hospice care, substance abuse treatment, maternity services, preventive care for adults, and well baby/child care—were less consistently covered. The latter three benefits were covered by each of the HMOs. Among plans that did not offer maternity coverage, half offered it as an additional rider.

High Premiums and Individual Health Status May Affect Access to the Private Insurance Market

Beyond characteristics such as how consumers access the market, the number and types of health plans available, and the multiple cost-sharing options, other aspects of the individual market also distinguish it from the employer-sponsored group market. Aspects such as restrictions on who may qualify for coverage and the premium prices charged can have direct implications for consumers seeking to purchase coverage and are often exacerbated by the fact that individuals must absorb the entire cost of their health coverage, whereas employers usually pay for a substantial portion of their employees’ coverage. A consumer may find affordable coverage or may find coverage only at prohibitive rates. A consumer may find coverage available only if conditioned upon the permanent exclusion of an existing health condition or may be locked out of the private health insurance market entirely. Consumers may be forced to turn to state high-risk programs or an insurer of last resort for coverage—at a significantly higher premium—or go without any health insurance coverage whatsoever.

Effect of Demographic Characteristics and Health Status on Premium Prices

Substantial Variation in Premium Prices Due to Demographic Differences

Unlike the employer-sponsored market where the price for group coverage is based on the risk characteristics of the entire group, prices in the individual markets of most states are based on the characteristics of each applicant. Characteristics commonly considered to determine premium rates in both markets include age, gender, geographic area, tobacco use, and family size. For example, on the basis of past experience carriers anticipate that the likelihood of requiring medical care increases with age. Consequently, a 55-year-old in the individual market pays more than a 25-year-old for the same coverage. Similarly, females in this market may be charged a higher premium than males of the same age group because of the costs associated with pregnancy and the treatment of other female health conditions. These individuals, however, if in the group market, would usually pay the same amount as the other members of their group, regardless of their specific age or gender. Premiums may also vary geographically. In some states, premium prices are higher in urban areas than in rural areas because of higher medical costs. Likewise, smokers are expected to incur greater medical expenses than nonsmokers and are thus often charged higher premiums in the individual market. Finally, family composition is also factored into premium price as a larger family would be expected to incur higher medical expenses than a smaller family. Treatment of this last factor is generally similar between the individual and the group markets. Carriers establish standard rates for each combination of demographic characteristics.

Table 4.1 provides examples of the range in monthly premium rates some carriers we visited charge individuals, depending on their age, gender, or geographic location, in states that do not strictly regulate carrier rating practices. The low end of the range generally represents the premium price charged to males about the age of 25 who do not live in a metropolitan area. In contrast, the high end usually represents the most expensive insured in this market, a male aged 60 to 64 who lives in a metropolitan area.

Medical Underwriting Affects Premiums and May Bar Access to the Individual Market

Absent state restrictions, carriers also evaluate the health status of each applicant to determine whether an applicant’s health status will result in an increase to the standard premium rate, the exclusion of a body part or an existing health condition, or the denial of the applicant altogether. This process is called medical underwriting.

Under medical underwriting, carriers evaluate an applicant’s health status on the basis of responses to a detailed health questionnaire. On the questionnaire, applicants must indicate whether they or any family member to be included on the policy have received medical advice or treatment of any kind within their lifetime or within a more limited time frame, such as the previous 5 to 10 years, and whether they have experienced a broad range of specifically identified symptoms, conditions, and disorders. Applicants must also indicate whether they have any pending treatments or surgery, are taking any prescription medication, or have ever been refused or canceled from another health or life insurance policy. On the basis of these responses, carriers may request additional information—typically medical records—or require an applicant to undergo a physical examination. Some carriers require physical examinations regardless of applicants’ responses to their questionnaires.

The information obtained through this process is used by carriers to determine whether to charge a higher than standard premium rate, exclude from coverage a body part or an existing health condition, or deny the applicant coverage altogether. The criteria used to make these determinations vary among carriers and are considered proprietary. Certain conditions are commonly treated by carriers in the same manner, however. Table 4.2 lists examples of some carriers’ treatment of certain health conditions in states that do not prohibit medical underwriting.

The carriers we visited generally accepted the majority of applicants for coverage at the standard premium rate. Where state mandates did not exist, however, these carriers denied coverage to a significant minority of applicants. Denial rates ranged from zero for carriers in states such as New Jersey, New York, and Vermont where the law guarantees coverage, to about 33 percent, with carriers in those states that do not prohibit medical underwriting typically denying coverage to about 18 percent of all applicants. Individuals with acquired immunodeficiency syndrome (AIDS) or other serious conditions, such as heart disease and leukemia, are virtually always denied coverage. We also found examples in which individuals with less severe conditions, such as attention deficit disorder and chronic back pain, could also be denied coverage by some of the carriers. Furthermore, at least two HMOs we visited almost always deny coverage to any applicant who smokes. Table 4.3 lists the estimated declination rates for some of the largest carriers we visited.

Some officials suggested that these declination rates could be understated for at least two reasons. First, insurance agents are usually aware of which carriers medically underwrite and have a sense as to whether applicants will be accepted or denied coverage. Consequently, agents will often deter individuals with a health condition from even applying for coverage from certain carriers. In fact, officials from one carrier in Arizona told us that since agents discourage those who would not qualify for coverage from applying, their declination rate is not an accurate indicator of the proportion of potential applicants who are ineligible for coverage.

Secondly, the declination rates do not take into account carriers that attach riders to policies to exclude certain health conditions or carriers that charge unhealthy applicants a higher, nonstandard rate for the same coverage. Thus, although a carrier may have a comparatively low declination rate, it may attach such riders and charge higher, nonstandard premiums to a substantial number of applicants. In fact, a national survey of insurers showed that 20 percent of all applicants were offered a policy with an exclusion rider, a rated-up premium, or both.

The majority of the indemnity insurers we visited will add riders to policies that exclude certain conditions either temporarily or permanently. For example, knee injuries related to skiing accidents may be explicitly excluded from coverage as may be a more chronic condition such as asthma. Also, a person who suffers from chronic back pain may have all costs associated with treatment of that part of the body excluded from coverage. Similarly, some carriers we visited will accept an applicant with certain health conditions but will charge him or her a significantly higher premium to cover the higher expected costs. For example, an Illinois carrier charges 2 to 3 percent of its enrollees a nonstandard rate. This 2 to 3 percent, however, pays approximately double the standard rate. Also, at least one carrier we visited charges individuals, depending on their medical history, a standard or nonstandard rate for its HMO product. The nonstandard rate is approximately 15 percent higher.

Access to the Individual Insurance Market Varies Among States and Affects Consumers Differently

Individual consumers may be affected differently by the varying methods carriers use in determining eligibility and price. A consumer may find affordable coverage, may only find coverage that explicitly excludes an existing health condition, or may find coverage only at prohibitive rates. Many consumers may be locked out of the private health insurance market entirely.

Tables 4.4 and 4.5 provide examples of what individuals may face, given particular demographic characteristics and health conditions, when attempting to purchase individual insurance from carriers in the states we visited. In addition to demographic characteristics and health status, the extent to which the state regulates the individual insurance market also influences eligibility and premium price decisions. Price comparisons among states, however, can be misleading. Premium prices also vary among states because of regional and state-specific factors. For example, differences among states in cost of living and health care utilization, among others, may also contribute to premium price differences.

Premium Rates May Vary Depending on Certain Demographic Characteristics

As discussed, carriers, absent regulation that prohibits the practice, generally base standard premium rates on the demographic characteristics of each applicant. Such demographic characteristics may include age, gender, geographic area, and family composition. Table 4.4 shows this price variation. Using the monthly premium charged to a healthy, 25-year-old male as a baseline, it compares the differences in prices certain carriers will charge to other healthy individuals on the basis of their age and gender.

Carriers anticipate that the likelihood of needing medical care increases with age. In the states we visited, all the carriers except those that were prohibited by law from doing so, charged higher premiums to older applicants. For example, an Arizona PPO plan cost a 25-year-old male $57 a month and a 55-year-old male $191 a month for the same coverage, a difference of $134. Similarly, a 55-year-old male would have paid $243 more than a 25-year-old male for a PPO product from one Illinois carrier. The carriers we visited were not as consistent in their treatment of gender. Several carriers charged females a higher premium than males of the same age group because of the costs associated with the female reproductive system and pregnancy. For example, 25-year-old females in Illinois and Arizona paid $31 more each month than males of the same age for the same PPO coverage and $36 more each month for a fee-for-service plan in Colorado. All applicants to a Colorado HMO and a North Dakota fee-for-service plan, however, paid the same monthly premium, regardless of gender. Premium prices also varied depending on the geographic area where the applicant resides. For example, the monthly premium for the standard HMO product in New York may cost as much as $289 in metropolitan New York City or as little as $145 in more rural areas of the state.

As the table indicates, all applicants in New Jersey, New York, and Vermont, regardless of age or gender, would pay exactly the same amount for the same insurance coverage from the same carrier. In these states, the individual insurance reform legislation requires community rating, a system in which the cost of insuring an entire community is spread equally among all members of the community, regardless of their demographic characteristics or health status. Reform legislation in New York does allow for limited adjustments by geographic regions. In New Jersey’s individual market, the premium price of the sample product for the carriers in the state ranges from $155 to $565. Although this is a fairly wide price range, all applicants are eligible for and may select from among any of these plans.

The prices listed in table 4.4 generally are carriers’ standard rates charged to individuals with the specified demographic characteristics. Absent state restrictions, most carriers will also evaluate the health status of each applicant to determine whether to charge an increase over the standard premium rate, to exclude a body part or existing health condition from coverage, or to deny the applicant coverage altogether. Some carriers also regard smoking to be a risk characteristic and consider it when they determine an applicant’s eligibility and premium price. Table 4.5 provides examples of what a 25-year-old male with varying habits or health conditions might experience in terms of availability and affordability of coverage in the individual insurance market in the states we visited. Again, the baseline is the monthly premium price charged to a healthy, 25-year-old male.

Three of the 11 carriers shown in table 4.5 charge smokers $7 to $27 more each month for the same coverage, and one HMO automatically denies coverage to all smokers. At least two of the carriers will attach a rider to a policy that explicitly excludes coverage of a preexisting knee condition and will not cover any costs associated with treatment of that part of the body. While three of the carriers automatically deny an applicant with preexisting diabetes, one will accept the applicant but will charge him or her a significantly higher premium to cover the higher expected costs. And finally, an applicant who had cancer within the past 3 years would almost always be denied coverage from all carriers except those in the guaranteed-issue states of New Jersey, New York, and Vermont. Individuals in these states, regardless of their health condition, will generally pay the same amount as healthy individuals for similar coverage.

In non-guaranteed-issue states, applicants who have a history of cancer or other chronic health conditions are likely to have a difficult time obtaining coverage. In many of these states, high-risk insurance pools have been created to act as a safety net to ensure that these otherwise uninsurable individuals can obtain coverage, although at a cost that is generally 50 percent higher than the average or standard rate charged in the individual insurance market for a comparable plan. Individuals in Colorado, Illinois, and North Dakota who are denied coverage from one or more carriers can obtain insurance through the high-risk pool for $52 to $122 more each month. Arizona is the only state we visited that did not have guaranteed issue or a high-risk pool. Unhealthy individuals in this state who are most in need of coverage are not guaranteed access to any insurance product and will most likely be uninsured.

Once Covered, Individuals May Face Obstacles to Continued Coverage

Several state insurance regulators and a representative of the National Association of Insurance Commissioners (NAIC) expressed concern that some carriers may use closed block durational rating, a carrier rating practice used in the individual health insurance markets of many states. Under this practice, carriers offer a guaranteed renewable product at an artificially low rate to attract large numbers of new enrollees and increase their market share. These carriers eventually increase premium rates to more adequate levels and close the block of business by no longer accepting any new applicants. Because insurance pools rely on a steady influx of new, healthy applicants to maintain rates, the rates in the closed block rise even faster. Healthy members of the block tend to migrate—and are sometimes actively solicited by the carriers—to lower priced products that are not similarly available to the unhealthy members of the block. The unhealthy members must either remain in the closed block with its spiral of poorer risks and increasing rates or leave the carrier and face the uncertain prospect of obtaining coverage from another carrier on the open market. Consequently, this practice allows carriers to shed poorer risks and retain favorable risks.

Though legal in most states, some regulators strongly object to this practice. They suggest it penalizes those individuals who have dutifully purchased and maintained their health coverage but eventually become unhealthy. Some states, through guaranteed-issue requirements and premium rate restrictions, have prohibited this practice.

Carriers Suggest Medical Underwriting Helps Keep Private Health Insurance Affordable

Although medical underwriting results in the exclusion of individuals from the private health insurance market, many carrier representatives and analysts suggest that it plays a role in keeping insurance premiums more affordable for most individuals. They contend that coverage of uninsurable individuals is a public policy concern and should be addressed through public initiatives such as high-risk pools, not through the private sector insurance market.

Insurance industry representatives explain that where states prohibit carriers from using medical underwriting, individuals are essentially guaranteed access to insurance regardless of their health status. They suggest that guaranteed access to coverage can result in adverse selection.

Adverse selection refers to the tendency of some individuals to refrain from purchasing insurance coverage while they are younger or healthier because they know it will be available to them in the future should their health status decline. If a significant number of younger, healthier individuals decide to forgo coverage, the average health status of those remaining in the insured pool diminishes. Higher claims costs for this less healthy group will result in higher premium prices, which in turn, could force additional healthy individuals to forgo coverage. The resulting spiral of poorer risks and higher premiums could make insurance less affordable for everyone.

Many state insurance regulators and analysts disagree with this premise or suggest that its impact is overstated by the insurance industry. They present data to support their position as do insurance industry representatives to support theirs. The appropriate degree of regulatory intervention in private insurance markets will continue to be a subject of debate, underscoring the importance of thorough, ongoing evaluation of the impact of various state insurance reforms.

State and Federal Initiatives Attempt to Expand Access to Coverage for Individuals

A wide range of initiatives to increase access to various segments of the heath insurance market have been undertaken by states and more recently the federal government. While almost all of the states have enacted insurance reforms designed to, among other things, improve portability, limit waiting periods for coverage of preexisting conditions, and restrict rating practices for the small employer health insurance market, they have been slower to introduce similar reforms to the individual market. From 1990 through 1995, a number of states passed similar insurance reforms in the individual market, and by year-end 1995, about 25 states created high-risk insurance pools to provide a safety net for otherwise uninsurable individuals. Eight states and the District of Columbia have Blue Cross and Blue Shield plans that provide all individuals a product on an open enrollment basis. At least seven states have no insurance rating restrictions, operational high-risk pool, or an insurer of last resort. Table 5.1 catalogs state initiatives to increase individuals’ access to health insurance. Recent legislative efforts at the federal level also attempt to increase individuals’ access to this health insurance market.

About Half of the States Have Passed Individual Insurance Reforms, but Provisions Vary

To improve the availability and affordability of health insurance coverage to individual consumers, a number of states have passed legislation in recent years to modify the terms and conditions under which health insurance is offered to this market. These reforms may seek to restrict carriers’ efforts to limit eligibility and charge higher premiums because of an individual’s health history or demographic characteristics. We identified 25 states that from 1990 through 1995 had passed one or more reforms in an effort to improve individuals’ access to this market. We found substantial variations in the ways states approached reform in this market, although reforms commonly passed included guaranteed issue, guaranteed renewal, limitations on preexisting condition exclusions, portability, and premium rate restrictions. More states may soon enact reforms in this market because of NAIC’s recent recommendation of two model laws for reforms in the individual insurance market.

An explanation of the reforms follows. Table 5.2 catalogs the reforms passed by each state.

Guaranteed Issue

Guaranteed issue requires all carriers that participate in the individual market to offer at least one plan to all individuals and accept all applicants, regardless of their demographic characteristics or health status. We found that 11 states required all carriers participating in the individual market to guarantee issue one or more health plans to all applicants. This provision, however, did not necessarily guarantee coverage to all individuals on demand. To limit adverse selection, carriers in most states did not have to accept individuals who qualify for employer- or government-sponsored insurance. Also, some states only required carriers to accept all applicants during a specified and usually limited open enrollment period.

States also varied in the number of plans they required carriers to guarantee issue. In states such as Idaho, the legislation explicitly defined a basic and standard benefits plan that each carrier must offer all individuals. Other states, like Maine and New Hampshire, required carriers to guarantee issue all health plans they sold in the individual market. New Jersey explicitly defined and limited the number and type of plans carriers offered in the market.

Guaranteed Renewal

Guaranteed-renewal provisions prohibit carriers from not renewing coverage to plan participants because of their health status or claims experience. Exceptions to guaranteed renewal include cases of fraud or failure to pay premiums. A carrier may choose not to renew all of its individual policies by exiting a state’s market but is then prohibited from reentering the market for at least 5 years.

Preexisting Condition Limitations

Twenty-two states limited the period of time coverage can be excluded for a preexisting condition. States typically defined a preexisting condition as a condition that would have caused an ordinarily prudent person to seek medical advice, diagnosis, care, or treatment during the 12 months immediately preceding the effective date of coverage; a condition for which medical advice, diagnosis, care, or treatment was recommended or received during the 12 months immediately preceding the effective date of coverage; or a pregnancy existing on the effective date of coverage.

Most reform states allowed carriers to exclude coverage for a preexisting condition for up to 12 months. Some states, however, such as Oregon and Washington, limited this exclusionary period to 6 or 3 months.

Portability

Portability provisions require carriers to waive any preexisting condition limitations for covered services if comparable services were previously covered under another policy, and this previous policy was continuous to a date not more than a specified number of days before the new coverage went into effect. Among states that had passed portability reforms, the specified number of days ranged from 0 to 90. Six states had enacted portability provisions of 30 days, the most common duration among reform states.

Premium Rating Restrictions

Eighteen of the 25 states included provisions in their legislation that in some way attempted to limit the amount carriers can vary premium rates or the characteristics that can be used to vary these rates. Among the seven states we visited, New Jersey, New York, and Vermont restricted carriers’ rating practices and generally required all carriers to community rate their individual products with limited or no qualifications. Under community rating, carriers must set premiums at the same level for all plan participants. That is, all participants are generally charged the same price for similar coverage regardless of age, gender, health status, or any other factor. North Dakota had limited rating restrictions, and Arizona, Colorado, and Illinois essentially had no rate limitations in place.

Most of the 18 states with restrictions, however, allowed carriers to vary, or modify, the premium rates charged to individuals within a specified range according to differences in certain demographic characteristics, such as age, gender, industry, geographic area, and smoking status. For example, New Hampshire only allowed carriers to modify premium rates for differences in age, while South Carolina allowed carriers to use differences in age, gender, geographic area, industry, smoking status, occupational or avocational factors, and any additional characteristics not explicitly specified, to set premium rates.

Most of the 18 states, however, limited the range over which carriers may vary rates among individual consumers. Carriers usually establish an index, or base rate, and all premium prices must fall within a given range of this rate. For example, in Idaho premium rates were permitted to vary by no more than +/-25 percent from the applicable index rate and only for differences in age and gender. Carriers in Louisiana were allowed to vary premium rates more liberally. The state’s legislation allowed carriers to vary premium rates +/-10 percent because of health status and allowed unlimited variation for specified demographic characteristics and other factors approved by the Department of Insurance.

High-Risk Pools May Be an Option for Those Denied Coverage but Remain Relatively Expensive and Enroll Few

In addition, about 25 states have created high-risk insurance programs that act as a safety net to ensure that individuals who need coverage can obtain it, although at a cost that is generally 50 percent higher than the average or standard rate charged in the individual insurance market for a comparable plan. To qualify for the high-risk pool, applicants generally have to demonstrate they have been rejected by at least one carrier for health reasons or have one of a number of specified health conditions. Officials from at least two of the state insurance departments we visited suggested that their states’ high-risk pools ensure the availability of health insurance to all who needed it and prove that no access problem exists—provided the individual can afford the higher priced coverage.

Although high-risk pools exist as a safety net for otherwise uninsurable individuals, they essentially enroll an insignificant number of individuals. In fact, in at least 22 of these 25 states, less than 5 percent of those under 65 with individual insurance obtain coverage through the high-risk pool. Only in Minnesota does the pool’s enrollment exceed 10 percent of the individually insured population. The low enrollment in these high-risk pools may be due in part to limited funding, lack of public awareness, and their relative expense. Some states limit enrollment and may have waiting lists. For example, California has an annual, capped appropriation to subsidize the cost of enrollees’ medical care and curtails enrollment in the program to ensure that it remains within its budget. Also, insurance department officials in each of the states we visited with high-risk pools recognized the public is often unaware that these pools exist, even though carriers are often required by law to notify rejected applicants of it. Officials in two of these three states were generally unaware of the extent to which carriers complied with this requirement. And finally, although these programs provide insurance to individuals who are otherwise uninsurable, they remain relatively expensive, and many people are simply unable to afford this higher priced coverage.

Several Blues Plans Act as Insurers of Last Resort

In addition to the 11 states that require all carriers to guarantee issue at least one health plan to all individuals, the Blue Cross and Blue Shield plans in 8 states and the District of Columbia voluntarily offer at least one product to individuals during an annual open enrollment period, which usually lasts 30 days. Although these plans accept all applicants during this open enrollment period, they are not limited in the premium price they can charge an individual applicant.

Seven States Have Passed No Initiatives to Ensure Unhealthy Individuals Access to the Market

Our analysis also shows that by the end of 1995, seven states neither had passed reforms that attempted to increase access to the individual insurance market nor had an operational high-risk pool or a Blues plan that acted as insurer of last resort. In these states, individuals who are unhealthy, and thus most likely to need insurance coverage, may be unable to obtain it. These states are Alabama, Arizona, Delaware, Hawaii,Nevada, South Dakota, and Texas.

Federal Legislative Efforts May Also Increase Individuals’ Access to Coverage

In addition to state efforts, recently passed federal legislation also attempts to increase access to the individual health insurance market. The Health Insurance Portability and Accountability Act of 1996 will affect the individual market in several ways. It will, among other things, guarantee access to the individual market to consumers with previous qualifying group coverage, guarantee the renewal of individual coverage, authorize federally tax-exempt medical savings accounts (MSA), and increase the tax deduction for health insurance for self-employed individuals.

Under this act, individuals who have had at least 18 months of continuous coverage have guaranteed access to an individual market product and do not need to fulfill a new waiting period for preexisting conditions if they move from a group plan to an individual market plan. It is important to note that although this law guarantees portability, it in no way limits the premium price carriers may charge individuals for this coverage. Also, with some exceptions, the legislation requires all carriers that provide individual health insurance coverage to renew or continue in force such coverage at the option of the individual.

In addition, self-employed individuals who purchase health insurance will, beginning in 1997, have the option of establishing tax-deductible MSAs. An MSA is an account into which an individual deposits funds for later payment of unreimbursed medical expenses. To be eligible for the tax deduction, self-employed individuals must be covered under a high-deductible health plan (defined as a health plan with an annual deductible of $1,500 to $2,250 for an individual and $3,000 to $4,500 for family coverage) and have no other comprehensive coverage. As noted in chapter 3, many participants in the individual market already purchase high-deductible health coverage. An individual with an MSA can claim a tax deduction for 65 percent of his or her health plan’s deductible for self-only coverage and 75 percent for family coverage.

Finally, the act increases the tax deductibility of health insurance for self-employed individuals, who constitute about one-fourth of individual market participants. Currently, self-employed individuals may deduct 30 percent of the amount they paid for health insurance for themselves as well as for their spouse and dependents. Beginning in 1997, these individuals may deduct 40 percent of this cost; 45 percent in 1998 through 2002; 50 percent in 2003; 60 percent in 2004; 70 percent in 2005; and 80 percent in 2006 and thereafter.

Concluding Observations

While employer-sponsored group plans are still the dominant source of health insurance coverage for most Americans, millions depend on an accessible and affordable individual market outside the workplace. Many Americans, including family farmers, self-employed individuals, and those working for small firms that do not offer coverage, must rely on the individual market as their permanent source of health insurance coverage. Others rely on this market between jobs and during other periods of transition. Recent trends suggest a growing share of the U.S. population will probably turn to the individual market at some point in their lives. The days of rapid expansion of both private employer and government program coverage are probably behind us. Meanwhile, employer downsizing continues, job mobility increases, and the ranks of part-time and contract workers grow.

The individual insurance market is complex, and consumers, unlike those who have access to employer-sponsored plans, are largely on their own in obtaining and financing coverage. Consumers can access the market in a variety of ways; must choose among multiple, usually nonstandardized, products offered by multiple carriers; and must select one of many cost-sharing options, each of which will have a different impact on the amount of money consumers will ultimately pay. Further adding to the complexity of this market is its high geographic variability. Depending on the state or even on the markets within a state, consumers may face an entirely different set of choices.

Many consumers face barriers to coverage in the individual market. Absent state restrictions, carriers base coverage and pricing decisions on each individual’s demographic characteristics and health status. Thus in most states, those who are older or in poor health may be charged significantly higher premiums or may be denied coverage altogether. Among those with coverage in the individual market, many may be underinsured. Increasingly sold are very high deductible plans with lower premiums but greater financial risk for consumers. Many consumers may purchase these plans because they cannot afford premiums otherwise, suggesting that, unlike under medical savings accounts, a reserve to pay the high deductibles may not exist. Some consumers can only obtain coverage that permanently excludes the very medical condition for which they are most likely to need care. And other consumers—intentionally or unintentionally—purchase limited benefit policies as their only source of coverage.

Twenty-five states have recently passed legislative reforms for their individual health insurance markets and more are likely to follow. The reforms vary widely in scope from limited measures, such as those intended only to limit the length of preexisting condition waiting periods a carrier may impose, to comprehensive reforms requiring carriers to provide coverage to all who apply and use community rating to set premiums. Some states use other measures to increase individual market access or affordability, such as high-risk pools and insurers of last resort. At the federal level, the Health Insurance Portability and Accountability Act of 1996 is a recent example of federal legislation that will affect the individual health insurance market. The act guarantees access to the individual market to consumers with qualifying previous group coverage and guarantees the renewability of individual coverage. For the self-employed, the act authorizes federally tax-deductible medical savings accounts and increases the tax deductibility of health insurance. The importance of the individual insurance market to millions of Americans is a factor to be considered in weighing any further incremental measures to improve the accessibility and affordability of private health insurance.