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The Individual Insurance Market

Coupling Group & Individual Markets


Katherine Swartz, Ph.D., Associate Professor, Harvard University, Department of Health Policy and Management, Boston, MA.

Becky Derby, Senior Policy Analyst, Health Care For All, Boston, MA.

Thomas F. Wildsmith, IV, F.S.A., M.A.A.A., Policy Research Actuary, Health Insurance Association of America, Policy and Information Department, Washington, DC.

Katherine Swartz summarized her evaluation of New Jersey's Individual Health Coverage Program (IHCP)—a complex set of reforms to increase access to individual health insurance through increased choices of policies and insurers, distribute losses from high-risk individuals across all carriers selling health insurance in New Jersey, and reduce the rate of uninsured New Jersey residents.

Dr. Swartz reviewed the complex regulations that created the IHCP—including guaranteed issue, community rating of premiums, standardization of policies, and a requirement that all insurance companies doing business in the State participate in the individual market either by selling policies or sharing in the losses of insurers who do. She noted that the complex design of the "play or pay" system yielded an unintended consequence: Small insurers could expand their individual market share by offering very low premiums, secure in the knowledge that any of their losses would be shared by other carriers.

Dr. Swartz summarized the effects of the reforms by noting that a market was created where almost none had existed before:

  • As many as 28 insurers were selling policies soon after reform, and 17 sell now.
  • Enrollment increased steadily in the first 2 years but has recently declined.
  • Price competition apparently is occurring, although premiums have not declined.

She noted that New Jersey's experience demonstrates that reforms can create a market and distribute losses and that understanding the complex combination of regulations is critical to understanding and evaluating what happened in New Jersey.

Dr. Swartz emphasized that a key lesson for other States is the importance of using sophisticated models of insurer behavior when designing regulations, especially given the increasing importance of individual insurance markets.

Rebecca Derby described Massachusetts' experience with reforms similar to those in New Jersey. However, unlike New Jersey's "pay or play" reforms, Massachusetts requires most small-group insurers to offer individual products. She began by summarizing the events leading up to passage of the 1996 non-group market reforms. Consumers in the non-group market encountered problems with access, particularly if they had health problems. Blue Cross Blue Shield of Massachusetts acted as the insurer of last resort. It imposed a 3-year waiting period for pre-existing conditions but still experienced financial difficulty.

In addition, there were reports of self-employed individuals "gaming" the discrepancy between regulations in the small-group market (where they were guaranteed access to coverage under the State's small-group reforms) and the non-group market.

The 1996 reforms were the result of a working group that included consumer advocates, Blue Cross Blue Shield, the State Health Maintenance Organization (HMO) association, and small-business groups. The reforms included restricting the non-group market to individuals ineligible for group coverage, a 2-month annual open-enrollment period with open-enrollment windows for individuals losing other coverage, standardized products, modified community rating, and requirements that small-group insurers with a large market share offer at least one non-group product.

Ms. Derby noted that the coupling of small-group and non-group markets was intended to achieve a number of objectives, including guaranteeing the presence of multiple plans in the non-group market, evening the playing field between insurers, ensuring access for individuals with health problems, and preventing insurers and individuals from gaming the two markets.

Ms. Derby reported that only two plans left the small-group market as a result of the requirement to sell non-group policies and that in 1999, 19 insurers offer non-group products. Compliance was "spotty" during the first open-enrollment period, and there were large variations in rates the first year, which narrowed during the second. She reported that the prices for the two dominant non-group products are comparable to those in the small-group market.

Ms. Derby concluded that Massachusetts' experience demonstrates that coupling small-group and non-group markets is an effective strategy for ensuring a choice of products and insurers in a reformed non-group market. However, rates and marketing are crucial to real participation by small-group insurers, and publicity and funding for outreach are key.

Tom Wildsmith concluded the session with some general reflection on the issues raised by the reforms discussed in this session (coupling group and individual markets) as well as those raised by other sessions. He remarked that generally two primary factors drive individual market reforms: the overall cost of coverage (which is unsubsidized in the individual market) and the high costs of covering people with serious health conditions. He noted that addressing either problem requires some form of subsidy and that various types of market reform represent different approaches to subsidizing coverage.

For example, New Jersey's "pay or play" requirement is driven by the recognition that the individual market is too small and fragile to generate the needed subsidies. His primary critique of "all-markets" requirements is that they do not allow insurers to focus on the market that they can serve best; they require insurers to participate in a market in which they lack expertise and in which they cannot develop the economies of scale necessary to be competitive. He also noted that if the cost of participating in the individual market becomes too great, insurers may be discouraged from participating in either market.

Mr. Wildsmith also questioned whether an all-markets requirement provides the desired subsidy over the long term. Large employers can self-insure, and insured plans generally are accustomed to experience rating, covering the costs of their own employees, but no more.

Also, having small employers subsidize the individual market may backfire. The small-group market is stronger than the individual market, but small employers are already less likely than large employers to offer coverage. Hence, a tax to cover losses in the individual market may lead to less small-group coverage.

Mr. Wildsmith categorized reform measures as implicit or explicit subsidies. Although most reforms use implicit subsidies, he argued that explicit subsidies are generally better public policy because they encourage a conscious choice of funding source and permit the use of larger funding bases. Explicit subsidies also permit targeted solutions to specific problems, such as high-risk pools for uninsurable individuals and credits or vouchers for low-income individuals.

Mr. Wildsmith concluded with some general observations about reform, noting that reforms frequently change who has average "trading" low-cost people for high-cost people, with a small but measurable reduction in the size of the market. He also noted that although it is rarely discussed prior to reform, reforms change the type of coverage available, as managed care plans frequently dominate reformed markets.


Swartz K, Garnick DW. Lessons from New Jersey's Creation of a Market for Individual Health Insurance. Conference draft paper presented at The Evolution of the Individual Insurance Market: Now and in the Future, sponsored by The Robert Wood Johnson Foundation. 1999 Jan 20; Washington, DC.

New Jersey Individual Health Coverage Program Board. The New Jersey Individual Health Coverage Program Buyer's Guide: How to Select a Health Plan. 1998.

American Academy of Actuaries. Risk Classification in Individually Purchased Voluntary Medical Expense Insurance. Issue Paper. 1999 Feb.

American Academy of Actuaries. Providing Universal Access in a Voluntary Private-Sector Market. Public Policy Monograph. 1999 Feb.

American Academy of Actuaries. An Analysis of Mandated Community Rating. 1999 Sep 2.

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