The Truth about the Individual Market, Part One

The individual market for health insurance has been long disparaged for being too expensive and too restrictive. The criticisms about health insurance are usually based on what the individual market is doing.

The promise by supporters of the Affordable Care Act that people will no longer be turned down for coverage is an example. This is already illegal in all but the individual market. Even there, denials are a miniscule issue. According to a recent report by Milliman, based on new reporting by carriers required by the National Association of Insurance Commissioners (NAIC), there are only 10,300,000 people covered by individual health insurance – three percent of the population of the United States. And denials would happen only at the time of application for coverage, not after someone is already covered. The trade group America’s Health Insurance Plans (AHIP) reports that 87% of all applicants for individual coverage are accepted. Out of 1,763,000 applicants who were medically underwritten in 2008, AHIP reports that 223,000 were denied coverage. This is less than one tenth of one percent of the country’s population.

I beg your pardon,
I never promised you a rose garden.

The other criticism of the individual market is that it is too expensive. Milliman’s analysis of the NAIC reports finds that is simply not true. In fact, the premium per member per month for individual (non-group) coverage is $211.67, while the small group premium is $333.25 and large group is $333.74.

Milliman also finds that the individual and small group markets have similar administrative costs on a per member/per month basis ($40.49 and $43.82, respectively), but both are higher than large group ($31.29), mostly due to “distribution costs” (marketing.) But because premiums are lower for individual coverage, similar expenses result in higher percentage of premiums. Thus, the individual market has a lower loss ratio (80.9%) than small group (83.7%) or large group (89.3%).

What about market domination? Milliman finds there are three states where a single carrier has 90% or more of market share in the large group market, two states for the small group market, and not a single state in the individual market. The number of states where a single carrier has 60% or more is 21 for large group, 17 for small group, and 15 for individual.

So what’s going on here? The individual market is somewhat more competitive, has similar administrative costs, and considerably lower premiums than the small group and large group markets. Yet it is widely disparaged. Why?

The biggest reason is denials of coverage for new applicants. Only seven states require companies in the individual market to accept all applicants (guaranteed issue), but 33 of the remaining states have a high-risk pool that will enroll people who are denied, and for the rest, Miliman reports:

… the state may designate an insurer of last resort, have a specified product that is issued on a guaranteed basis, or require that each market participant insure a quota of high-risk individuals.

Now, it may be that these risk pools are underfunded and too restrictive, but the insurers can hardly be blamed for that. That is the responsibility of state legislatures. And it hardly seems rational to turn the entire health care system on its head to solve a problem that affects much fewer that one-tenth of one percent of the population.

The other problem, of course, is that benefits in the individual market are less generous than in the group market. These plans very often don’t cover prescription drugs or maternity, or require a separate rider for these benefits. But if the market wanted to buy coverage for these benefits, it is certain the insurers would be happy to sell them. But, when people buy their own coverage they tend to be more cautious in getting value for their money, and don’t load up on things they don’t think they will need.

The biggest problem in the individual market is that it isn’t subsidized, and we’ll get into that next time.

Comments (29)

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  1. Ken says:

    Excellent post, Greg. One of your best.

  2. Beverly Gossage says:

    You are preaching my sermon. Thanks for that. I would add that the individual market is portable and can often be taken from state to state. Since rates are based on risk, young people who generally earn less, pay a much lower premium. These are the healthy folks that we want to keep in the pool. Great post!

  3. Devon Herrick says:

    Alleviate urge

    …benefits in the individual market are less generous than in the group market.

    People often don’t realize how much insurance costs until they try to buy it on the individual market. When they do shop for individual coverage, people quickly learn that first-dollar benefits costs much more than higher-deductible plans. The proponents of the new health care law want to increase the cross-subsidies from healthy to sick. To achieve this, health advocates hope to encourage use of comprehensive coverage. To lessen the inclination to skimp of coverage (especially by families who do not expect to need costly care), the new health care law contains consumers’ ability to buy cheap coverage. In theory, consumers will still be able to buy low-cost, bronze plans. But in reality, few insurers will be willing to sell them considering the regulations that make them unprofitable.

  4. Ralph @ MediBid says:

    @Devon,
    It has more to do with choice, and spending our own money. In a group situation, the HR person often chooses for all, and the squeaky wheels get what they want. In the individual market people are deciding for themselves, and spending their own money, and people make better decisions on their own behalf

  5. Ralph @ MediBid says:

    But this post reminds me of a story I heard on Friday. I was visiting a urologist in FL, who is a client of mine, and the office manager said they had a client who come to them and said she was covered by Blue Cross. She went for surgery, and had a stent installed. They billed Blue Cross, and they told them that her coverage had lapsed, so they would not pay. They billed the patient, and the patient said that they would have to take it up with Blue Cross because obama said that they were not allowed to cancel people’s coverage when they got sick. They doctor explained that they still had to pay premium, and the patient said that obama never said that, so she keeps coming to the doctor for uncompensated care.
    This is what we are in for.

  6. Brian Liechty says:

    Overall a good post but one caveat on the statistics, John: The only reason that AHIP reports “87% of all applicants are accepted” is that most people don’t even complete an application. A substantial number of these individuals seek counsel through a qualified health insurance agent. The individual’s situation and options are discussed, and in about 80% of the cases the application is never submitted because it’s known to be a waste of time: The individual would not meet underwriting criteria and/or won’t pay for it.

    The correct statement from AHIP should be, “87% of the submitted applications are accepted”. The number of applications approved compared to the number of people truly interested in purchasing one is closer to 10-15%, not 87%.

    Speaking from a state without guaranteed issue policies, a couple other points: Even with heavy subsidies, State-sponsored “insurance of last resort” tends to be sub-standard coverages at very high costs–therefore unavailable or poor value to the average consumer. And many of the newer “affordable” plans–the federal PCIP is a good example–have restrictions that are nonsensical: You have to remain uninsured for 6 months before you are eligible. So . . . someone who does the responsbie thing, who keeps themselves insured even at punitive cost, is not eligible for the far-less expensive government plan unless they drop their other coverages and “go bare” for that period. Completely contrary to the goals of the programs.

    One last point related to Bevery’s comment above: Health insurance is state-regulated and very few are porttable from one state to another. There may be a transfer program in place with some compnaies to accomodate people moving from one locale to another, but most of the time they simply have to apply for a new policy in their new state of residence.

  7. Brian Liechty says:

    Sorry, I typed “John” instead of “Greg”.

  8. tdp says:

    One other caution regarding the ’87% accepted’ number from AHIP — recissions. Several insurers made a business of liberally issuing coverage but then aggressively pushing retro-active terminations if an insured proved to be a high-dollar claimant.

    The individual market has indeed been hampered by poor tax policy and regulation, but it also has had some irresponsible actors who poisoned the well for all.

  9. Steven Bassett says:

    Thanks Greg. So let’s get to an individual market: 1) tax deal to individuals and families 2) A single open enrollment period on conversion from a group plan where pre-ex is waived. If you miss the open enrollment then you’re subject to today’s medical UW policies. 3) Guaranteed renewability allowing for carrier switch, but allow restrictions on jumps to low deductibles and plans that cover more items. 4) If it made some folks feel better 4 to 1 rating could work, but much less would push away the good risks.

  10. Beverly Gossage says:

    Brian,
    As a health insurance agent for group and individual policies who has been appointed in 23 states, I can tell you that you are right about agents advising some individuals not to apply if we know that they won’t be accepted; however, my experience has been closer to 80% of those who seek a private policy qualify, certainly not 10%-15%.

    Here is what I came to realize: Most of those folks seeking private policies, who would most likely be declined, developed high risk conditions while on an employer plan. When the employer plan stopped for whatever reason, they sought a private policy. Had they been on a private plan before they became ill, they would not have been forced to the high risk pool.

    Most of these folks would have been far better off if the employer had added to the employee’s salary and let them purchase their own private policy like they do auto and home owner’s insurance.

    Regarding portability, if a client purchases a policy from a carrier which is also licensed in the state where the client is moving, the client just takes his policy with him and contacts the carrier with the new zip code. The carrier adjusts the rate based on the zip code and the plan stays the same with no underwriting required. The best carriers with the largest national presence are Humana, Aetna, and United. BCBS is not as good because each state’s BCBS is independent of the other.

    Yes, the high risk pool is more expensive to cover the high expected claims for those in that pool. This is as it should be or the healthy would delay coverage until they experienced a catastrophic event.

  11. Janice Michaud says:

    John, great article, worthy defense.
    In my practice as an insurance agent, I would say the 87% is accurate. The companies I work with are changing the underwriting guidelines based on higher deductilbes, more are accepted.
    Some other considerations are many double app, and there are many who change their minds and forego when rated up or just don’t carry thru (they are accustomed to someone doing this for them).
    The group market that is not health underwritten, causes cognitive dissonance for folks coming into the individual market. I deal with this daily.

    I hope, John, you will address in another part of this article: the cost burden to the individual market of the delay in folks seeing their health and risk in terms of future underwriting.

    Also, it is the individual market, in the form of HIPAA GI policies that bears a financial burden that is caused by group coverage. The numbers are skewed against individual coverage because of these costly plans, furtively categorized.

    Thanks for all you do,
    Janice

  12. Joe S. says:

    Great post.

  13. Ian Duncan says:

    Two actuarial points about the difference between large group and small group/individual rates ($9 and $13 per month, approximately). Small group and invidual coverage is largely insured and large group is largely self-insured. Self-insurance allows the large plans to avoid state mandates and state Risk-based capital requirements, which probably add 5-6% to the overall cost of coverage.

    In addition to turning the market on its head to solve a tiny coverage problem, the minimum loss ratio requirement of the ACA is designed to address a perceived administrative cost problem, part of which is a function of the regulatory demands above. I am curious why no company has taken up this issue (limiting what a company can charge), which seems as constitutionally dubious as the mandate.

  14. David J. Gibson, M.D. says:

    In my opinion, one must view this article from the perspective of the megatrends that are now well underway within the health care financing industry.

    The first megatrend is the collapse of the entire contract infrastructure of managed care. Physicians led by hospital based practices, are canceling their provider network contracts and charging beneficiaries full billable rates as out-of-network service providers. Even in network ambulatory based physician practices, faced with exploding aged and therefore uncollectable accounts receivables, are violating the terms of their provider contracts and charging billable rates at the time of service. The patient is expected to subsequently recover the difference between contract and billable rates after the claim has been adjudicated. The problem here is that managed care was not designed to serve the high deductible market and thus lacks to ability to adapt to the market realities now present.

    The second megatrend is in response to the above. Employers are finding little value in paying for access to contracted networks that contain growing and gaping holes in the most expensive contracted services. The fundamental purpose for PPOs is to protect the patient from balance billing.

    The third megatrend relates to the renegotiation of the basic social contract that has existed between the employee and his/her employer. With the context of the accelerating introduction of high deductible plans into the group health market, the conversion of the employee from being a passive beneficiary within a defined benefit plan into an engaged consumer within a defined contribution plan is well underway. As has been documented extensively elsewhere, at-risk consumers behave far differently than passive beneficiaries.

    All of the above leads to the prism I am referring to when you review this article. The private market is going retail and the only product that can accommodate this evolving market is the individual product. Like managed care, the group market is by definition is designed for the wholesale market. It simply cannot survive when the consumer of services becomes the primary financial risk taker. Thus, from this perspective, it is inevitable that the product that will soon dominate the private market will be the individual product.

  15. Greg Scandlen says:

    Ian,

    Milliman excludes self-funded companies. I should have mentioned that. This data is based on NAIC reports, so covers fully-insured coverage only. It also excludes mini-meds and other non-comprehensive products in the non-group market.

  16. brian says:

    Good points, looking forward to the next part on the individual market.

  17. Linda Gorman says:

    Greg,

    The administrative cost numbers are interesting. Do you know if Milliman included the cost of the human resources departments that typically help administer large group plans in its large group number?

  18. Greg Scandlen says:

    Linda,

    No, I am quite sure that is not included. Since this is based strictly on NAIC reports it would include only those expenses paid directly by the insurer. Your inference that this would add quite a bit to the large group expense is exactly right.

  19. Jon Kessler says:

    I am in the individual market and have been for six years despite nearly continuous employment with groups during that period. As Beverly Gossage points out, the financial risk that I or a member of my family would contract an expensive chronic condition and then lose group coverage is enough to justify going this route versus reliance on an employer.

    However, both regulation and reality have seriously warped the individual market. Effective underwriting doesn’t work with asymmetrical information. And there are people who simply cannot be underwritten at any cost. Government attempts fight reality have made things worse. Consider the standard practice of “block” or “time” underwriting, where carriers are in effect forced to price individual members out of a pool. Tax inequalities. Smaller competitors’ lack of access to preferred pricing, made worse by medical providers using the government to shut out competition from specialty facilities. On and on.

    I’d welcome a serious effort at national reform of the individual market to make it work better.

  20. Greg Scandlen says:

    Brian,

    You should check the report itself. There are many reasons an interested person might not go ahead and complete an application. Anticipated rejection is certainly one of them, but probably not as big as finding out what the coverage will cost. Most people who are accustomed to an employer plan are shocked when they discover the underlying cost of coverage. Talk to people who are looking at COBRA continuation.

    There was a recent news story about a fellow with AIDS who was going to sign up for the new ObamaCare risk pool, I think in Minnesota. It is heavily subsidized and people are charged standard premiums,but once he found out it would cost him about the same as his rent he decided not to apply — even with active AIDS. Curious that he put a higher priority on his housing than on his health, eh?

  21. Patrick says:

    Greg, You missed the whole point of Obama’s rant against insurance companies. He wants total control of what healthcare services you get – Single Payor. He couldn’t sell that, so he started bashing the health INSURANCE industry – a CONVENIENT VILLIAN. In 34 years in the biz I’ve never found anyone who likes to pay premiums for something they don’t want to use! So it’s an easy sell – to move toward Single Payor – bash the insurance companies to get votes. He totally missed ‘reducing the high cost of healthcare – it became insurance reform.

    Loved Ralph’s comment about the lady who decided not to pay insurance premiums when she needed it the most. Are people like that allowed to reproduce? Sorry about the blunt comment, but I’m tired of subsidizing them.

  22. Jim Morrison says:

    Greg,
    An excellent post. I’m anxious to see Part Two.

  23. Bert Loftman says:

    Greg says, “And it hardly seems rational to turn the entire health care system on its head to solve a problem that affects much fewer that one-tenth of one percent of the population.”
    I do not agree. A large problem is Job-Based-health insurance caused by the income tax breaks. Individual should obtain the same tax breaks and the FairTax would do this. Then the free market could develop an individual health insurance market.
    Thanks, Bert

  24. Jon Kessler says:

    Bert, I honestly don’t know the details of the FairTax, so that may be a solution. However, generally, this is a sticky area for conservatives. Adding a new personal deduction for individual health insurance expenses would further complicate the tax code. The better answer is to take away the existing exclusion for employer-provided health benefits. Obamacare starts us down this road with the Caddilac Tax, which, if it weren’t constructed to have no impact until after Obama is long gone from office, would be about as popular as some recent cadillac models, meaning, not very popular at all.

    I for one would be in favor of subsidies for those who cannot afford insurance in this environment if those were in lieu of the shameful program we have called Medicaid.

  25. steve says:

    “there are only 10,300,000 people covered by individual health insurance – three percent of the population of the United States.”

    Exclude Medicare aged patients and Medicaid patients and you have a higher percentage. You cannot blame private insurers for not funding pools, but it is their high costs that necessitate their existence.

    Steve

  26. John R. Graham says:

    I neither sell insurance nor practice medicine, so I have to trust what those folks tell us.

    Bev Gossage says that it’s not that difficult to carry your individual policy when you move. I’ve never had an individual policy so I can’t say. But I have auto insurance and I know that when I move anywhere in the country I just call the carrier, tell the operator my new ZIP code, receive a fairly minor adjustment to premium, and carry on driving. It takes just a few minutes.

    With respect to physicians bailing out of network contracts: I’m not seeing it. I’m seeing them consolidating into larger groups to increase negotiating power. However, I appreciate the argument that physicians are struggling to manage accounts receivable.

    I am concerned that the network contracts have not gotten on top of this. For example, I have a consumer-driven health plan and never pay a cent when I see the doctor. If I had a traditional PPO with the same carrier, I’d pay a co-pay. I then get an EOB and a bill for the entire amount. This is idiotic.

    In my neighborhood (Marin County, north of the Golden Gate Bridge), I doubt an appointment with a physician would ever cost less than $100. So, the patient with a high-deductible health plan should pay at least $100. Then, if the adjudicated claim is $120, send him a bill for $20. The result would be a massive reduction in credit risk.

    (Of course, this proposal is only relevent to the current, still malformed, consumer-driven plans. In real consumer-driven plans, I suspect that there would be no claims adjudicatio for most physicians except surgeons. Patients and physicians would transact with mutually agreed prices, and no insurers would be involved.)

  27. Ron Bachman says:

    I am a big fan of changing federal and state tax and state insurance insurance laws to expand the market for individual health insurance purchases. I beleive that expanding defined contribution plans and providing personal control and responsibility is enhanced with more individual insurance.

    However,many conservatives continue to argue against the value of employer based health insurance as simply an accidental loophole developing out of WWII wage and price controls. The reality that I observe is that in today’s economic world an employer’s greatest assest is their human capital. Employer based and supported health insurance is the maintenance contract on their human capital. Employers are not likely to eliminate or pass that maintenance contract on to someone else; it affects productivity, creative=ity, teaming, disability, workers comp, and bottom i=line profits.

    There is a place for both individual and group. Unfortunately, individual and fully insured small group plans are controlled under very inadequate state laws typically written by insurer lawyers to the disadvantage of the consumer. “Replacement” of ObamaCare and free market solutions to lowering the uninsured must begin at the state level.

  28. Ralph @ MediBid says:

    @Ron,
    Well put: “A maintenance contract on your human capital.” Similar to the disabled seamen act of 1798 which insured international trade. The other factor about group is the actively at work presumption of underwriting. Small group reform set the pooling point too low such that even first dollar claims are fully pooled. This is where opportunity exists to to have at least the first few thousand dollars experience rated.

  29. Janice Michaud says:

    Greg,
    I’m sorry to have missed that you authored the article and mistakenly addressed John.
    Most of all, I’m disquieted by not recognizing your “voice”. Surely I’ve read enough of both of you to recognize. Over 50 alert!
    Great article… great comments… way to flush out dynamic ideas.
    Janice