Ignorance About the Market for Individual Health Insurance Impedes Reform

Last week a small businessman of my acquaintance interviewed yet another job candidate who had no idea that people could purchase their own health insurance. He has this conversation frequently, as his company does not offer small group health insurance.

Federal and state regulations have created such a mess in the small group market that in many cases it is less expensive for employees to buy their own health insurance than to pay the employee’s share of the premium for insurance purchased by their employer. This small business dropped its small group coverage when small group prices went up so much that employees, who had to pay 50 percent of premiums, could buy individual policies for the same amount of money.

As the company is in a state with a functioning high risk pool that offers insurance to people who are uninsurable, everyone can purchase an individual policy if he so desires.

This company has found that making people responsible for their own health insurance has substantially reduced management costs. For a small business in which management has neither the time nor the expertise to explain benefits, deal with conflicts over the plan, field complaints about an insurer, or help employees file claims, this is no small matter.

Direct purchase has also let employees pick both exactly the kind of plan they want and the amount of coverage they need. People who prefer HMOs get them. People who prefer large deductibles and health savings accounts get them. People who want low deductibles and are willing to pay higher premiums get what they want, too. Plus, employees continue to have health insurance if their small employer folds, if they change jobs, get laid off, or want to start their own business.

And because individuals own their own health insurance, their health history is none of their employer’s business.

One of the enduring myths in US health care policy circles is that large group insurance costs less than individual insurance. The problem is that the people making this claim compare premiums for individual insurance with premiums for employer provided group insurance. They ignore the fact that employer group plans also need human resources departments to administer them, and that those costs should be included in the premium comparisons.

In contrast, individual health insurance premiums include all of the costs for the brokers who educate customers, help them choose plans, and help them navigate the claims process. It also includes all the costs for record keeping, underwriting, and negotiations.

 For more information on how effective direct purchase health insurance is at spreading risk while keeping costs down, and on why guaranteed issue for pre-existing conditions and the price controls that go with them will likely raise health insurance costs for everyone, see my article for the Library of Economics and Liberty.

Comments (8)

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  1. Vicki says:

    I really enjoy everything Linda Gorman writes.

  2. hoads says:

    The whole “pooling risks” through employer based health insurance is a lie. Insurance companies routinely raise health insurance premiums of employers at will without regard to the company’s health consumption profile. Here’s an article about the Harris County Medical Society whose insurance premiums were increased 23% in one year. The members demanded the benefits payout receipts from the Blue Cross and found only 51% of premiums paid were paid out in benefits. http://www.texmed.org/Template.aspx?id=6699

    Health insurers have essentially enjoyed charging “commercial rates” to employers and is why they don’t want to see an end to employer based health insurance.

    The whole “risk pooling” is ridiculous anyway. Why shouldn’t health insurers be required to compete for customers like every other type of insurance? And why doesn’t even the Republican HCP demand so?

  3. Devon Herrick says:

    I think most people beyond the age of 25 understand they can get health coverage on their own. But the demand is not as great as public health advocates like to believe.

    A former college roommate of mine wanted to provide subsidized coverage to his workers at an apartment complex he owned. After the costs became unaffordable, he discovered less than one-third of his workers were even participating. Most his employees were not willing to pay their small share of the premiums. The only employees to sign up were the ones with pre-existing conditions. They were the only ones who considered his health insurance plan a good buy.

  4. Larry C. says:

    Very interesting on the difference between individual and group insurance. Dr. Gorman’s point of view is always refreshing.

  5. Nancy says:

    One other point: individual insurance is portable; group insurance is not.

  6. Bart I. says:

    So the question is, why does NCPA cover its own employees?

    I understand that there is no state income tax in Texas, so the maximum tax benefit for employer-sponsored coverage is around 43%. Granted, a 43% discount seems a formidable incentive, except:

    (1) Small company plans use modified community rating, in that neither sex nor health status can be used to set individual rates. Although the employers themselves are rated, my understanding is that Texas has a 1.67-to-1 band around rates that can be charged to small companies.

    (2) Many of the articles presented here argue that community rated coverage– even modified– is at least twice as expensive as that individual coverage.

    Since employer-sponsored coverage is community rated, individual coverage should be available at a 50+ percent discount relative to employer coverage. So wouldn’t it follow that employees would be better off taking benefits in the form of taxable income, and forgoing the 43% tax discount in favor of a 50%-plus savings on individual coverage?

    What are the going rates for individual and small-company coverage in Texas?

  7. John R. Graham says:

    I doubt that small-group coverage will ever make sense, because neither the employer, employee, carrier, or agent know who will be working for the small firm 12 months from now. So, group health is re-written annually. It cannot be guaranteed renewable. As long as the Internal Revenue Code artificially induces group coverage versus individual coverage, people will fall through the cracks and we’ll need high-risk pools and the like to address the problem. If the government stopped the discrimination, group benefits might not disappear, but employers would have to offer guaranteed renewable, post-employment, continuation coverage if they chose to offer group benefits, because they would have to “compete” with employees’ own coverage.

  8. ChristineWithRegence says:

    In all the talk about health care reform, I don’t feel like there’s enough discussion about understanding the real costs of health care. Why don’t we ever know the costs of health care procedures and treatments? ?” I got a kick out of this fun, short video. Check it out. It makes you wonder why our health care system is set up the way it is.