Individual Rather Than Group Insurance?

The Wall Street Journal had a blog entry last week discussing the relative virtues of individual health insurance policies rather than group policies. You can find it here. Unfortunately, the larger article on which the blog entry is based is behind the Journal's subscription wall. But it's worth considering whether individual health insurance policies are more affordable than group policies. If you are young and healthy, buying an individual health insurance policy may be the way to go. For everyone else, probably not. This is due to one of insurance's fundamental underlying principles that allows insurance to work: the ability to pool risk. Generally speaking, the greater the number of individuals over whom an insurer can spread its risk, the more capable the insurer is of taking on additional individuals to insure at the lowest possible premium. If the group over whom the insurer is spreading the risk is very large, say 100,000 people, the additional risk posed by adding one 50 year old moderately obese, sedentary guy with high blood pressure isn't something the insurer will likely worry too much about. On the other hand, that same guy will likely be uninsurable if he applies for an individual policy. Right now the law doesn't prohibit insurers from underwriting--assessing the particular risk posed--an applicant for an individual insurance policy. In underwriting individuals as they apply for coverage, insurers can adjust the premium they charge based on the particular risk that specific person presents to the insurer. A young, healthy person who doesn't engage in risky behaviors (think of the aerobically fit 25 year old librarian) will get pretty affordable health insurance that provides decent coverage. But anyone beyond about 50 years old, even those in pretty good health, simply aren't good risks relative to younger folks. Consequently, given the ability, an insurer will adjust the premium upward. Insurers can and do cherry pick the best risks when they sort through applications for individual insurance policies. So unless there are some significant changes in state or federal law that limit the ability of insurers to reject applicants they perceive to be bad risks, the prospect for everyone going out and getting an individual policy isn't realistic. There is one way that individual policies are good: they aren't subject to ERISA but are governed by state insurance laws. That provides significantly more protection for insureds than ERISA. But even that potential benefit may be lost if the individual policies are part of a systematic establishment of health reimbursement accounts by employers. In that situtation, they may be dragged back within the scope of ERISA.