Individual Health Insurance Market as a Mechanism for Increasing Access to Health Insurance

May 2008

In an effort to increase access to health insurance, Congress, President Bush, and the 2008 presidential candidates have proposed expanding the individual health insurance market through mechanisms such as state-run purchasing pools, tax credits, and insurance mandates. The individual market is smaller than the group market and subject to different regulations and greater risk selection. Although Congress, President Bush, and the presidential candidates propose expanding the individual market, it is unclear how their policies would affect this market and whether such change would in fact increase access to affordable, comprehensive health care.1

The individual insurance market is small relative to the group insurance market and beneficiaries are more likely to opt in and out of coverage due to increased price sensitivity. Approximately 4.6 percent of the non-elderly population, or 12 million individuals, are enrolled in individual plans, the majority of whom lack access to group coverage.2 In a HCFO-funded study, Andrew Coburn, Ph.D., of the University of Southern Maine examined patterns of individual coverage. He found that the median length of time beneficiaries were enrolled in the individual market was eight months and that the individual market frequently served as interim coverage between periods of employer-sponsored health insurance (ESHI) coverage. (For more detail about grant findings, see

HCFO grantee Mark Hall, Ph.D., of Wake Forest University conducted extensive case studies in six states to study the impact of health insurance reforms on the individual market. In general, he found that individual insurance products have high administrative costs and that the markets are often small and unstable, with few competitors.3 Products offered in the individual market vary in price, comprehensiveness, terms of coverage, and duration. Unlike many ESHI offerings, the individual insurance market allows consumers to choose among products and provides price transparency as consumers typically pay the entire premium.

Due to the transitory nature of its beneficiaries, the individual market is subject to adverse risk selection and instability. To ameliorate adverse risk selection, some plans, depending on state regulations, may underwrite the coverage, denying coverage based on preexisting conditions or raising premiums, thus preventing older and less healthy individuals from accessing affordable health care. A 2004 survey conducted by The Commonwealth Fund found that beneficiaries between the ages of 50 and 70 who were enrolled in the individual market paid more for health insurance premiums-often with more limited coverage-than peers covered by group-based coverage or Medicare. These individuals were also less likely to receive necessary care.4

Although individuals between the ages of 50 and 70 tend to pay more than those in group insurance, in 2005, the growth rate for premiums in the individual market was less than for ESHI.5 In a HCFO-funded study, Mark V. Pauly, Ph.D., and colleagues at the University of Pennsylvania's Wharton School examined the relationship between expected medical expense and actual paid premiums for households with individual insurance and found that premiums were not as dependent on expected medical risk as anticipated. To the extent that premiums were associated with medical risk, it was only for specific risk characteristics. Moreover, premiums for those enrolled in health maintenance organizations (HMOs) or in markets with a high penetration of managed care insurers were less closely associated with expected medical risk.6

Recent proposals to increase access to health care include provisions that would directly or indirectly increase the number of beneficiaries enrolled in the individual market. Senators Ron Wyden (D-Ore.) and Robert Bennett (R-Utah) have proposed legislation, The Healthy Americans Act (S-334), that would change the tax code and eliminate ESHI. The proposal would require that all individuals purchase private, individual health insurance coverage through state-run purchasing pools while providing individuals with incomes below 400 percent of the federal poverty level (FPL) with federally subsidized coverage.7 To pay for the coverage, employers would be required to shift their portion of the cost of health insurance to their employees in the form of higher salaries and would eventually make payments to the federal government. The Congressional Budget Office (CBO) has scored the proposal and indicated that if implemented, the Healthy American Act would be budget-neutral by 2014 and would eventually generate revenue. 

In the 2008 State of the Union Address, President Bush proposed that Congress change the tax code so that all individuals who purchase private health insurance-whether ESHI or individual-receive tax deductions to increase affordability.8 Presidential candidate Senator John McCain (R-Ariz.) proposes to alter the tax code to shift preference away from ESHI and would provide tax credits to individuals and families purchasing individual plans.9 To assuage concerns that older and sicker individuals would not be able to afford or obtain coverage through the individual market, Senator McCain recently proposed that states use federal funding to create high-risk pools and contract with health plans to cover these individuals. 10 Senator McCain believes that expansion of the individual market will increase price transparency and therefore competition, potentially lowering health care costs.

Democratic presidential candidates Senators Hillary Clinton (D-N.Y.) and Barack Obama (D-Ill.) also propose to expand the individual health insurance market, though less directly. Both candidates would retain ESHI, but Senator Clinton would provide refundable tax credits and Senator Obama would provide income-based subsidies to individuals who cannot afford to purchase insurance on their own.11, 12 In addition, Senator Clinton's proposal would require that all individuals obtain health insurance. Under this mandate, individuals without access to ESHI would likely purchase coverage in the individual market. Mandates to purchase health insurance may increase the size of the individual market, encourage healthier and younger individuals to enter the market-which may help to spread risk and limit costs-and increase the duration of coverage, potentially stabilizing the market.13 Additionally, the Democratic candidates would prevent health plans from refusing to enroll individuals based on health status, which may increase access, but also costs.

While expanding the individual market may improve access to health care for some individuals, especially those without access to group-based coverage, the effects of such expansion on the market, price, and quality of health care remain to be seen.14 Over the past decade, HCFO has funded numerous projects-listed below-that may help inform these efforts. In addition, HCFO recently released a report and policy brief on the individual insurance market based on findings from related HCFO studies and past meetings and publications.

Title: Monitoring the Early Experience with Federal Health Insurance Tax Credits
Institution: Georgetown University
Principal Investigator: Karen Pollitz, M.P.P.
Grant Duration: February 2004-July 2005

As part of the Trade Adjustment Assistance Act of 2002, Congress created a new, refundable, advance-payable health care tax credit. This tax credit can be viewed as a small-scale demonstration of health insurance tax credits as a way to expand coverage more broadly. This project examined five aspects of the tax credit. It: 1) described the qualified coverage options established in every state; 2) explored the reasons why states decide to establish different coverage arrangements; 3) examined enrollment statistics to determine the impact of state coverage decisions; 4) explored the availability of data on state-based coverage programs for evidence that premium subsidies reduce adverse selection; and 5) reviewed available data on people who claim the tax credit and the premiums they pay. The purpose of this study was to provide policymakers with objective and timely information that will help them monitor and understand the early operations of this program.

Title: Sustaining Individual Health Insurance Markets Under Community Rating and Open Enrollment
Institution: Rutgers, The State University of New Jersey
Principal Investigator: Joel Cantor, Sc.D.
Grant Duration: April 2002-September 2003

What is the extent of risk selection in New Jersey 's Individual Health Coverage Program (IHCP), which was implemented in 1992 as part of the state's individual market reforms? What are the policy options for sustaining access to individual health plans and describing the role of the non-group coverage in New Jersey 's health care insurance market? Using data from the Robert Wood Johnson Foundation-funded New Jersey Family Health Survey (NJFHS), the researchers aimed to answer the following questions: 1) How has the distribution of risk changed in the IHCP since 1995-1996 and what are the implications of those changes for the viability of community rating and related reforms? 2) What is the potential impact on current or potential IHCP enrollees of adopting modified community rating? and 3) What role does the IHCP play in the continuum of coverage in New Jersey ? The objective of this study was to analyze changes in New Jersey 's individual insurance market to inform state policymakers considering reforms to make non-group markets accessible and viable. The researchers supplemented the NJFHS data with a sample of 600 non-group subscribers (subscriber lists provided by top 4 or 5 carriers in state who covered 95 percent of lives in the individual market). Using the same methodological approach utilized by Katherine Swartz, Ph.D., and Deborah Garnick, Sc.D., in the early years of the IHCP, they assessed the risk of medical expenditures of adult IHCP enrollees compared to that of a contrast population composed of individuals with non-small-group employment-based insurance. They also compared the IHCP enrollees with the entire employer-group market and the uninsured.

Title: Guaranteed Renewability in Individual and Group Health Insurance: Functioning and Future Prospects
Institution: University of Pennsylvania, The Wharton School
Principal Investigator: Mark V. Pauly, Ph.D.
Grant Duration: November 2001-October 2002

If private insurers can be encouraged to improve the protection offered by their products, is it possible that those improvements can benefit consumers and obviate the need for regulation with undesirable side effects? This project focused on the individual and small-group insurance markets, particularly the sharp increases in premiums that occur when an individual incurs large medical expenses. The researchers: 1) estimated the age profile of premiums for an "optimal," benchmark guaranteed renewability (GR) policy that would cover claims (including the expenses of the high-risk insured) but not be priced so high that low-risks would leave for a cheaper policy; 2) used data from the Medical Expenditure Panel Survey (MEPS), longitudinal claims databases, and the Health and Retirement Survey to calibrate an empirically based, "exploratory" model derived from the optimal policy described in the first task that they could use in task #3; and 3) simulated hypothetical case studies that members of the Society of Financial Service Professionals participating in "virtual focus groups" evaluated on the basis of degree of realism. This study explored the effects of guaranteed renewability on public policy-particularly if it could provide protection to high-risks in a population-and informed insurance firms and insurance regulators about how to make it work better.

Title: Patterns of Individual Coverage
Institution: University of Southern Maine, Muskie School of Public Service
Principal Investigator: Andrew F. Coburn, Ph.D.
Grant Duration: October 2001-June 2003

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 Southern 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? This study better informs the policy debate, at both the federal and state levels, about the best options for sustaining affordable individual insurance coverage. 

Title: Premium Variation and Insurance Demand in the Individual Market
Institution: University of Pennsylvania, The Wharton School
Principal Investigator: Mark V. Pauly, Ph.D.
Grant Duration: March 1999-October 2000

What effect does prior risk have on the premiums faced by purchasers in the non-group health insurance market? Researchers at the University of Pennsylvania's Wharton School analyzed the extent to which premiums paid for non-group health insurance vary with the purchaser's prior risk, and how this relationship varies with income, family size, presence or absence of strong individual insurance product community rating laws, managed care competition and penetration, and provider competition. Using the Community Tracking Study Household Survey, along with data from the Medical Expenditure Panel Survey (MEPS), the Area Resource File and the InterStudy Survey, they examined whether purchases in the individual market were affected by these factors differently than purchases in the group market. Part of this analysis involved constructing measures for each individual's projected health care expenses, based on known predictors of health spending. The study's objectives were to: 1) look at the extent to which non-group premiums vary with individual characteristics such as age, gender, family size, and poor health status; 2) examine the overall variation in non-group premiums for various population subgroups; 3) assess how local market conditions or community rating laws affect the variation of risk selection along the premium scale; 4) examine how much variation exists in benefit design and other plan characteristics within the non-group market; and 5) examine if otherwise similar families choose differently from a choice of non-group plans than from a choice of group plans.

Title: Uninsured in America : Individual and Community Factors
Institution: University of Washington
Principal Investigator: Barry Saver, M.D.
Grant Duration: March 1999-February 2001

Does an individual's community have an impact on the decision to purchase health insurance in the private market? A team of University of Washington researchers examined whether community-level characteristics, such as unequal income distribution, segregation in housing, and availability of safety-net services, affect not only the decision to purchase private health insurance, but also the access to care of uninsured persons. Access was measured using estimates of services available to uninsured or vulnerable populations in the community (e.g., the community's "safety net"), as well as whether the availability of safety net services influences low-income individuals' and families' decisions about whether or not to purchase individual insurance. In addition, the researchers estimated the probability of purchasing individual insurance, delaying or not obtaining care, utilizing outpatient services, and having a regular source of care. They used the Community Tracking Study Household Survey, along with data from HCFA, the American Hospital Association, the U.S. Census Bureau, the Area Resource File, the Urban Institute's "Assessing the New Federalism" project, and The George Washington University data on the percent of medically underserved persons served by federal and state funds or programs. The project's objectives were to: 1) assess how individual, community, and state-level factors affect the decision to remain uninsured or to purchase individual health insurance and whether those factors explain lower rates of individual insurance purchased by minorities; and 2) describe access problems experienced by the uninsured.

Title: Expansion of the Evaluation of the Effects of New Jersey's Individual Health Coverage and Access Programs
Institution: Harvard School of Public Health
Principal Investigator: Katherine Swartz, Ph.D.
Grant Duration: May 1998-April 1999

Using data collected during a previous HCFO evaluation of the market for individual health insurance coverage in New Jersey, the researchers wrote three papers: 1) The Effect of Subsidies on the Decision to Purchase Health Insurance Among Low Income Individuals: Lessons from the "Health Access New Jersey" Program ; 2) Meeting Information Needs: Lessons Learned from New Jersey's Individual Health Insurance Reform Program ; and 3) Satisfaction with Health Plans Among People Insured in the Individual Health Insurance Market in New Jersey. In addition, they completed drafting five additional papers begun under the original grant. The objective of this project was to provide state and national policymakers considering various insurance market reforms with further information about how well these reforms have allowed New Jersey to meet its program goals.

Title: An Evaluation of the Primary and Secondary Effects of Insurance Market Reform
Institution: Bowman Gray School of Medicine
Principal Investigator: Mark A. Hall, J.D.
Grant Period: September 1996-December 2000

What are the effects of state health reforms? Researchers at the Bowman Gray School of Medicine evaluated insurance market reforms in 12 states. The effects within a single carrier's various lines of business were compared among carriers within a given state, and these statewide patterns were compared across states. The study consisted of intensive case studies of insurance market reforms and their effects in a non-random sample of six states that have enacted varying reforms, and a less intensive study of an additional six states. The researchers conducted: 1) two rounds of open-ended interviews of key informants; 2) participant observational studies of insurance agents; 3) content analyses of sales literature and news articles; and 4) statistical analyses of archival documents and secondary data. The objective of this study was to inform lawmakers and the public policy community about whether and how these reforms have achieved their multiple purposes or caused negative consequences, as well as about how the reforms might be improved.

Title: Evaluation of Reforms of the Market for Individual Health Insurance Coverage in New Jersey
Institution: Harvard University School of Public Health
Principal Investigator: Katherine Swartz, Ph.D.
Grant Duration: September 1995-December 1997

Researchers at Harvard University and Brandeis University conducted a three-part evaluation of reform of New Jersey 's individual health insurance market implemented in August 1993. By gathering information from interviews with state officials and insurance executives, as well as from a survey of people enrolled in the individual insurance program, the researchers examined who enrolls in individual policies, what aspects of the reforms most influenced their choices, and what key players perceive as the strengths and weaknesses of the reforms. The objective of this project was to provide state and national policymakers considering various insurance market reforms with information about how well these reforms have allowed New Jersey to meet its program goals.

1 Rogal, D. "The Individual Insurance Market: A Building Block for Health Care Reform?" Policy Brief, AcademyHealth, May 2008.
2 Bernard, D. and J. Banthin. "Premiums in the Individual Health Insurance Market for Policyholders under Age 65: 2002 and 2005." Statistical Brief #202, Agency for Healthcare Research and Quality, April 2008. Also see
3 Kirk, A. "The Individual Insurance Market: A Building Block for Health Care Reform?" Report, AcademyHealth, May 2008.
4 Collins, R. et al. "Paying More for Less: Older Adults in the Individual Insurance Market," Issue Brief. The Commonwealth Fund. June 2005. Also see
5 Bernard, D. and J. Banthin. "Premiums in the Individual Health Insurance Market for Policyholders under Age 65: 2002 and 2005." Statistical Brief #202, Agency for Healthcare Research and Quality, April 2008. Also see
6 Herring, B. and M.V. Pauly. "Premium Variation in the Individual Health Insurance Market," International Journal of Health Care Financing and Economics, March 2001.
7 "Healthy Americans Act Could be Budget-Neutral by 2014 When Fully Implemented, According to CBO Report," Kaiser Daily Health Report,, May 2, 2008. Also see
8 "Empowering Americans with Affordable Options for Health Care," The White House, George W. Bush, 2008. Also see
9 "Straight Talk on Health System Reform," McCain, 2008. Also see
10 Cooper, M. and K. Sack. "Federal Money in Health Care Plan from McCain," The New York Times, April 30, 2008. Also see
11 "Providing Affordable and Accessible Health Care," Hillary for President, 2008. Also see
12 "Healthcare," Obama '08, 2008. Also see
13 Kirk, A. "The Individual Insurance Market: A Building Block for Health Care Reform?" Report, AcademyHealth, May 2008.
14 Ibid.