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Small-Group And Individual Health Coverage In California Is Becoming Less Affordable

Researchers Say That Small-Group Premiums Are Increasing, While Individual-Market Policies Are Covering Less And Requiring More Cost Sharing

Bethesda, MD -- Health coverage is becoming less affordable for Californians in both the small-group and individual insurance markets, but affordability problems are showing up in very different ways in the two markets, Jon Gabel and coauthors report in a paper published today on the Health Affairs Web site. http://content.healthaffairs.org/cgi/content/abstract/26/4/w488

Premiums paid by employees for small-group coverage in the Golden State increased 53 percent between 2003 and 2006, from $250 in 2003 to $382 in 2006. Premiums for individual coverage rose only 23 percent between 2002 and 2006, from $211 in 2002 to $259 in 2006.

However, the average actuarial value of individual coverage declined dramatically: Individual-market policies paid 75 percent of medical costs on average in 2003 but only 55 percent in 2006. In contrast, small-group policies retained their actuarial value, paying for roughly 83 percent of medical expenses across the period.

Led by analysts from the benefits consulting firm of Watson Wyatt Worldwide, Gabel’s team calculated payouts by each plan and patient’s expected out-of-pocket expenses for a standardized large population with group insurance that was kept constant across plans. Hence, the analysis of the individual insurance market assumes that insurers treat a population identical to that treated in the group market. In accordance with California insurance law, the small-group market was defined as including firms with two to fifty workers.

The work was supported by the California HealthCare Foundation; it builds on earlier CHCF-funded work, published in Health Affairs by Melinda Buntin and coauthors, which documented 1997-2002 trends in the California individual insurance market.

“If you look only at premiums, individual coverage in California looks like a good deal, while small-group coverage looks increasingly expensive” said Gabel, a senior fellow at NORC in Washington, DC. “However, if you consider all out-of-pocket expenses facing policyholders, individual coverage in California is growing more unaffordable as fast as, and in fact even faster than, small-group coverage.” In 2006, absolute premiums were considerably higher in the small-group market than in the individual market, but when premiums were adjusted for the financial protection provided by particular plans, there was no longer any statistically significant difference between premiums in the two markets.

Individual-market enrollees faced much higher cost sharing in 2006 than their small-group-market counterparts. The average deductible in the individual market was $2,136, more than six times the size of the average small-group-market deductible ($348). HMOs, which rarely feature deductibles, accounted for nearly half (44.5 percent) of all California small-group enrollment in 2006 but only 28 percent of the individual market in 2006, down from 37 percent in 2004.

Individual-Market Coverage Is Unaffordable To Californians At The Middle;
Small-Group Single Coverage Is Affordable At Median Income,
But Family Coverage Is Not

Gabel and coauthors deemed coverage affordable if premiums and other out-of-pocket expenses would consume less than 8 percent of income. By that standard, which the researchers acknowledged could well be too high, coverage in the individual market is unaffordable for Californians at the median income level, who would spend 16.1 percent of their income for single coverage and 19.1 percent for family coverage. Golden State residents with incomes at the federal poverty level would spend 50.3 percent of their income for single coverage and 67.9 percent of income for family coverage.

Some states are considering following Massachusetts in mandating that individuals with incomes over 300 percent of poverty purchase insurance, Gabel and his colleagues note. If this coverage is purchased in the individual market, “findings from this paper suggest that when out-of-pocket medical expenses are added to premium payments, single people would need to earn approximately $50,000 a year (almost $20,000 above the median income for single people in California) to drive expenses below 10 percent of family income.”

Small-group coverage remains affordable for single Californians at the median income, who would spend 3.5 percent of income on premiums and other expenses, up from 2.7 percent in 2003. However, families at the median income purchasing small-group coverage would have to spend 8.2 percent of income, slightly above the affordability benchmark and up from 6.7 percent of income in 2003. For those at the poverty level, single coverage in the small-group market would consume 11 percent of income, up from 8.5 percent in 2003. Small-group insurance is more likely than individual insurance to meet consumer affordability standards because employers contribute a share of premiums and benefits are more comprehensive.

Why Do The Same Insurers Price Differently
In The Small-Group And Individual Markets?

Given that essentially the same insurers dominate both the small-group and individual markets in California, why are the products available in the two markets so different? Gabel and coauthors attempted to answer this question through interviews with insurance executives.

“In the individual market, insurers, based on their marketing research, were keenly conscious of ‘price points’--psychological thresholds beyond which many potential purchasers will not buy coverage. For younger potential buyers, these price points are very low,” the researchers report. They note that Blue Cross of California, which has the largest market share in California’s individual market, has had great success marketing its low-cost, low-benefit product Tonik to young, healthy males. In contrast, similar products that insurers have tried to introduce into the small-group market have not sold so well.


ABOUT HEALTH AFFAIRS:

Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.

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©2007 Project HOPE–The People-to-People Health Foundation, Inc.