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Transcript of Web-assisted Teleconference

Individual Health Insurance: Are You Ready For Change?

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This Web-assisted audio teleconference series was originally broadcast on April 24, 2002, via the World Wide Web and telephone. The User Liaison Program (ULP) of the Agency for Healthcare Research and Quality (AHRQ) developed and sponsored the program.

The transcript follows for the session; select for the Streaming Audio (Length, 1 hour, 19 minutes; 9.7 MB).

Cindy DiBiasi: Good afternoon and welcome to "Individual Health Insurance: Are you ready for Change?" This is a Web-assisted audio conference for State and local health policymakers sponsored by the User Liaison Program within AHRQ, the Federal Agency for Healthcare Research and Quality (AHRQ). My name is Cindy DiBiasi and I will be your moderator for today's program. The individual health insurance market is one of the most frayed corners of America's health insurance patchwork quilt. About 16 million Americans currently have individual policies or about one for about every ten who have group coverage. People generally buy individual policies only when they can't obtain group coverage, such as through the workplace, and don't qualify for public programs like Medicare or Medicaid.

Now, on the whole, access to and the cost of individual coverage are very much dependent on a person's health status, age, place of residence and other factors. In a recent study, researchers found that consumers with common pre-existing conditions were unable to obtain the coverage they sought at the standard rate 90 percent of the time. We will hear more about that study later in the program.

Most States do not require insurers to accept all applicants or to use community-rating methods in setting premiums. Insurers commonly use underwriting criteria either to deny coverage or to raise premiums for those in less than perfect health. With health care costs rising sharply, employers are likely to cut back on those they cover and the benefits they provide under group plans. Some believe that we are likely to see a rise in the number of people seeking individual health insurance. Higher costs and increasing unemployment also mean that State-sponsored high-risk pools that provide subsidized coverage for so-called uninsurables will be stretched even thinner.

Today's audio conference will explore current problems with the individual insurance market and highlight how States are addressing them. We will look at the individual health insurance market from the perspective of both consumers and carriers. We will also take a closer look at strategies available to State and local policymakers for regulating this market. Federal proposals currently on the table also will be highlighted, including how these proposals might impact State policy.

In the studio with me I have several experts who will be participating in our discussion. Deborah Chollet is a Senior Fellow at Mathematica Policy Research where she conducts and manages research on private health insurance coverage, markets and regulation. Her areas of research include employer-sponsored health plans for workers and retirees, individual health insurance and Medicare supplement plans.

Karen Pollitz is project director of the Institute for Healthcare Research and Policy at Georgetown University. Karen's research focuses on regulation of private health insurance plans and markets, managed care consumer protection and access to affordable health insurance. Karen also is an adjunct professor in Georgetown's Graduate Public Policy School.

Finally, we are joined by Steve Larsen. Steve is the Insurance Commissioner for the State of Maryland and the Health Committee chair for the National Association of Insurance Commissioners. Prior to his appointment as Insurance Commissioner for the State of Maryland, Steve served as the chief legislative officer for the current Governor of Maryland, Parris Glendening. Welcome everyone.

Now I think we are ready to discuss State and local options for addressing the individual health insurance market. To begin our discussion today, I am going to first turn to Deborah Chollet of Mathematica Policy Research. Deborah, can you give us a sense of who is buying health insurance in this individual market?

Deborah Chollet: Cindy, as you said, essentially the audience for the individual market is the population that doesn't have coverage from another source. It is workers and their families who don't have employer-based coverage. It is individuals who don't have access to public program coverage typically because they are not in the right category of eligibility or their income isn't sufficiently low to qualify for a public program that would finance their health care.

At present, according to the most recent information we have, about 16 million people are in this market. That is only about 7 percent of the population. That will vary from State to State to maybe twice that much, 12-14 percent, in some very rural States where there isn't a strong employer base offering health insurance coverage. That percentage is much less in States where there is a lot of employer-sponsored coverage.

We think of the individual market simply because of its size as kind of a niche market. It really isn't. In fact, the average person in the individual market looks like the average person in the population overall. Most are adults of childbearing age. Most are employed. They are not self-employed. They are fully employed as wage and salary workers, year round, all the time. But, they don't have an employer-sponsored health plan either—in most cases because it is not offered; or in some cases because they are not buying what is offered. Typically it is so much less expensive to buy into a group plan that we presume people in the individual market are not offered an employer-based plan. They live in urban areas, they live in cities. Not in the country, sorry, not in farming communities.

Although those kinds of people are disproportionately represented in this population, it is true that relative to the population at large, this is going to be a market populated with retirees, with older workers, people over age 50, relative to the general population. They are more likely than the general population to be the spouse of a worker that is retired and is Medicare eligible. They themselves are not eligible for Medicare by virtue of their younger age. They are more likely than the population at large to be self-employed and they are more likely to live in rural areas. There is a different kind of distribution but on average they look like the population as a whole.

I think two characteristics of the individual population are particularly important for this market. One is that they are lower income. People who buy into the individual market do not have the same levels of income as people who are covered, especially in the group market. In particular in the group market—they are older than the population that is covered in the group market.

In the individual market, a quarter of the people who are buying coverage report income less than 200 percent of the Federal poverty level. That compares to only 16 percent in the group market. Half of the population shown in the group market has income that exceeds 400 percent of the Federal poverty level, but only 43 percent of people in the individual market have that level of income. So you are looking at median income in the group market of about 300 percent of poverty and in the individual market the median income is about 20 percent lower than that.

Secondly, with respect to age, the individual market is distinctly older than the group market. Seventeen percent of the individual market is age 55 to 64 compared to just 10 percent in the group market.

That combination of features—lower income, higher age—presents a particular problem for affordability and we will talk, I am sure, throughout this hour about how insurance is rated. One of the key ways that insurance is rated is by age. Older people are charged more in the individual market than they would be charged in the group market. So that combination of being more likely to be older and more likely to be lower income creates a big problem of affordability in this market and it explains in large part why the market is so small.

Cindy DiBiasi: Let's talk a little bit about who is selling these policies.

Deborah Chollet: There are a large number of insurers in this market, but compared to a group market again, which is, I think, what many regulators certainly are more accustomed to looking at—it is a smaller market. There are fewer insurers. When I count up insurers by State offering health insurance coverage, that is an insurer that writes in 50 States would be counted as 50 insurers, I come up with almost 700 insurers in the individual market. Now, a number of those are national companies writing in 50 States. A large number of them however, write in fewer than 50 States. That compares to about 2,400 insurers in the group market. So the individual market is a little less than a third the size of the group market in terms of the number of insurers writing coverage.

It also looks different from the group market. BlueCross BlueShield Plans and commercial carriers are much more important sellers of insurance in the individual market than they are in the group market. Those carriers, BlueCross BlueShield and commercial insurers represent three-quarters of the sellers in the individual market compared to just about half of the sellers in the group market. Let me correct what I said: in terms of market share they hold about three-quarters of the individual market, compared to holding about half of the group market.

In the individual market, despite the fact that there are so many fewer insurers, there are a lot of insurers relative to the size of the market. So we see a very different kind of arrangement of business in the individual market than we see in the group market. The insurers in the group market have many more lives on average. They are insuring a much larger population on average in the group market than in the individual market. When we look at the size of the population relative to the number of insurers, we have an abundance of insurers in the individual market. There are many more insurers per covered life in the individual market.

The result of having so many more insurers per covered life in the individual market is that each insurer on average survives on very little premium. They are not making a lot of money, on average, in the individual market compared to the group market. In the individual market, when I begin to look at the distribution by State—the average State if there is such a thing—has 14 individual insurers, top to bottom, largest to smallest in the individual market—compared to nearly 50 in the group market.

Despite the fact that there are so few insurers, when I look at the amount of business they do, I am looking at $11.9 million per insurer in the individual market which sounds like a lot of money. But it is not so much compared to nearly $60 million per insurer in the group market. The average insurer looks very different in this market. Not only is the market small, with relatively more insurers per covered life in the individual market, but then the market is also very concentrated. Relatively few insurers account for most of the business. As I look from State to State, I find that in every State, one to three insurers hold at least half the market. In some States, three insurers will hold 90 percent of the market. In one State, one insurer holds more than 90 percent of the market. That is in Alabama. So it is a highly concentrated market.

That has meaning too for how most insurers survive. That means most insurers are holding very little share. They are not even holding close to the average. When I look at the average business per commercial insurer in this market, I am looking at just a little over $1 million per company, per State, in the individual market. So the way insurers behave in this market is in part dictated by the fact that they are doing such small premium volume.

When I look from State to State also I find that some of the States that are worried about their very small number of insurers, the rural States, the small population States such as New England—who are extremely worried about having very few insurers—in fact, have an abundance of insurers relative to their population. Again, it is very hard for an insurer to do a lot of business when there are not a lot of people in a market so the result is you end up with very few insurers in less populated States. Again, you are looking at, on average, 7 percent of a very small population. If you have fewer than a million people, 7 percent is not a large number of people.

Cindy DiBiasi: So given the fact that this is such a small market, isn't it hard for insurers to offer an affordable policy?

Deborah Chollet: It is very hard for them to offer an affordable policy for a number of reasons. The risk pools are small and therefore the risk that comes in at the margin has a potential for really rocking their business. So they are concerned that they give themselves a margin on price to both deflect the bad risk and also to help manage the risk that comes in that they hadn't anticipated. This kind of behavior where an insurer is very concerned about that marginal risk that comes in relative to their total premium volume leads to what we call "cherry picking." Again, we will talk a lot I think about "cherry picking" during the course of this conversation. It is aggressive underwriting to deny coverage to people who represent high health care costs or to rate them in a way that reflects very high health care cost the insurer anticipates.

In part because of the high cost of this market, there is high turnover. The high premiums lead to high turnover. If you have a chance to get into a group policy, if you have a chance to get into a public program, you exit, very quickly, from this market. The result is that many, if not most, consumers in this market will stay less than a year. It depends on the insurer. Some insurers have somewhat greater stability. Many insurers have very low stability in their market. Some of the most aggressive pricers have the lowest stability in their market and that leads to higher cost and higher pricing again in turn. There is kind of a pattern here that you observe with these insurers.

This is an individual market, obviously. That means that you are making individual sales. It costs you a lot to sell a policy relative to what it costs in the group market. So those administrative costs add up and that is a big part of the cost to the individual market is their administrative costs.

In addition, the market is expensive of because the reasons I stated. If you have another option, you will go elsewhere. That means, that includes, remaining uninsured. So if you are relatively healthy, given how the products are priced, you may choose not to buy the product at all. The upshot of that is that people who buy health insurance in the individual market are more likely to be sick, which leads to higher costs and higher prices in this market as well.

Cindy DiBiasi: A desperation move.

Deborah Chollet: That is right. So the key challenge in this market is adequate coverage at an affordable price. All of the characteristics of the market, the demand side and the supply side of this market, make that a difficult kind of thing to achieve.

Cindy DiBiasi: Deborah, we are going to get back to you. You have certainly given us a lot to think about and I hope our audience is thinking about the questions that they would like to ask. Now that Deborah has given us a picture of the market dynamic, I am going to turn to Karen Pollitz, project director at the Institute for Healthcare Research and Policy at Georgetown University. Karen, let's take a look at insurer behavior. I often hear about people who are waiting to pass medical exams before purchasing individual coverage. Can you explain why this is?

Karen Pollitz: Sure Cindy. Those people are waiting for the results of medical underwriting, which is a process that insurers in the individual market use to assess the risk status of an applicant; to determine whether or not they are a standard risk and therefore able to be insured at the standard price. Insurers typically underwrite coverage in the individual market except in States where they are not allowed to do so. They underwrite for the reasons that Deborah said. There is reason to believe, as an insurer, that someone who is showing up applying for a policy knows more about their health than you do. So to keep prices as affordable as possible, insurers use underwriting to try to screen out substandard risks and make affordable coverage available to people who are healthy.

Cindy DiBiasi: Obviously assessing risk is an important aspect of any kind of insurance one purchases. Once the risk level of an applicant has been analyzed, what do carriers do with those applicants who are health risks?

Karen Pollitz: Well, with applicants who are determined to be a substandard risk, carriers basically have three main options which they can use alone or in combination. They can turn you down. They can simply deny coverage. They can sell you coverage, but limited coverage. Not the policy you applied for, but one with limited coverage. They do that most often by using riders, or an amendment to the insurance contract excluding coverage for the health services for the condition that you already have—for your "pre-existing condition." But they may also modify benefits in other ways by increasing the deductible, increasing cost sharing for prescription drugs, or for doctor's office visits, and so forth. The third option that they can use is to charge a higher premium, sometimes called a "rate-up." So instead of selling you the policy at the standard rate, they might sell you the policy at 150 percent of the standard rate or even 200 percent of the standard rate.

There is little consistency about what happens, so it is sort of hard to predict going in. If you asked me: "Well, I have this condition and what will happen to me in this market"? It is a little hard for me to tell because insurers look at risks in different ways. They use different sort of underwriting philosophies. We have found even underwriters within the same company may look at the same applicant, one may decide to rider them; one may decide to offer them a policy at a rate-up. It is different.

The process also is not something that happens instantaneously. This process can take anywhere from two weeks to two months depending on the health risk you present and what kind of additional investigation the underwriters decide to go through. You begin the process by filling out an application, answering a lot of questions about your current status and health history. Then, depending on your answers, that may trigger further investigation. The underwriter may ask for copies of your doctor's medical records. They may send a paramedic to your house to take blood samples or give you a physical, and they also consult a database that the industry maintains to see if any other adverse underwriting actions have been taken against you by another carrier.

Cindy DiBiasi: Let's talk a little bit more about medical underwriting because it is an additional step in obtaining individual coverage. It is not generally a part of signing up for group coverage. How does this affect my ability to buy individual coverage? If I went out to by an individual policy for me and my family, what would I find?

Karen Pollitz: Well, that depends. It depends on how healthy you are, how healthy you have been in the past, how old you are, where you live. It depends on a lot of factors and to which carrier you are applying.

We did a study a year ago where we sent some hypothetical applicants out to real carriers to kind of test medical underwriting and the market. All of our applicants were in less than perfect health. Each one of them went out to a different market across the country and ended up making 60 different applications for coverage. I have a couple of slides here to show you how they fared in the medical underwriting process. One of our applicants is a young lady named Alice. She is 24 years old and a waitress so, as Deborah described, she is one of these market participants who works full-time in a job that doesn't offer health benefits. Most restaurants don't. Alice is 24 years old. She is actually in terrific physical shape but she does suffer from hay fever. Every year during pollen season she sneezes and her eyes water and it is very unappealing to the diners so she needs to take a prescription drug called Allegra to control her allergy symptoms. That is pretty much the extent of Alice's health problems. Again, Alice made 60 applications for coverage. Only three times, or in 5 percent of her applications, was she awarded a clean offer. In other words, only three times was the carrier willing to sell her their most popular policy at the standard rate. The rest of the time Alice got substandard offers. Most often she was offered a policy with an exclusion rider that said: "This policy won't cover your allergies." But sometimes those exclusion riders were more serious. In three instances, Alice was offered a policy that would not cover her upper respiratory system. A pretty big amendment to her policy. Several times Alice was offered a policy at a higher than standard rate, at a rate up, anywhere from 20-40 percent. Sometimes she got a combination of these riders and rate-ups. Five times Alice got turned down flat. The carrier just said, "I'm sorry. I won't take you with your hay fever. I just don't want to sell you coverage at all." The price of the coverage that Alice was offered, on average, was about $1,600 per year. But that also varied tremendously depending on the market and depending on the policy. The cheapest policy she was offered, an HMO policy in Fresno was, believe it or not, $400 per year, major medical. The most expensive policy she was offered was $4,000 per year. A ten to one price variation.

Cindy DiBiasi: For a 24-year old?

Karen Pollitz: This is a 24 year-old with hay fever. So that is Alice. Another application for coverage was made by the hypothetical Crane Family. We also sent them out into the market. They are a young family. The parents are in their 30's and they have two kids, one of whom is healthy. But their little boy Collin suffers from asthma and recurring ear infections. Again, a couple of times the Crane family was offered a clean offer by a carrier that was going to sell them coverage at the standard rate. They never got turned down completely for coverage, but nine times they were offered a policy that excluded their son. The rest of the time, they too were made offers with exclusion riders for Collin's allergies, sometimes his upper respiratory system, and sometimes his ears. They were offered policies with a $2,500 deductible, a policy that didn't include a prescription drug card and so forth. They also experienced some offers with pretty severe rate-ups. Again, the price of the policy they were offered varied a lot, mostly depending on where they lived, again by a factor of about nine or ten to one.

We had another hypothetical applicant, Frank, who is more typical of the early retiree that Deborah talked about. Frank was 62 years old when he applied. As people age, they start to have more health problems. This is just a fact of life. Sure enough, old Frank is overweight and suffers from hypertension. He has to take medication to control his blood pressure. Unfortunately, Frank also smokes half a pack of menthols a day. So he was not a very attractive applicant to the insurance in this market and, sure enough, most of his applications were rejected outright. People did not want to sell him coverage at all. He was offered three policies that had an exclusion rider for his circulatory system, which kind of made us all puzzle as we did this study because we are not sure what is covered when you have a policy that excludes your circulatory system. When Frank did get offered coverage, it was at some pretty hefty rate increases. Rate increases on the order of 100-110 percent. So his average premium, remember Alice's was around $1,600 per year, was closer to $10,000 a year. But again, you saw this level of variation. He was offered one policy for $3,000 a year and another policy for $30,000 per year. So affordability was a problem with Frank.

Finally, we had an applicant named Greg, a young, self-employed writer who is HIV-positive. Greg got rejected all the time. He was rejected on all 60 applications. There are many other health conditions that are similar to HIV—or not similar—but many other conditions that are likely to be treated similarly by medical underwriters including: cancer, diabetes, heart disease, multiple sclerosis. Also, if you are pregnant, you can be pretty sure that you are going to be turned down in the individual market. At least until after you deliver the baby.

Cindy DiBiasi: What about people who are in excellent health? I guess we have to define what "excellent health" means.

Karen Pollitz: Well, excellent health would have to be pretty excellent. Some of the applicants I didn't tell you about were actually in excellent health today. There is nothing wrong with them. They are making no claims, but they had a health history. One of them had a knee injury that was operated on ten years ago. He hasn't made a claim on it since and it is fine. Another is a cancer survivor of seven years. They both encountered difficulties buying coverage in this market. So perfect health means now and ever since you were born, really, to some carriers.

Again, this varies a lot by carrier.

Assuming you are in perfect health, when you are entering this market for the first time you may be surprised if you are expecting coverage to look and cost the way it did when you had group health plans through work. This market isn't like that. Coverage typically is much less comprehensive in the individual market than it is under group health plans. In particular, it is very difficult to buy coverage for maternity care—very difficult indeed. Mental health and substance abuse services are often not covered or are subject to very, very strict coverage limits. Prescription drugs also are subject to stricter limitations in individual market policies. You tend to see higher cost sharing. People typically will buy a policy with a $1,000 or $1,500 deductible in this market in order to get the premium down.

As Deborah mentioned, the premium varies depending on how old you are. So if you are young and healthy, you may be able to find a policy that is around $1,000, $1,200, and $1,500 a year. But as you get older, in your 50's and your 60's, premiums are going to cost three or four times that for the exact same policy.

In this market, even if you enter it in perfect health, even if you stay in perfect health, the stability and the durability of coverage over time can be an issue. Insurers come and go in this market. Policies get closed. If you buy a policy when you are healthy and then later you get sick, you may find that you are not able to move to another policy. People tend to get stranded in pools of other similarly sick people and that causes the premium to go up.

Occasionally you do find carriers that will re-rate individuals. So even if I buy a policy this year, I am healthy, I get a good rate, I make a claim this year, and next year my rates go through the roof. This is not a typical practice in this market, but there are carriers that do that. It is not illegal everywhere and that can be a problem.

Cindy DiBiasi: Karen, we are going to come back and talk to you some more about this. Let's turn first to Steve Larsen, the Insurance Commissioner for the State of Maryland and the Health Committee chair for the National Association of Insurance Commissioners (NAIC).

Well Steve, pretty grim picture that we have heard so far. We have heard a little bit about the structure of the market and the challenges. What is the individual insurance market like in Maryland and are people getting what they need?

Steve Larsen: Well, I think it reflects a lot of the anecdotes that we heard from Karen's research. We had the opportunity a few years ago to look at our individual health insurance market. I co-chaired a task force to look at the "non-group market." When you are an insurance geek instead of saying "individual" you say "non-group market," which is the same as the individual market. We saw, I think, all of what Karen's research found. First of all, a large number of people are flat-out turned down when they try to get individual coverage. Our data showed that for our BlueCross carrier, who is the largest individual player in that market, 30 percent of the people that came to them for individual coverage were turned down. Another HMO we looked at, half of the applicants who came in to get coverage get turned down. So I think to some extent that is an even grimmer picture than what we heard from Karen's research because it seemed that most people were able to get something. There weren't at least as many flat turndowns.

The second thing is that the products, the individual products, the policies, vary tremendously in their content. Maryland has many what are called "mandated benefits", which are laws that require certain benefits to be provided. Beyond that core group of benefits there is a lot of variation, particularly in terms of deductibles and cost sharing. You have co-payments for visits that vary depending on whether it is a child under five or over five. The plans have different co-payments. One of the BlueCross products that we looked at had 11 different deductible levels. To some extent you could argue that is good because that is choice, but it also means that it is very difficult to compare policies. If you are lucky enough to qualify, to not be excluded, and you are comparing individual policies from two carriers, it is hard to compare apples to apples. They have different co-pays, different deductibles, different cost sharing. So the products do vary tremendously.

The other thing that we found was that the rates as you have heard, do vary tremendously. One is just based on health status, whether you are relatively healthy or not. But, and this was a feature that Deborah also referenced, this notion of age banding which is rates being dependent on the age category that you fall into. The difference between the premiums for younger people and older people, for the same health status can vary two, three or four hundred percent. What is called "age banding" is a technique that insurers are using more and more to try and get at the best risks.

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