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The Individual Health Insurance Market



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Last week, USA Today ran this front page story on recent premium increases in the individual health insurance market that got some attention. We are told, among other things, that Anthem Blue Cross in California is passing on double-digit premium increases to 640,000 enrollees, and an insurer in Washington state is charging nearly 18 percent more this year for coverage compared to last year.

The piece leaves the reader with the clear impression that the average premium increase in the individual market was very high for 2009, even though the data in the story is entirely anecdotal. Some insurers in some markets are charging much more in 2009 than they did 2008 — that is certainly true. And it could very well be the case that premiums, on average, went up more rapidly in the entire market this year than normal, but we don’t know that yet — not from this story anyway.

Still, this piece does tell us something about the individual market, which is that enrollees can be vulnerable to sudden premium spikes. The question is: Why?

The reason is that the individual market, as currently constituted, is small and somewhat idiosyncratic because it is essentially the refuge of that segment of the population that doesn’t have access to job-based plans, such as seasonal workers, early retirees not yet eligible for Medicare, and workers in small firms that don’t offer a plan. People almost always sign up with their job-based plans if they can because the premiums paid by employers are tax-free while the premiums paid by individuals who buy insurance on the open market are not. Nationwide, there were 165 million people under age 65 in employer-sponsored plans in 2007 and only 17 million in individually-purchased plans.

Although 17 million is still a lot people, they are spread over fifty states and many different state regulatory structures governing how risks are pooled. Insurers must charge premiums commensurate with the health claims they expect their enrollees to file, otherwise they would become insolvent. In a voluntary marketplace with relatively small numbers of enrollees, the risk profile of any given insurer can change rapidly, which may necessitate a large premium adjustment. Some small employers also face large premium spikes if a disproportionate number of enrollees suddenly find themselves with cancer, for instance. 

Opponents of market-based reform plans like to cite USA Today-type stories to discredit the whole concept of ownership, consumer choice, and competition in health care. But, in reality, the article again points to the need for a systematic reform which would give individually-purchased insurance the same tax advantage as now provided to employer-paid premiums. That change by itself would give the individual market the size and scale it needs for more stability. And then the competition which consumer choice provides would entice lower cost, higher quality products into the market as well. Over time, the financial advantages enjoyed by today’s dominant employer-based plans would give way to the security of owning stable insurance that can be kept even as job circumstances change.   

– James C. Capretta is a fellow at the Ethics and Public Policy Center.  He served as an Associate Director of the Office of Management and Budget from 2001 to 2004.



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