posted on:  9/20/2006    revised: 3/10/2010

Summary

Individual health insurance policies are changing rapidly in response to public demand.  The high deductible indemnity type policies popular with self-employed people in the past are quickly being replaced by limited benefit policies without deductibles that encourage routine care. The new policy owners are more likely to be employer than in the past.  For the 20 million Americans who are responsible for their own health care, understanding the new options is a very important issue, both financially and for their future medical care.

Individual health insurance is changing rapidly.  The field, but apparently little agreement on the nature or even the direction of the trends.  The Commonwealth Fund, a private foundation working toward reform in the health care system, released a study this week  (8/18/06) that contradicts many of my own observations about individual health insurance and the data reported by a number of other health insurance companies.  Apparently we were not the only one who found the Commonwealth study to be incredible.  American Health Insurance Plans, another non-profit group representing the health insurance industry, responded that the Commonwealth study figures just do not add up.  

Group Coverage is Decreasing

As a starting point, everyone seems to agree that the percentage of people covered by employer-provided health insurance is decreasing.  This change is occurring slowly, apparently dropping by less than one half of one percent per year.  There are many reasons for this trend, covered recently in my previously published report "Trends in Large Employer Plans".  In the small business and individual market, this is generally seen as a good thing.  It turns out that when you let an individual shop for their own health insurance coverage  even if the employer is paying for it - they will almost always choose a policy with less coverage at a lower price that the plan that would have otherwise been selected by the employer.  In order words, the market seems to be saying that group health insurance is something that is not so attractive to those who have it.

More Shopping, Less Buying

The study by Commonwealth reported that 9 out of 10 people who begin a search for health insurance will quit before buying coverage or be disappointed with the coverage they find.  This could well be true, but the same argument could be made for any high ticket item.  Out most recent data indicates that only 1 in 45 people buy health insurance online the first time they look on a Web site.  This ratio has changed from about 1 in 20 two yeas ago, 1 in 10 two years ago and 1 in 9 in the late 1990s.  I think it is just a function of people becoming more proficient at using the Internet to search for insurance.  There is no indication that these shoppers refuse to purchase any more now than in the past, it is just that they spend more time looking for a good deal.  (Many spend time looking for a deal that is too good to be true).

Allocating Budget for Health Care

Another surprising bit of data is that less than half of Americans spend more than 10% of their income on health-related expenses.  This includes insurance and out-of-pocket expenses.  We predict that eventually health care expenses, as a percentage of income, will rise at least until they exceed expenditures on housing.   If this is true, then we have a long road of increased health care spending ahead.

Cost of Coverage

According to my own data obtained from MedSave.com and other online health insurance services, the average amount spent for individual health insurance is less than half of the amount of the average group health insurance.  In addition, the amount has not changed significantly over the past few years.  AHIP seems to agree with that observation, pointing out that 16 million Americans find individual health insurance to be more affordable than group coverage.  In addition, we find that the real dollar amount spend on health insurance has not increased in recent years, primarily due to the rapid introduction of low cost individual health insurance. 

There is no doubt that an apples-to-apples comparison of the cost of a policy from one year to the next would reveal high double digit price increase.  Yet few people actually renew the same policy from one year to the next.  Policyholder are far more likely to shop for a less expensive policy or change coverage options to keep the cost relatively constant. 

Life of a Policy

The average life of an individual health insurance policy is less than 12 months and the median is about six months.  This remains unchanged over time. 

2006 has seen the rapid introduction of "mini-med" limited benefit health insurance that is less expensive than other traditional health insurance.  This trend is still in its infancy, and we will many more of these health insurance policies introduced over the next year or two.  The net effect of this change is that people are buying less coverage for les money.  The overall cost of health care is not affected.

But the bottom line is that each year individuals, on average, spend less money on health insurance than they did a few yeas ago.  But health expenses have continued to climb, leaving a growing portion to be paid out-of-pocket.

Out of Pocket Costs

Policy deductibles have increased in recent  years from an average of $500 to $1000 or more.  Commonwealth reports that 4 out of 10 people with policies of $1000 or higher have problem with unpaid medical bills.   This is apparently true regardless of whether the policy in individual or group type coverage.

Policy Exclusions and Ineligibility 

The Commonwealth study says that less than half of the individual policies issued exclude coverage for pre-existing medical conditions.  This must be a misstatement or misunderstanding.  Almost 100% of individual health insurance policies limit or exclude coverage for pre-existing medical problems.  Few, if any, commercial individual health insurance policies provide immediate coverage for a person that has previously been uninsured.

The study indicates that less than a third of all applicants are declined or offered modified coverage (higher than standard price or an exclusion for some condition).  Our experience is that among the low cost insurance companies that have the ability to do so, the number of declined application and policies with exclusion riders is in excess of 25% of the applications submitted.  We are aware that some of these same health insurers directly contradict our counts, and we can offer no explanation of the discrepancy.

Quality of Coverage

None of the published studies delves into the quality of the coverage, and this could be the key to many of the discrepancies.  Fewer employers or individuals purchase old-style indemnity type insurance.  "Indemnity type" means that the policy will pay for all "ordinary and necessary medical care" regardless of cost considerations and expected outcomes.  Basically, if your doctor suggested the treatment, it is covered.  In the past insurers relied on the American Medical Association to determine what was the ordinary and necessary medical care to be paid for by the policy.  Nowadays insurers are more likely to specify a specific dollar amount of coverage, especially for any situation that they cannot make a determination of medical necessity.

Commonwealth could argue that my perspective, along with the AHIP, is biased because of working relationships and compensation from the health insurance industry.  Yet

keywords:   individual health insurance, affordability

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Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved.