Before the Affordable Care Act, there were three types of private health insurance markets, which were regulated by the state. There were the large groups, small groups, and individuals.
- Large Groups – Most large employers do not buy their health insurance, they are self-insured and employ insurance companies to be their administrators.
- Small Groups – these range from 2 to 50 or 50-99 individuals.
The largest insurer of the small and individual group market insures more than of those two markets even though there are thousands of insurance companies.
Types of Health Insurance Coverage (non-elderly 2012)
|Medicare, Veterans Administration, Other||4.9%|
Why is the premium higher for small/individual groups than for the large groups?
- Premiums of $200-$1000 for small and individual coverage are common even with high deductibles. They also have limited coverage.
- It is very common for people to be denied coverage or excluded from some coverage.
- Premiums have two costs – expected costs and a loading fee
- Loading fee – administrative and marketing costs + payment for bearing risk
- Economies of scale does play a part in lower premiums for large groups
What are the risks?
- Spending could be higher than predicted.
- Adverse selection – those who want health insurance are likely to need it the most (costly patients for insurance companies). In the individual and small group market, a larger than expected number of people with extremely high costs, share a disproportionate amount of cost.
How did insurance companies reduce the risk of adverse selection pre-ACA?
- Market segmentation – specialize in small employers or individuals (sell to a target group – far less likely to be sick)
- Medical underwriting – charge more for people whose medical history correlated with high costs (like old people)
- Deny coverage
- Exclusion of coverage for pre-existing condition (like don’t cover some diseases)
- Use different benefits and cost sharing – attract people who would have lower expenses and discourage people with high costs. For example: Offering a health club benefit is attractive to people who consider themselves healthy versus someone who is old and overweight (discourages them)
Before the ACA, who were the uninsured?
- 50 million Americans
- 1 in 6 people under 65
- 28% had household incomes above the median household income of $50,000. 90% of the uninsured had incomes less than 400% of the Federal Poverty Level. These households will get premium subsidies under the ACA or Medicaid coverage depending on their incomes.
- 75% younger than 45 years of age (15% of them were children)
- Half of them had incomes below $30,000
There has been a decline in employer-sponsored health insurance:
- Premiums have doubled between 2002 and 2012
- Premiums for small employers have increased by more than double