The Individual Health Insurance Market

Originally published as Issue Brief No. 58 by the Center for Studying Health System Change (HSC), December 2002. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

The Individual Health Insurance Market: Researchers, Policy Makers Seek Common Ground on Tax Credits for the Uninsured

As Washington policy makers weighed the use of tax credits to encourage uninsured Americans to purchase health insurance, researchers and policy experts gathered at a conference cosponsored by the Center for Studying Health System Change and Health Affairs to debate the strengths and weaknesses of the individual health insurance market. One presenter concluded that the individual market "works acceptably well for about 80 percent of potential buyers" but was unlikely to serve the remaining 20 percent, who were in the poorest health. Another argued that the individual market "is not a good place to target substantial new resources aimed at lowering the number of uninsured persons." A proposal that drew considerable interest from conference attendees called for the federal government to act as a reinsurer of the individual market by assuming responsibility for most of the costs generated by people in the top 2 to 3 percent of the national spending distribution.

Growing Interest in Health Insurance Tax Credits

Tax credits to help people purchase individual or nongroup health insurance were a central part of the national debate over how to reduce the number of uninsured Americans. President Bush and members of Congress from both parties had proposed credits for low-income individuals and families, but reliance on the individual market drew sharp criticism from those who viewed the market as deeply flawed and a poor vehicle for expanding coverage. On October 23, HSC and Health Affairs held a conference to explore these divergent perspectives. Health Affairs also released a special online issue examining the same questions. The conference drew a standing-room-only crowd of nearly 300 analysts, reflecting the intense interest in this topic on Capitol Hill. HSC President Paul B. Ginsburg framed the meeting's objective as an effort to "dig beneath the surface and explore what we know, what we don't know and what we need to find out about this market."

A Shrinking Market Shows Signs of Promise

The individual health insurance market covered an estimated 8.6 million Americans in 2001, down 11.5 percent from 1997, according to Mark Pauly of the University of Pennsylvania, who co-authored an overview paper with HSC Vice President Len Nichols. Administrative costs were higher in the individual market than in the group market, primarily because selling policies to individuals cost insurers more. The nongroup market also suffered from adverse selection, since those who sought coverage on their own were more likely to have health problems. Despite these shortcomings, Pauly and Nichols concluded the market worked acceptably for roughly 80 percent of potential buyers -- primarily people in good health with incomes high enough to afford coverage. However, it was unlikely to serve the roughly 20 percent who were in poor health, especially those with low incomes.

HSC researcher Jack Hadley estimated that 7 percent of people with individual insurance reported being in fair or poor health, compared with 21 percent of the uninsured. His conclusion was that either those who bought individual coverage were healthier, or the market screened the sicker ones out. Tax credits would help many healthy and younger uninsured Americans but would need to be adjusted for age or health status to serve sicker, older, and lower-income populations.

Tax Credits Could Help Millions

Providing tax credits to uninsured people would enable millions to purchase health insurance, according to Katherine Baicker, an assistant economics professor at Dartmouth University and former economist for the White House Council of Economic Advisers. President Bush's proposal to provide credits of up to $1,000 for individuals and $3,000 for families would help an estimated six million uninsured Americans obtain coverage. Baicker stressed that 80 percent of uninsured families had someone in the workforce, and 60 percent had incomes above the poverty line. She argued that no single approach would capture all the uninsured and urged coupling tax credits with expanded subsidies to state high-risk pools. The Trade Adjustment Assistance Reform Act provided a model, offering tax credits to workers who lost jobs due to trade along with $80 million in new funding for state high-risk pools.

Not Ready for Prime Time

Karen Pollitz of Georgetown University's Institute for Health Care Research and Policy made the case against increased reliance on the individual market. She argued that the current market made coverage less accessible, less affordable, and inadequate for many people without insurance, especially those with modest incomes or less-than-perfect health. Drawing on earlier research she co-authored with HSC's Richard Sorian, Pollitz described presenting insurers with applications from seven fictitious individuals with health problems ranging from hay fever to depression to HIV infection. The applications were rejected 37 percent of the time, and many of the approved policies came with riders restricting benefits or charging higher premiums. Mark Hall of Wake Forest University questioned whether tax credits alone could make the individual market function like the group market, suggesting that expansion of group coverage might be more practical.

Insurers View Market Favorably

Janet Stokes Trautwein of the National Association of Health Underwriters urged policy makers to focus on the millions of people who were well-served by the individual market, arguing that coverage for the chronically ill was widely available and benefits were not always greatly restricted. Tom Miller of the Cato Institute dismissed adverse selection as a "trumped-up bogeyman," arguing that the individual market was small primarily because the tax system was so heavily tilted in favor of employer-sponsored group insurance. Leaders of two major insurers expressed bullish views: Thomas Hefty of Cobalt Corp. and its Blue Cross and Blue Shield United of Wisconsin noted that the uninsured rate in Wisconsin -- which did not limit premiums -- was half the national average. John Bertko, chief actuary for Humana, said half the company's applicants for individual coverage went through clean and received a policy, though 10 to 20 percent might be uninsurable.

High-Risk Pools and Federal Reinsurance

Thirty states had established high-risk pools for the medically uninsurable. Minnesota stood out with 6 percent of covered lives in its pool; Oregon and Nebraska each had 2 percent. Bruce Abbe of Communicating for Agriculture described the pools as serving a small but important niche, guaranteeing everyone in the market a place to buy insurance. Deborah Chollet of Mathematica noted that most pools had experienced problems mirroring those of the individual market itself: expensive coverage, long waiting periods, and limited benefits. Florida had shut down its pool due to inadequate funding, and California, Illinois, and Louisiana had capped enrollment and periodically barred new entrants.

An idea that generated wide interest came from Katherine Swartz, professor of economics and health policy at Harvard. She proposed having the federal government serve as reinsurer for buyers of individual coverage who incurred the steepest medical bills. The government would step in for those with the most expensive 2 to 3 percent of health care costs while carriers retained responsibility for most medical expenses. Swartz argued that much of insurers' underwriting was futile because it was nearly impossible to predict who would become very high-cost, and that the government already played a similar role in areas like natural disaster insurance and mortgage guarantees.

Finding Common Ground

Despite the strong opinions and wide-ranging perspectives expressed at the conference, HSC Vice President Len Nichols found evidence of some convergence. Participants agreed the individual market worked for some people but would likely never serve others. The sharpest disagreement centered on what to do about those left out. Nichols framed the core policy question: "Do you want to cover the relatively many low-risk people who could take the tax credits and buy reasonable coverage in the nongroup market without much regulation, or do you want to focus your limited public dollars on the smaller but more vulnerable high-risk population?" How policy makers answered that question would go a long way toward determining whether they favored individual tax credits, expansion of public programs, or more subsidies for the private group market as the next step toward reducing the number of uninsured Americans.

Sources and Further Reading

Pauly, Mark, and Len Nichols, overview paper on the individual health insurance market, HSC/Health Affairs conference, 2002. | Pollitz, Karen, and Richard Sorian, research on individual market applications and denials. | Health Affairs, special online issue on the individual market, 2002. | Trade Adjustment Assistance Reform Act provisions on tax credits and high-risk pools.