The Truth about the Individual Market
by Greg Scandlen
Reprinted with permission from http://healthblog.ncpa.org
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 – 3% 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 1% 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 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 people.
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 1% 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. The health insurance marketplace continues its march toward change as California’s Department of Insurance proposes new controversial rules on small business self-insurance and officials mull increasing premiums on those with unhealthy lifestyles.