Prior to World War II, many employees purchased their own individual or family health insurance policies, sometime called “personal” health insurance policies, just like they do today with homeowners, auto, and life insurance. As mentioned earlier, in 1945, to get around wartime wage and price controls, employers were allowed to give employees unlimited health benefits without having to report it as income.
This created an up to 2-for-1 tax advantage (depending on the income tax bracket of the employee) for employer health benefits provided by employers versus individual health insurance policies, purchased by employees themselves.
Today, most employers offer their employees group health benefits and typically pay 50%-100% of the cost for employees who participate. If the employer’s plan allows, employees are also permitted to contribute pre-tax funds (through salary reduction) to add their dependents to the employer group plan.
Employer healthcare costs (and group insurance premiums) have been increasing the past ten years at 3-4 times the rate of general inflation. In response to the rising costs of group coverage, employers have been reducing health benefits, increasing the employee (and especially dependent) cost to participate, or even cutting out health benefits entirely.
Employees who work for companies that do not have a group health policy, or for companies that do not offer participation in a group health policy at rates they can afford, purchase their own individual health insurance policy directly from an insurance carrier such as WellPoint, UnitedHealth Group, Aetna, Coventry, Humana, Assurant, or other insurance carriers.
A major cost increase for employees the past few years has been the cost of adding a spouse or dependent to their employer’s group plan. Employers have drastically reduced the amount they contribute to spouses and dependents in response to rising group plan expenses.
Individual health insurance today in 45 states costs 1/2 the price of employer group coverage for the 70%-90% of applicants who medically qualify
Individual health insurance, which used to cost much more than employer-sponsored group insurance, now costs healthy new applicants 1/2 the price of comparable employer-sponsored group policies in 45 states. And, if health care reform stands, in 2014, most individuals and families will receive a massive subsidy from the federal government to buy individual health insurance through an exchange.
The dramatic relative price change between individual versus group policies has occurred because 45 U.S. states allow insurance carriers to distribute individual health insurance with medical underwriting. Allowing medical underwriting means that insurance carriers may reject, accept, or uprate (i.e. charge more for) applicants based on their health status or age. KY, WA, and NH changed in 2003 to allow medical underwriting.
In contrast, in New York and other “guaranteed-issue” and “community-rated” states, insurance carriers must accept all applicants for individual health insurance and cannot charge more based on health status or age.
In a typical non-geriatric population group, 20% of the people incur 80% of the healthcare costs, and 80% of the people incur 20% of the healthcare costs. Individual health insurance carriers only accept the healthy 70%-90% of applicants at typically 50% of the premium cost of group policies. Once accepted, states require that the carrier cannot increase premiums based on the insured’s subsequent health, but can raise individual health insurance premiums based on the cost of all insured individuals in a large geographic pool—typically a pool of very healthy individuals with individual health policies.
Individual Health Insurance is Guaranteed Renewable
Once a person obtains an individual health policy, they can renew it until age 65 regardless of employment and their premium cannot be increased solely due to their own very large claim (e.g. $1 million). Premiums do increase each year with general medical inflation but cannot be increased due to individual claims history.
The number of people buying individual health policies is growing rapidly. In a 2007 report, Citigroup estimated the existing market for individual health insurance policies had grown to 19 million members and further projected it would grow 37% to 26 million members by 2010.
This estimate may be conservative given recent regulatory changes by the federal government affecting individual health insurance. Some of these regulatory changes include:
(1) Employers can now use Section 105 Plans to reimburse Individual Health Insurance 100% tax-free
The IRS now allows employers to use Section 105 plans to reimburse employees, tax-free, for premiums paid for individual health insurance. This effectively reduces the cost to employers of providing employee health benefits by up to 50%. For employers who cannot afford to offer any type of group plan, or meet participation in their existing group plan, this also opens the door to reimburse the cost of individual health insurance premiums.
(2) HIPAA Now Requires States to offer Guaranteed-Issue Individual Health Plans to Uninsurable Individuals
Since 2006, the Federal Government requires all states to offer guaranteed-issue “state risk pool” individual and family coverage to employees and dependents with preexisting medical conditions that lose their employer-sponsored health benefits. Forty states go beyond the federal mandate and offer such state-guaranteed coverage to any resident who is charged more or rejected for individual health insurance. However, state-guaranteed coverage is expensive: the federal government suggests states charge 300% the cost of similar coverage for healthy people.
(3) Health Reform Requires a Federal Risk Pool offer Guaranteed-Issue Individual Health Plans to Individuals who have been Uninsured for 6 months
In July, 2010, the health reform bill created the Pre-Existing Condition Exclusion Plan (PCIP) to provide health insurance coverage to uninsurable citizens. More than 20 states (including District of Columbia) administer their own PCIP program. The federal government and HHS run the program on behalf of the remaining states.
Summary of Individual Health Insurance Today
Individual Health Insurance is the fastest growing sector of the health insurance industry, expected to increase from 19 million to 35 million policies from 2007 to 2012.
Individual Health Insurance has become an affordable alternative to group employer coverage for healthy families in 45 states. It is portable and permanent regardless of employment.
Individual Health Insurance can now be payed with tax-free dollars in the following ways:
- Employers can pay premiums as a tax-free benefit through Section 105; and
- Employees can pay premiums on a pre-tax basis through Section 125 Premium Reimbursement Arrangements (PRAs, also called “Premium Only Plans”).
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