No Easy Answers
Is There a Future for Individual Health Insurance?
by Karen Bender
As more and more employers drop their
health insurance coverage, will individual
coverage be able to fill the gap?
Continues Decline." "Employment-Based Coverage
Drops." These are
typical of the headlines
prevalent in the
news today. In a “normal” market, the erosion of
one source of supply would enhance the opportunities
of other suppliers. So if employment-based coverage drops,
this means that there will be an increased demand for individual
insurance, right? As any health actuary who has been in the business
for long knows, health insurance is not a “normal” market,
and a drop in the employment-based health insurance market may
or may not bode well for individual health insurance.
The real underlying problem to the health insurance “crisis”
is that health care is extremely expensive. I want to say upfront
that I don't have any easy answers to this. Easy answers would
already have been identified and implemented. Even so, the issues
facing the individual health insurance market are real and
Why doesn't the drop in employment-based coverage bode
well for individual insurance? First, the drop will increase the
focus on the individual market, and it may not be able to bear the
scrutiny. Individuals used to obtaining insurance through their
employers will expect access, affordability, and portability. Will
they find it?
Second, in the employment-based market, the employer makes
a significant contribution to premiums, thus shielding the employee
from the true cost of insurance. In the existing individual
insurance market, the individual pays 100 percent of the premium,
resulting in sticker shock for many considering its purchase.
Third, acquisition and ongoing administrative expenses are
significantly higher for individual health insurance than they are
for the small-employer and large-employer counterparts. While
we in the industry understand these costs, will we be able to defend
60 cents to 75 cents of every premium dollar going toward
claims as opposed to 80 cents to 90 cents in the group market?
Or, conversely, 25 to 40 cents of every premium dollar going toward
State of the States
According to the 2005 Employer Health Benefits Summary, published
by the Kaiser Family Foundation and Health Research and
Education Trust, employment-based insurance dropped from 69
percent to 60 percent in the past five years. Some of the causes
- Group insurance premiums are increasing at rates that are
multiples of the general cost-of-living increases as well as wage
- Fewer small employers offer insurance. (Sixty-two percent of
all uninsured workers were either self-employed or working for
firms with fewer than 100 employees. And 35 percent of workers employed with firms with fewer than 10 employees were uninsured.)
- An increasing number of employers are asking their employees
to contribute more to the cost of health insurance premiums. The
take-up rate (the percentage of employees opting for insurance
when offered) decreased from 87 percent in 1997 to 84.8 percent
- Of those who didn't elect to participate in their own employers'
health plan, 71.3 percent (up from 64.4 percent) cited cost as
- Employers are dropping insurance programs for early retirees.
And what are states doing to stop the erosion in the employer
- Some states are considering employer mandates (pay or play)
as well as individual mandates.
- Other states are trying to tax large employers that don't spend
enough of their payroll on health benefits, the theory being that
some of those employees not receiving health insurance benefits
will end up on the Medicaid rolls. This is commonly known as the “anti-Wal-
over a gubernatorial veto in Maryland.
- Some are changing the definition of “dependent” to enable
young adults to continue coverage under their parents' policy.
New Jersey lawmakers recently approved a bill requiring health
insurers to provide the dependent coverage option for dependents
up to age 30! It doesn't appear that the New Jersey bill even requires
that young adults be dependents in the traditional sense,
only that they're unmarried without dependents of their own and
that they're not insured.
- Almost all states have expanded Medicaid-type programs, such
as the State Children's Health Insurance Program (SCHIP) to insure
children (and sometimes adults) of low-income families.
- Some states are studying the possibility of introducing a singlepayer
Lessons From Small-Employer Groups
It's interesting to note that these state efforts appear to acknowledge
that the individual market isn't a viable alternative to the
absence of employer-sponsored insurance, or there wouldn't be
so many efforts to maintain the employer-sponsored health insurance
paradigm. This observation by itself indicates that the
individual market may be the next target for increased regulatory
focus, especially if there is a general belief that the existing market
isn't meeting the needs of the public.
What can we learn from the small-employer group market?
First, I want to emphasize that individual insurance is very different
from group insurance; a
pool composed of individuals is
different from a pool composed
of many small employers. There
are, however, some things we can
learn from the reforms that occurred
in the small-group market.
The main issues that drove
small-employer group reform in
the early 1990s were access, affordability,
and portability. The
Health Insurance Portability and
Accountability Act (HIPAA) with
its portability rules and guaranteed-
issue requirement for all employers with between two and
50 employees, eliminated the access-and-portability issue for
small employers and their employees.
Affordability remains a problem for small employers. In my
opinion, the cost of guaranteed issue in a voluntary insurance
market was significantly more than any of us anticipated. I conclude
this because premium trends in the small-group market
have consistently been percentage points higher than the premium
trends in the large-group market over the same periods.
If the cost of guaranteed issue was a one-time occurrence, then
we should have observed an increase in the initial year or so after
HIPAA implementation. Then the trends for the two markets
should have been consistent. This becomes important when we
study the issue for the individual market.
In most states, carriers in the individual market are allowed to
vary premiums by age, gender, geography, and smoking status.
Traditionally, potential buyers in the individual market must pass
medical health underwriting in order to purchase insurance. Insurance
companies generally have the following choices: accept
the individual; accept the individual with riders for specific conditions;
reject the individual. Sometimes companies will implement
a surcharge to the premium in lieu of riders. Pre-existing condition
clauses are present in almost all individual policies (other than
those that are HIPAA-eligible).
Early retirees , who no longer have access to
employer-based insurance coverage, are shocked at
their inability to purchase afordable health insurance.
According to a study completed by America's Health Insurance
Plans (AHIP), about 88 percent of applicants in the individual
market were offered coverage. However, the offer rates
varied significantly by age, with 95 percent of the applicants under
the age of 18 being offered coverage and only 70 percent of the
applicants ages 60 to 64 being offered coverage.
The study also shows that the number of applicants ages 60 to
64 was significantly less than the number of applicants at younger
ages, which could indicate that the older individuals with health
conditions didn't apply for insurance—whether discouraged from
applying or not actively marketed to.
Of the 88 percent of applicants who were offered coverage,
slightly more than three-quarters were offered standard rates;
about 22 percent were offered higher premiums, and the balance
were offered waivers, higher premiums and waivers, or some
Once again, the percentages vary significantly by age. About
87 percent of the applicants under age 18 accepted for coverage
were offered standard premiums, while about 56 percent of applicants
accepted for coverage at ages 60 to 64 were offered standard
premiums. About 40 percent of applicants accepted for coverage
in the 60 to 64 age group were offered higher premiums, and
the balance were offered some combination of higher premiums
Of the total number of applicants ages 60 to 64, 30 percent
were rejected; about 39 percent were offered coverage at standard
rates; 28 percent were offered coverage at higher premium rates,
and the balance were offered coverage at some combination of
higher rates and waivers.
Remember, older individuals' standard premiums are higher
than the standard premiums for younger individuals to reflect the
higher cost of health claims as we all age. So a load to a standard
premium for individuals ages 60 to 64 is above and beyond the
incremental cost for expected aging.
Why is this important? Because employment-based insurance
is eroding and because the baby boomers are aging and retiring
(some by choice and some by other means). Early retirees, who
no longer have access to employer-based insurance coverage, are
shocked at their inability to purchase affordable health insurance.
A study by the California HealthCare Foundation found that
heads of families age 55 and over, many of whom are early retirees,
are more than twice as likely to purchase individual insurance
as those under age 35. Yet, according to the AHIP survey, the
number of applications for this category was significantly lower
than the number of applications for younger people.
Is something occurring in the marketplace to discourage older
individuals from even applying for insurance? Also, we baby
boomers are not an “accepting” pool; we'll complain loudly and
often when we discover that we can't easily access insurance coverage,
and the one thing that regulators don't like is complaints.
The second issue that drove reform in the small-group market was
affordability. The resulting reforms limited the amount of variation
carriers could charge one employer versus another employer.
The National Association of Insurance Commissioners (NAIC)
developed several model bills describing what it considered to
be reasonable rate reforms. Each state then decided what type of
rating rules best fit its needs, with the results ranging from pure
community rating to no rating limits whatsoever. Community rating
means that rates can vary only by dependent status (e.g., single,
family) within a given geographic area for a specific benefit. Other
factors such as age, gender, group size, industry, morbidity, and/or
health status can't be used to determine initial or renewal rates.
The result is a complex set of regulations with no nationwide
consistency. While these reforms did succeed in reducing the
variation in rates among employer groups within a specific state,
they haven't been successful in controlling the overall costs of
health insurance and may have exacerbated the affordability
Some states tried to carry over the small-group reforms into
the individual market. Be careful what you wish for; the resulting
experience in the individual markets from some of these reforms
has been less than stellar.
New Jersey implemented guaranteed issue, community rating,
and standardized plans in its nongroup market from 1992 to
1994. Premiums have increased well above the rest of the country.
As of June 2005, the lowest annual premium a family could pay for a $500 deductible plan was $46,944—and as high as $263,904.
Few would argue that these premiums are affordable.
Vermont, New York, and New Hampshire also implemented
pure community rating and guaranteed issue for the individual
market during this same period. Kentucky, Washington, Massachusetts,
and Maine implemented modified community rating
and some form of guaranteed issue. The results have been
consistent: A large number of carriers have withdrawn from the
individual market, leaving consumers with significantly fewer
choices. By 1996, there was only one carrier in Kentucky that
was still in the individual health insurance market. There were
none in Washington at one time.
Premiums have risen significantly above the increases observed
in other states. A study completed in 2002 showed that
Massachusetts, New York, New Hampshire, and New Jersey, four
of the states that passed the most rigorous individual health insurance
reforms, had the four highest annual insurance premiums
for individual family coverage in the country.
There have been different reactions to the adverse impacts
in these states. New Hampshire and Kentucky have been trying
to ”reverse” the reforms and introduce provisions that would
make these states more similar to the environment in non-reform
states. They've discovered, however, that it's easier to get insurance
companies to leave the state than it is to have them return.
Vermont expanded its Medicaid eligibility, in part to address
the exodus of carriers, and is now second in the nation in the
proportion of its under-65 population covered by Medicaid.
New York introduced Healthy New York, a state-subsidized
program targeted at low-income individuals and small employers.
Washington and New Jersey have implemented a series of “reforms
of the reform” in efforts to mitigate the adverse consequences of
their initial good intentions. Maine has introduced the state-sponsored
Dirigo Health Plan, intended to eliminate the 136,000 uninsured
within six years with a reduction of 57,000 within the first
year. Enrollment during the first year was 7,300, of which fewer
than 2,000 were formerly uninsured. What did increase in Maine
was enrollment in MaineCare, Maine's Medicaid program, which
now insures nearly 25 percent of Maine's population.
Can a private insurance industry survive as the primary source
of insurance when so many are enrolled in public programs?
The previous examples show how good intentions resulted in
exactly the opposite results. However, the industry also needs to
be cognizant of some of its own practices that drive the pressure
for some of these regulations.
Many insurance companies use associations (or some similar
enabling vehicle such as discretionary trusts) to market what is,
for all practical purposes, individual insurance. These vehicles
are classified as “group” insurance in some states and allow insurance
companies to bypass the rate approval processes (and
sometimes other regulatory oversight) required of traditional
This can be an asset in the market by providing a more efficient
means of delivering health insurance, but it can also be
abused. Not so long ago, the Wall Street Journal reported on an
insurer using health status and/or claim experience to set renewal
rates for each individual without any reasonable ceiling. While
the use of health status and/or claim experience may be a valid
means of maintaining a viable individual pool, there must be reasonable
Another approach in the individual market is to introduce a
set of products for several years and then “close the pool” and
start a new pool with a new set of products. No new members
can enter the closed pool, and only those who can pass health
underwriting are allowed into the new pool. The rate for each
pool is based solely on the experience of that particular pool. The
average morbidity in the old pool can only deteriorate, resulting
in higher-than-trend increases. The individuals in the old pool
who can pass health underwriting have an incentive to join the
new pool because of lower rates. There are fewer members in the
old pool to spread the risk. The results are escalating premiums
in the old pool.
As someone who reviews rate filings for various states, I've
observed first hand the premium level that can result from these
closed pools. The closed-pool problem was the subject of an intense
five-year study completed by an Academy committee (of
which I was a member) on the behalf of the NAIC. Because of
NAIC direction, experience rating (e.g., the use of health status
and/or claim experience to determine, in part, renewal rates)
wasn't one of the scenarios studied. The NAIC is currently considering
which, if any, of the proposed possible “solutions” modeled
by the Academy it will adopt.
Durational rates are another technique for attracting the best
new business. Besides using open and closed pools, insurers can
vary the rates within a pool by year of issue as underwriting wears
off. If used appropriately, this may be a way of creating a viable
pool over the long run. If abused, the practice could be considered “bait and switch” where the rates are very low initially and increase
significantly when the impacts of underwriting no longer apply.
If the industry doesn't want what it considers to be unreasonable
regulations, it needs to discipline itself to avoid the circumstances
that drive the regulations.
Portability is defined as the ability to change carriers without having
to undergo medical underwriting or satisfy any pre-existingcondition
waiting periods. HIPAA guarantees portability between
employer group plans as well as between employer group plans to
individual plans. HIPAA didn't address premium rates, however.
So while coverage for an individual transferring from a qualified
group plan to an individual plan was guaranteed coverage, the
premium rates could still be very high.
States that have implemented guaranteed issue with no (or minimal)
pre-existing condition limitations in their individual market
have, by default, introduced portability. The previous examples of
the adverse effects of guaranteed issue in the individual market
demonstrate that this is not a solution. We all know that the industry
can't survive “just-in-time” insurance. Washington tried this
with its reforms and drove all carriers out of the market.
We have numerous examples of reforms that don't work. We also
know that the status quo will only invite more regulatory oversight,
which could have results exactly the opposite of those intended. It
appears that the current system can't adequately meet the needs
of a large population that may be required to seek insurance on
an individual basis.
How do we handle the portability problem? I had the opportunity
to participate in the Academy's visits to Capitol Hill last year,
where I talked to legislators who can't understand why individual
insurance shouldn't have the same portability requirements as
group insurance. It's a challenge trying to explain how this isn't
easily accomplished in a voluntary individual market where the
financial incentive would be to insure the medically underwritten
individuals for the first couple of years and then encourage them
to leave thereafter.
I don't think I was able to make them understand that there's
no easy way to achieve portability without significantly increasing
the cost and complexity of insurance and its administration.
There’s no easy way to achieve portability without
significantly increasing the cost and complexity
of insurance and its administration .
If the individual market is to be viewed as a viable alternative
to group insurance, there is going to be tremendous pressure
to increase the number of applicants ages 50 to 64, as well as
to improve the acceptance ratio for this population and the
population as a whole. While high-risk pools, which exist in
many states, serve as a safety net for the truly uninsurable, the
high premium associated with these pools creates an affordability
Expanding the acceptance rate can be an opportunity for the
industry to develop new and innovative underwriting/rating approaches,
such as conditioning renewal rates upon acceptable
blood pressure readings, compliance with medical protocols and
disease management programs, etc. This approach will also require
flexibility by regulators.
High-deductible health plans and health savings accounts are
ideal for the individual market and may represent the first step
toward employers shedding their health insurance obligations.
The biggest barrier to employers adopting a defined contribution
approach to health insurance is the absence of a viable individual
health insurance market where even the sick can purchase insurance
at what is perceived as reasonable rates. The Bush administration
is working hard on extending tax incentives for individual
health insurance that will be closer to or at the same level as those
enjoyed by employers. If this is successful, then the scrutiny of the
weaknesses of the individual market will increase.
Will there be an effort to define national standards for the
individual health insurance market (similar to a federal charter)
to eliminate the costs of trying to comply with 50 different departments
of insurance? If so, what will these national standards
What about an individual mandate? This undoubtedly would
increase demand for increased access. Is the industry ready?
As I said before, I don't have answers to all these questions. I
do know, however, that if the industry wants to control its own
destiny, it needs to consider some of its existing practices and try
to develop solutions proactively.
Karen Bender is a principal with Mercer Oliver Wyman in
Employer Health Benefits 2005 Summary, The Kaiser Family
Foundation and Health Research and Education Trust, http://www.kff.org/insurance/7315/sections/upload/7316.pdf.
Paul Fronstin, director, “Sources of Health Insurance and
Characteristics of the Uninsured: Analysis of the March 2005
Current Population Survey,” Employee Benefit Research Institute
(EBRI) Brief No. 287, November 2005, www.ebri.org.
“Individual Health Insurance: A Comprehensive Survey of Affordability,
Access, and Benefits,” Center for Policy and Research,
America’s Health Insurance Plans, August 2005.
“Snapshot: Individual Health Insurance Market,” California
HealthCare Foundation, November 2005, http://www.chcf.org/
Conrad F. Meier, “Destroying Insurance Markets,” Council for
Affordable Health Insurance and the Heartland Institute, 2005.
Dave Spellmen, “Disagreement on Dirigo Is Not Disrespect.“,
Blethen Maine Newspapers, Dec. 20, 2005, http://news.
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