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. 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 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. 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. 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. 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. 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. 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. 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. 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.