Mar 25, 2017

Individual Rather Than Group Insurance?


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11/17/2008
Brian S. King
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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.

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5 Comments to "Individual Rather Than Group Insurance?"

Good question Don. I believe that the premiums on an individual policy vary to a much larger degree than the premiums on group policies depending on the health history of the individual applicant. But I don't know how either individual or group premiums relate to HIP coverage, which I think is the equivalent to your Texas Risk Pool.
Posted by Brian S. King on November 17, 2008 at 01:47 PM
Brian:
The Texas Risk Pool provides insurance that is supposed to be about double the price of individual health insurance. This extra charge is, apparently, based on current premiums, as if the person applied for an individual policy at the same time he applied to the Risk Pool.
The fact that my premium in year 11 was 40% higher than the Risk Pool's premium in year 1 should tell you that insurers want your individual business, only if you can prove your health periodically to get a new policy. If you don't do that, you'll pay the price in substantially higher premiums.

I am curious if Utah insurers price their individual policies similar to those in Texas?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
I don't Don. I know that the Health Insurance Pool (HIP) is available in the state to supply coverage for individuals who are uninsurable under a standardized underwriting system. But it sounds as if you are talking about something a bit different in Texas.









Posted by Brian S. King on November 17, 2008 at 01:47 PM
Brian:
In Texas, as well as many other states, insurers will close out a block by issuing a new policy form.
This means no new applicants are allowed in that particular pool.
The healthy tend to switch to a new, temporarily, open pool - either with the same insurer or another insurer.
Those who cannot qualify medically are left in the old, closed pool.
I found out about this pooling technique after my premium on my individual policy had periodically increased so high over 11 years, that the premium was 40% higher than that of the Texas Risk Pool!
Do you know if this pooling technique is allowed in Utah?
Don Levit
Posted by Don Levit on November 17, 2008 at 01:47 PM
Posted by Don Levit on November 17, 2008 at 01:47 PM

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