An Unhealthy Individual Health Insurance Market

Issue brief from Lester Feder and Ellen-Marie Whelan details why the broken individual insurance market, in its current form, is not fit to serve as a model for system-wide reform.

In This Issue

The Individual Market: Why It’s Broken

Rob and Ghada Abraham

SOURCE: AP/Carlos Osorio

Rob and Ghada Abraham of Livonia, Mich., are challenging a Blue Cross Blue Shield of Michigan plan to raise the cost of their individual market policy by 24 percent.

Though 45 million Americans are uninsured, only 14.5 million Americans buy health insurance on their own. This is in large part due to the fact that the market for individual health insurance is broken. A recent survey found that 9 out of 10 individuals who explored individual coverage never bought a plan because no insurer would sell them one or premiums were higher than they could afford.

Individuals shopping for coverage on their own generally pay more for less generous benefits than their counterparts who get insurance through their employers. Forty-three percent of Americans enrolled in an individual plan spend more than 10 percent of their incomes on premiums and out-of-pocket medical expenses. Those with pre-existing conditions may not be able to find an insurer willing to cover them at all, or they may face outlandishly high premiums and still not be able to get coverage for the conditions that most need treatment.

Today, only 4.9 percent of Americans get insurance through the individual market, but some health reform proposals want to make this flawed sector the foundation of a restructured system. From President George W. Bush to Senator Tom Coburn (R-OK) to Republican presidential candidate John McCain, conservative policymakers have sought to redirect tax incentives for employer-based coverage to promote health coverage through the individual market. Proponents of such plans note that employer-based insurance makes it harder for workers to change jobs and puts an ever-growing financial strain on employers. They also claim that costs will decrease if patients pay for their care directly and are able to demand better prices.

There is no question that the employer-based insurance market has serious problems. Almost 10 percent fewer firms offer insurance today than did eight years ago. But the individual market can only be a viable alternative to employer insurance—whether now or in a restructured system sometime in the future—if we fix the severe barriers that already prevent many who want coverage from purchasing it.

Shopping on the individual market

Shopping for an individual plan can be a baffling experience. Unlike auto insurance or homeowner’s insurance, which have a relatively limited set of options and straightforward premium structures, health insurance plans can have very different coverage limits, deductible and co-payment configurations, and restrictions on which doctors patients can see. Premiums vary widely, too, because older people or those with pre-existing conditions may pay a lot more than younger and healthier people—that is, if they can find an insurer willing to sell them a policy. Since plans are not standardized, comparing them side-by-side can be next to impossible. And the bewildering array of acronyms used in describing different plans does not make it any easier for consumers to sort out their choices.

The most fundamental difference between plans is how much flexibility a patient has in picking a doctor. Indemnity plans, which are the least common and most expensive form of coverage, allow patients to see any doctor they choose. Most plans, including Health Maintenance Organizations, or HMOs, and Preferred Provider Organizations, or PPOs, reduce costs by restricting patients to a network of doctors within a “managed care” model. These models charge patients more if they see a doctor out of their network.

Shoppers also face difficult trade-offs between how much they can pay in premiums and the comprehensiveness of care. Mental health, dental, vision, and maternity benefits may only be available through expensive “riders” that must be purchased on top of regular coverage. Often plans with lower premiums are available that have higher deductibles or co-payments and reduced drug benefits, if any. In the past few years, consumers have had the option of choosing High Deductible Plans, or HDPs, paired with Health Savings Accounts. These plans allow people to invest money in tax-free accounts—HSAs—for medical expenses in exchange for a high deductible. If a patient does not spend the money in their HSA, the remaining amount rolls over into the next year.

On top of digesting all these choices, choosing a plan is hard because consumers are not buying services for fixed needs. They’re anticipating future needs, which is very hard for individuals to do accurately. It’s not hard to imagine a healthy 50-year-old who enrolls in a plan that limits benefits at $100,000 per condition, figuring that he has never had an illness that required treatment beyond that amount and the premiums are less expensive then a more comprehensive policy. Then, sometime that year, he develops cancer requiring expensive, ongoing treatment, leaving him with bills that far exceed the amount covered by his policy.

Health status discrimination

Paying claims costs insurers money, so they have a powerful incentive to protect themselves against covering individuals in less-than-perfect health. A handful of states prohibit insurers from discriminating on the basis of health status, but in most places insurers can deny coverage to individuals with pre-existing conditions, exclude coverage for their pre-existing conditions, or charge enrollees higher premiums.

According to a recent survey by the Commonwealth Fund, more than two-thirds of people who investigated buying an individual policy found it difficult or impossible to find adequate coverage. Ninety-two percent of people with a health problem never bought a plan, presumably because they were denied coverage or could not afford the plans offered to them. This could be because they have pre-existing medical conditions—whether a chronic disease like diabetes or a one-time event like delivering a baby by Caesarean section—that lead insurers to raise their rates or reject covering them altogether. Plans will often include an “exclusionary rider” that allows insurers to refuse coverage of pre-existing illnesses. These are often the conditions for which people most need coverage, and health insurance that does not cover them often does not seem worth the cost.

A study commissioned by the Kaiser Family Foundation dramatizes the situation faced by people in less than perfect health. Researchers presented 19 insurers in eight markets with profiles of potential enrollees in their plans. They included a 24-year-old waitress with hay fever, a family with an asthmatic child, a 62-year-old smoker with high blood pressure, and an HIV-positive 36-year-old. Insurers rejected the hay fever sufferer five times, and the vast majority of offers she received excluded coverage for hay fever or for her entire respiratory system. The family was offered policies excluding the asthmatic son altogether or excluding coverage for his respiratory ailments. The smoker was denied coverage more than half the time, and no insurer would cover the person with HIV.

As a group, the seven consumers in the Kaiser study were rejected 37 percent of the time. More than half the offers they did receive restricted benefits, and premiums were increased an average of 38 percent over standard rates.

The risk pooling problem

Risk pooling is the foundation of insurance. Your health insurance premiums subsidize the costs when someone else gets sick, and other people’s premiums, in turn, subsidize your costs when you get sick. The more people who share the risk, the less each individual needs to pay in to the pool. Employers who insure their employees act as pooling agents, allowing each employee to share their risks with their co-workers. In a pool of diverse workers, sicker and older people are balanced by healthier and younger ones.

If you come to an insurer as an individual instead of as part of a group, you have no one to share costs with you. Health policy experts often refer to the individual market as the “non-group market,” a term that calls attention to this fact. Using a process called “underwriting,” insurance companies assess how much care you are likely to require, and then limit benefits, fix deductibles, and set premiums accordingly.

Premiums for individuals start at a higher rate than those for businesses, because insurers assume that those who are likely to seek out individual insurance are more likely to need care than those who do not. This is in contrast to employer insurance, where an employee enters a plan because it is offered as a job benefit, not because he anticipates needing care.

According to the 2007 Commonwealth Survey, the estimated median premium for those in the individual market was $3,750, while nearly one-third of individuals pay premiums of more than $6,000 annually. Thirty-nine percent of those with individual plans have a deductible of more than $1,000, while 11 percent face a deductible of more than $3,000.*

These premiums may initially seem comparable with the amount paid by employers to insure their workers—the average annual premium for an employer to insure an individual worker was $4,024 in 2007. But non-group policies have such inferior benefits that such a comparison is deeply misleading.

Government interventions in the individual market

While the individual market remains far less regulated than the market for employer insurance, the federal government and some state governments have taken steps to address the problems of the individual health insurance market.

The most important federal measure came from the Health Insurance Portability and Accountability Act of 1996. For a very small group meeting strict requirement, HIPAA requires insurers to make available plans regardless of health status and it limits what exclusions insurers can impose on pre-existing conditions. In order to be “HIPAA-eligible,” you must have just left an employer plan, used all COBRA benefits, been covered continuously by other insurers for at least 18 months, and be ineligible for any other government program or private group plan. Even for the small number of people meeting these requirements, HIPAA does nothing to limit how much insurers can charge for their policies. The Government Accountability Office has found that plans cost HIPAA-eligible individuals four to six times the standard rate in states that do not impose additional regulations.

Another federal initiative has provided matching payments to states that create high-risk pools for those denied coverage because of their health status. Though 35 states have created such pools, they remain critically underfunded. States therefore cap enrollment and, ironically, often exclude coverage for the very conditions that forced people to turn to high-risk pools in the first place.

Seven states, including New York, New Jersey, and Washington, have implemented some form of “community rating” to control the expense of premiums to those with pre-existing conditions. In these states, insurance companies are required to set premiums using basic demographic data rather than the health status of any given individual seeking coverage. Other states, most notably Massachusetts, have addressed the problem of the lack of risk pooling by establishing a “connector” or an “exchange” (as in candidate Barack Obama’s health plan) which is an entity through which individuals can buy insurance. The connector  or exchange also standardizes plans, serves as a buying pool, and eases the shopping process by facilitating side-by-side comparisons of plans.


Major changes would need to be implemented for the individual market to become a real alternative to employer-sponsored insurance for most Americans. Steps needed to protect consumers would include requiring insurance companies to cover all who applied, eliminating exclusions for pre-existing conditions, and standardizing plans so they can be compared side-by-side. In order to keep plans affordable for higher risk individuals, they would also have to be community rated or use another fee structure that keeps premiums affordable.

In statements last month, two insurance trade associations said they might accept many of these important steps provided that a mandate for all Americans to obtain insurance be instituted so that the risk of sicker individuals could be pooled with those of healthier ones. Importantly, the statements from America’s Health Insurance Plans and the Blue Cross and Blue Shield Association are silent on the issue of how premiums should be set, which, for those seeking access to affordable care, may be the most important detail of all.

Any reform must ensure that all Americans have access to affordable health care, and currently, the challenges to making the individual market work within the present system seem almost insurmountable.

For further reading

Karen Pollitz et al., "How Accessible is Individual Health Insurance for Consumers in Less-Than-Perfect Health?" (Menlo Park, CA: Kaiser Family Foundation, 2001).

Sara R. Collins et al., “Squeezed: Why Rising Exposure to Health Costs Threatens the Health and Financial Well-Being of American Families” (New York: Commonwealth Fund, 2006).

Kaiser Family Foundation, "How Private Health Coverage Works: A Primer" (Menlo Park, CA: 2008).

Point-Counterpoint: The Market Isn’t Healthy

Point Counterpoint The bottom line
The health insurance market will be more cost-efficient with fewer regulations and more shoppers in the individual market to demand better options. Where insurance companies are not required to issue policies regardless of health status, they deny coverage to people with pre-existing conditions or make plans unaffordable. A healthy system manages costs by pooling risk, not by segmenting the market.
Individuals should be encouraged to save money by purchasing individual plans that forego services they do not need. Studies show higher costs prevent people from seeking needed care, including preventative care, tests recommended by their doctors, and prescriptions left unfilled. All Americans need adequate health insurance that gives them access to quality, affordable health care.
Risk pooling is unfair to young, healthy people who are being asked to subsidize coverage for older and sicker people. No one stays young and healthy forever. The person who is young and healthy today will age and will be sick at times. Pooling risk makes health care costs more predictable and manageable for everybody.

In the News

America’s Health Insurance Plans and the Blue Cross and Blue Shield Association endorsed an overhaul of the insurance market, provided all Americans are required to seek coverage.

Health Insurers Offer to Accept All Applicants, on Condition,” The New York Times, November 19, 2008.

Business Week walks consumers through the process of buying health insurance, the challenges of dealing with pre-existing conditions, and short-term insurance options.

How to Find the Right Private Health Insurance,” Business Week, October 13, 2008.

The Washington Post brings to life the challenges of finding individual coverage with a discussion of the Maryland, DC, and Virginia markets.

 “Uninsured? You’re Not Alone,” The Washington Post, October 16, 2007, p. HE01

The Pittsburgh Tribune Review describes the challenge of one couple’s transition from employer to individual health insurance.

 “Health care crisis gets personal,” Pittsburgh Tribune Review, July 3, 2005.

The Seattle Times reports how monthly premiums of over $1,300 are keeping people from enrolling in the state’s high-risk pool.

 “Most high-risk consumers shun costly insurance pool,” Seattle Times, January 21, 2005, p. A1.

Health insurance journalist Christopher J. Gearon illustrates the difficulty of shopping for individual coverage through his own attempt to select a health plan.

Christopher J. Gearon, “Full Coverage: Insurance Journalist Goes Shopping,” The Washington Post, October 26, 2004, F01.

The Last Word

“Insurance carriers seek to avoid covering people who have pre-existing medical conditions, and when they offer coverage, often impose limitations on the coverage they sell. This can price insurance out of the reach of many consumers in poor health or create significant gaps in coverage that could result in being underinsured…. Healthy consumers may also find it difficult to purchase comprehensive coverage in the individual market. In particular, coverage for maternity benefits, mental health care, and prescription medications tends to be limited, especially in comparison to what is typically offered under group health plans.”

"How Accessible is Individual Health Insurance for Consumers in Less-Than-Perfect Health?", a report from the Kaiser Family Foundation

*The Commonwealth Fund provided these numbers for CAP.

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