As of 2006, 68.5 percent of nonelderly Americans were estimated to have private health insurance, with 92 percent of the private coverage obtained through employers (Holahan and Cook 2007).  The remaining 8 percent of private coverage is purchased directly in the non-group market.  While employer sponsored insurance (ESI) is the dominant form of coverage for the nonelderly, the share of the population with that type of coverage is declining, particularly among those with low or modest incomes. 

As private coverage falls, the share of the population uninsured rises.  As the rate of employer-based coverage declines, policymakers consider whether it is best to try to strengthen that market and stem the decline, or whether it is best to create incentives for individuals to purchase insurance coverage in the private non-group insurance market or some more structured and regulated version of it.

Still, many employers continue to offer ESI to their workers, believing that they must do so in order to stay competitive for their desired types of labor.  Obtaining coverage through the workplace is attractive to many workers for a variety of reasons.  First, employer contributions to health insurance are exempt from income and payroll taxes.  Conversely, insurance purchased in the non-group market must be paid for with after tax dollars, with the exception of purchases by the self-employed who receive special tax advantages as well.  The higher the worker’s income, the higher their marginal tax rate, and the higher the value of the tax advantage of employer coverage. 

Second, group purchase of health insurance leads to economies of scale in administration – the larger the group, the lower the administrative load attached to insurance purchase.  Non-group insurance generally has very high administrative loads associated with it. 

Third, the larger the group purchasing insurance, the less the expected cost of the group will vary year-to-year.  Since most people are healthy, a small share of high cost people within a large group will not affect the average cost of the group very much.  But even a small share of high cost people within a small group can have a dramatic affect on the group’s average.  So purchasing through employers, particularly large employers, can create risk-spreading economies of scale.

Yet as the costs of medical care increase, employers find it more and more difficult to offset the costs of coverage with reduced wages.  Some are reducing benefits or increasing deductibles, co-insurance/co-payments, and/or premiums paid directly by the workers in order to reduce their spending on health care benefits.  Workers either pay more for coverage or decline their employers’ offers altogether.

However, the private non-group insurance markets in most states do not provide attractive alternatives to ESI for most people.  As noted earlier, administrative loads are high, making premiums significantly higher than ESI per unit of benefit provided.  In addition, most states do not require guaranteed issue of insurance, meaning that non-group insurers can refuse to sell coverage to particular individuals based upon their current or past health status.  Many states also allow their insurers to attach benefit riders to policies that they do issue, permanently excluding coverage for particular diagnoses, body systems, or body parts, depending upon an individuals’ health history.  Premiums can vary by the health status of the applicant as well in the vast majority of states.   

Insurers in the non-group market realize that individuals are more likely to purchase such coverage if their expected use of services is high.  In other words, insurers expect the non-group market to attract an adverse selection of enrollees.  Many of the insurer practices delineated above are attempts by insurers to protect themselves against such adverse selection.  Experience in states that have attempted to force more risk pooling within these markets, by requiring guaranteed issue of plans and/or by requiring non-group plans to set premiums based upon community rates (i.e., averages over all enrollees, regardless of health status), has led to increasing premiums and exit of many of the healthier individuals from the market. 

Under a system of voluntary health insurance with individuals able to opt in or out of coverage in various markets, the small non-group insurance plans are simply not large enough or diverse enough over which to spread the costs associated with individuals with high health care needs.

Examples of Health Policy Center research related to private health insurance include:

• Analyses of trends in health insurance coverage of workers, including a decomposition of recent changes attributable to the rate of employer sponsorship of coverage, the rate of eligibility for coverage given sponsorship, and the rate of worker take-up of coverage given sponsorship and eligibility;
  
• Microsimulation modeling of the potential impact of various approaches to reinsurance on the cost and level of coverage in private markets;
  
• The impacts of public health insurance program expansions on the rate of private health insurance;
  
• Access to employer-sponsored health insurance among low-income families;
  
• Health insurance options for workers with disabilities;
  
• The impact of tax credits on the private health insurance coverage of displaced workers; and
  
• The effects of employment changes and premium increases on the health insurance coverage of adults.
  

Holahan, John and Allison Cook. 2007. “What Happened to the Insurance Coverage of Adults and Children in 2006?” Issue Paper, Kaiser Commission on Medicaid and the Uninsured,  http://www.kff.org/uninsured/upload/7694.pdf.