Individual insurance may be better for people who come into poor health than small group insurance

A new analysis by Mark Pauly and Robert Lieberthal examines the relationship between type of health insurance coverage and the risk of becoming uninsured (Source: How risky is individual insurance?" Health Affiars Web Exclusive, May 6, 2008 - available for free access to two weeks only).  The authors find that people with median health status have a higher risk of becoming uninsured if they are individually uninsured and the lowest risk if they are insured through large group insurance.

On the other hand, the authors report that individuals who start out healthy and then develop fair or poor heatlh do better in keeping their health insurance when covered through the individual market than people covered on the small group market.  The risk of being uninsured in the next renewal period was 44 percent for those on the small group market, a rate almost twice as high as for those covered through the individual market.

According to the authors, "high risks pay more if they seek individual coverage after they have
become high risks, but individual coverage provides better protection (compared to group insurance) against high premiums for already individually insured peoplewho become high risk."

The analysis cites two main reasons for this finding.  One reason is that the individual market is supposed to employ guaranteed renewability at class average rates.  This feature means that a downward change in health status is not to specially affect the premium rate at renewal.  The second reason is that a downward change in health status often leads to a loss of employment.  If the person's health insurance is tied to their employment, this loss of employment results in a loss of health insurance.

As the authors conclude, "group insurance has a tear in its net of protection; it leaves a person who becomes a high risk more vulnerable to dropping or losing any and all coverage than does individual insurance."