Patterns of Individual Coverage

Grant Description: How do the dynamics of the individual insurance market inform how long participants remain covered? What factors affect the length of participation and subsequent insurance status? Researchers at the University of Maine examined three specific questions: 1) Who uses the individual insurance market? 2) What role does individual insurance play in providing longer-term versus bridge coverage; and 3) What are the patterns of entry into and exit from the individual insurance market? The objective of the study was to better inform the policy debate, at both the federal and state levels, about the best options for sustaining affordable individual insurance coverage.

Policy Summary:

• Participants in the individual insurance market are a heterogeneous group. Most individual spell periods begin when people enter from and exit to employer-based coverage. This implies that a primary function of individual insurance is to bridge gaps in employer-based coverage. However, an important minority of the individually insured maintains coverage for more than two years, with small business employees and the self-employed having the longest spells.
• Spells of individual insurance coverage are generally brief, with a median spell length of eight months. This lends support to insurance industry claims that marketing and administrative costs are higher than for group coverage. Given that most of this volatility involves moving from and to employer-based coverage, it is unclear what policymakers can or should do to stabilize individual coverage for this group.
• Health status does not affect the likelihood that someone will be individually insured at a point-in-time, versus being uninsured or having employer-based or public coverage. Given that those in poorer health are likely to have a higher demand for insurance, this suggests insurance companies’ techniques for avoiding adverse selection may be effective at limiting enrollment among sicker adults. Also, many of the sickest individuals may have public coverage.
• Health status relates to duration of individual coverage, with those in fair or poor health having the shortest spells.
• About 40 percent of consumers in fair/poor health leave individual coverage for public insurance, perhaps as they become eligible for Medicare by virtue of age or disability, or financially eligible for Medicaid.
• Nearly one-sixth of those exiting an individual insurance plan do so without another source of health insurance to take its place.
• Healthier and younger individuals are much more likely than their sicker or older counterparts to end up uninsured, supporting prior theory and research on adverse selection spirals in the individual market. Although younger persons generally face lower premiums, costs appear to be high enough (and self-perceived health risks low enough) to make them unable or unwilling to continue buying individual coverage. While it is unclear what effect tax credits will have on covering the uninsured generally, if sufficiently generous, they may help keep younger and healthier participants in the market.
• Individuals with family incomes between 100 percent and 200 percent of the federal poverty level have a slightly elevated rate of individual coverage (37 percent of the individually insured have incomes below 200 percent of poverty). Given the financial constraints of this income group and the high cost of many individual plans, many may be purchasing plans with high deductibles and/or limited benefits (although identifying benefit structure is beyond the scope of this study). Future research on individual coverage should investigate access to health care services for those in lower income brackets.
• While the bulk of those who exit an employer-based plan may be covered by HIPAA reforms, the nearly one-third that obtain individual coverage after being uninsured or covered by a public program would not be protected by HIPAA provisions.
• The patterns of individual insurance coverage are complex and vary for different subgroups that hold individual plans. For most, individual health insurance bridges periods of employer-based coverage, meaning that targeting policy interventions to this group (as HIPAA does) may be appropriate. However, there are significant minority subgroups in the individual market that are overlooked by this type of reform. Thus, policymakers should be mindful of the variability of individual insurance spells as they consider reforming or expanding access to individual health insurance coverage.