Individual Insurance: Health Insurers Try to Tap Potential Market Growth

Individual Insurance: Health Insurers Try to Tap Potential Market Growth

HSC Research Brief No. 14 | November 2009 | By Elizabeth A. November, Genna R. Cohen, Paul B. Ginsburg, and Brian C. Quinn

The individual insurance market served as the only coverage option for people without access to employer-sponsored or public insurance -- including the self-employed, those between jobs, workers at firms that did not offer benefits and early retirees without employer coverage. While the individual market had historically covered a stable 6 to 7 percent of the nonelderly population, several factors were prompting insurers to view it as a growth opportunity. These included the ongoing decline in employer-sponsored coverage, a large pool of younger healthy people going without insurance, and the likelihood that health reform proposals would expand the market's role.

Challenges for Insurers and Consumers

The individual market posed difficulties for both sides of the transaction. Insurers had to contend with adverse selection -- the tendency for sicker, costlier individuals to disproportionately seek coverage. To manage this risk, most insurers used medical underwriting to set premiums based on applicants' health status and to exclude pre-existing conditions. For consumers, these practices meant that people who needed coverage most often faced the highest barriers: denied access, coverage exclusions, premiums well above group market rates, and products that were difficult to compare across carriers.

Insurer Strategies Across Communities

HSC's examination of individual insurance markets in 12 Community Tracking Study communities revealed that insurers were pursuing several strategies to expand their presence. In markets with less restrictive state regulations, competition was more active, with insurers entering to offer products with individualized pricing that attracted healthier applicants. Blue Cross Blue Shield plans held the largest market share in most communities, partly because of their longevity in the market and, in some cases, their obligation to serve as insurer of last resort.

Insurers focused on developing lower-cost, less-comprehensive products designed to attract younger, healthier consumers. These products featured higher deductibles, limited benefits and lower premiums -- appealing to people who wanted catastrophic protection without paying for coverage they did not expect to use. Marketing strategies shifted toward Internet-based distribution channels that reduced acquisition costs and allowed consumers to compare and purchase plans online.

State Regulation Creates Divergent Markets

State regulatory environments varied widely and shaped the competitive landscape of individual markets. States with guaranteed-issue requirements, community rating and benefit mandates limited insurers' ability to offer cheap, bare-bones products, which reduced insurer interest but provided stronger consumer protections. States with minimal regulation attracted more insurers offering a wider range of products at varying price points, but left consumers with health problems facing much higher costs or denied coverage entirely. This regulatory patchwork meant that consumers' experiences in the individual market depended heavily on where they lived.

Policy Implications

The study found that insurers' current individual market strategies were unlikely to meet the needs of people with significant health conditions seeking affordable, comprehensive coverage. Congressional health reform proposals envisioned a dramatically different regulatory framework for the individual market -- with guaranteed issue, modified community rating and premium subsidies -- that would likely supersede the strategies insurers were pursuing. The research provided a snapshot of the individual market on the eve of potential transformation.

Sources and Further Reading

This analysis was originally published as HSC Research Brief No. 14 by the Center for Studying Health System Change, a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.