Introduction: The Evolution of the Individual Insurance Market

Recently reported data on possible declines in employer-based insurance and insurer responses to the Health Insurance Portability and Accountability Act of 1996 (HIPAA) have highlighted deficiencies in the individual insurance market and catalyzed policy discussions about how the individual market might be reformed or augmented to better serve those purchasing coverage. Policy makers are questioning the role of the individual insurance market as we experience a changing group market, and it is no longer clear that the individual insurance market must necessarily be considered merely a "residual" market, as it has been.

Conventional wisdom holds that those who have group coverage enjoy certain market advantages, including lower premiums, economies of scale, a more diverse risk pool, and better provision of information about benefits packages, prices, available providers, as well as a variety of other factors important to health care coverage and delivery. These advantages occur because coverage is provided through an employer or sometimes through an association. However, those purchasing insurance in the individual market sometimes enjoy more choice among insurance products, and their plan choice is not controlled by where they choose to work.

Traditionally, actuaries and others in the insurance industry have viewed this market as a residual market, believing that most who purchase insurance in the individual market are unable to purchase through a group, either because they are unable to work (due to illness, age, or disability) or because they are self-employed. Therefore, premiums in the individual market are higher than those in the group market for similar sets of benefits, and benefits are often reduced to make premiums lower than they would otherwise be. In addition, tax subsidies are greater for those in the group market. These factors render individual insurance products unaffordable to many, possibly increasing the ranks of the uninsured.

Recent debate has included talk of enacting incentives for encouraging healthier, employed individuals to purchase insurance in the individual market, including prominent proposals for increasing the premium tax deduction for individuals to make it comparable with the tax incentives accorded employment-based policies. In the case studies that follow--commissioned for a conference sponsored by the Robert Wood Johnson Foundation under its Changes in Health Care Financing and Organization (HCFO) program and conducted by the Alpha Center--you will see that a variety of interventions have been tested at the state level (although being state reforms, they do not include tax subsidies). Many states have implemented reforms to address problems of access (including risk selection) and affordability, ranging from rules governing insurance product pricing and guaranteed issue to facilitating pooling mechanisms. In addition, the federal HIPAA legislation also took a modest step toward addressing problems of access (but not affordability) for people leaving group coverage. The states represented here all went well beyond the HIPAA "floor" in their reforms. Can these reforms provide the basis for a higher federal floor? What have they accomplished in terms of expanding and maintaining coverage for individuals in the nongroup market? What aspects of the reforms and the environments in which they were enacted and implemented led to their results?

Together, the articles by Mark V. Pauly and Allison M. Percy and by Deborah J. Chollet provide an overview of the individual insurance market, including how it operates and who it serves. Pauly and Percy conclude that there is no obvious reform that can maintain the range of choice in the individual market while also lowering administrative costs. However, they note that federal proposals such as "health marts" or small group purchasing organizations, combined with more favorable tax treatment, could expand the options available. Chollet examines the demographics of those in the individual market, comparing them with the uninsured and employer-insured populations. She also looks at the difference in market structure between the individual and group markets and offers guidance to legislators and regulators on what...