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Can Individual Insurance Work?

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When it comes to the individual coverage market, remember these four truths.

Individual insurance is seen as both a rescuer and a villain. Supporters view the individual market as a critical option for the otherwise uninsured, but foes say such products don't really protect consumers and can be inhumane to those who most badly need insurance.

Nine percent of Americans now purchase individual health insurance, and the market has ballooned to $115 billion. With the greater emphasis on individual insurance has come greater scrutiny—most notably in California, where insurers have paid millions in fines and restored coverage to thousands of residents whose coverage was canceled.

Individual insurance is no panacea, but separating truth from fiction when it comes to the individual market may help such products at least serve a meaningful role in combating the uninsured crisis.

1. Individual insurance isn't group insurance. Group and individual insurance cover different markets, offer different products, and operate in different regulatory environments, says Adele M. Kirk, PhD, assistant professor of public policy at the University of Maryland, Baltimore County. Kirk wrote a report this year called The Individual Insurance Market: A Building Block for Health Care Reform?

Bob Barry, senior vice president of product and market strategy at Connecture, a Web-based healthcare software automation company based in Atlanta, says the combination of marketing plans to potential customers, retaining members, and processing payments from individuals rather than employers can create significant administrative costs for individual insurers. He says greater automation and better use of technology can limit the amount of human intervention required by the insurer.

"If you significantly reduce all that administration burden, then you have that many more dollars available to the claims pool," he says.

2. States with coverage guarantees need individual mandates. Growing the individual market will work only if more healthy people enter the risk pool. Barry says individual mandates such as Massachusetts' healthcare reform are needed if states implement coverage guarantees. The Bay State's program requires most residents to get health insurance; the reform has resulted in 439,000 newly insured residents.

Barry says bringing new and healthier people into the risk pool helps pay for care for the sick and keep overall costs down. Without the healthy in the risk pool, the individual market is not sustainable, he says.

3. Individual insurance is a journey, not a destination. Kirk says most people have historically used individual insurance as a bridge between employer coverage. She cites a Health Care Financing and Organization study based from the University of Southern Maine that noted 40% of 18- to 24-year-olds (the low-cost people insurers covet) with individual coverage eventually dropped their plans and became uninsured. There isn't much to buffer the individual market from being stuck with unhealthy, high-cost patients and few healthy people to help carry the load. This means that small numbers of healthy people are forced to pay higher premiums, which increases healthcare costs.

4. Rescissions are a necessary evil. The most controversial part of individual insurance is that a health plan can end a person's policy—health insurers say this is needed to control costs and avoid fraud.

But rescissions have also gotten the industry into trouble. In California, the state has fined health plans for dropping thousands of members and pushed the insurers into reinstating the policies. Fred Karutz, senior vice president of business development at Norvax, an online health insurance technology company in Chicago, says the rescission controversy will end once states implement reforms that tackle the individual market—specifically, stricter rescission and acceptance policies with the government reimbursing insurers depending on their risk load.

"I think rescission will be less of an issue because the government is going to get much more active in the rules of acceptance and when you can rescind a policy," says Karutz.

Les Masterson

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