Health Economics Program Issue Brief 2003-09 October 2003 Introduction Trends in Minnesota s Individual Health Insurance Market Although the majority of Minnesotans get health insurance coverage through an employer, some purchase it directly from insurance companies. While the individual health insurance market is much smaller than the employer group market, it plays a vital role in insuring people who do not obtain coverage through an employer. About 200,000 Minnesotans, or 4 percent of the population, purchase health insurance in the individual market (see Figure 1). Early retirees, students, individuals who are self-employed and individuals who do not have access to employer-sponsored health insurance are most likely to buy coverage in the individual market. Enrollees in this market must personally finance their insurance, which makes issues of affordability particularly important to policy makers. Figure 1 Distribution of Insurance Coverage in Minnesota, 2001 (by Primary Source of Coverage) Uninsured 5.4% Individual Market 3.9% Public Programs: 23.0% Medicare 13.3% Medical Assistance 6.1% GAMC 0.5% MinnesotaCare 2.7% MCHA 0.5% Private Group Coverage: 67.7% Large Group 57.9% Small Group (2-50) 9.7% Note: GAMC is General Assistance Medical Care; MCHA is Minnesota Comprehensive Health Association. Source: MDH, Health Economics Program Minnesota Department of Health
Recently, rising health care premiums have raised renewed concerns about access to affordable insurance in the individual market. This issue brief analyzes trends in Minnesota s individual market using data from a variety of sources. The Individual Health Insurance Market in Minnesota The individual market has several characteristics that make access and affordability of coverage a challenge. Because people may wait to buy coverage until they have a medical need, applicants for coverage in this market may be likely to have higher medical expenses than average. (This phenomenon is called adverse selection.) To mitigate this problem, health plans perform extensive underwriting in the individual market, which may result in denial of coverage, high premiums, or limitations on benefits. As a result, the individual market has much higher overhead costs than the group market. 1 In addition, the market tends to be volatile because of high turnover among enrollees. 2 In light of these market characteristics, the individual market in Minnesota is subject to the following regulations: 3 Guaranteed renewal, which means that health plans cannot refuse to renew coverage for an individual except under specific conditions; Restrictions on premium variation, also known as premium rate bands, which are intended to reduce premium volatility; Regulatory approval of premium rates, which was modified in 2002 to allow companies to charge new rates as soon as they are filed rather then waiting for the approval process, which the Department of Commerce has 60 days to complete. Minimum loss ratios, which are intended to limit profits of health plan companies by ensuring that a minimum percentage of premiums is paid out for medical claims. For health plan companies with 10 percent or more of the total private health insurance market in Minnesota and HMOs with more than 3 percent of the market, the minimum loss ratio in the individual market is 72 percent. For HMOs with less than 3 percent of the total private health insurance market in Minnesota, the minimum loss ratio in the individual market is 68 percent. For other health plan companies the minimum loss ratio is 60 percent. The Minnesota Comprehensive Health Association (MCHA) is a high-risk pool established by the legislature in 1976 that offers individual health insurance to Minnesotans who have been turned down for health insurance in the private market. MCHA rates are capped at 125% of the average individual market rates. Expenses that are not covered by enrollee premiums are paid for through an assessment on all health plan companies doing business in Minnesota s fully-insured market. 4 2
Enrollment in the Individual Market Table 1 Demographic Characteristics of Individual Market Enrollees, 2001 Individual Market Enrollees All Minnesotans Gender Male 47.2% 48.1% Female 52.8% 51.9% Total Age 0 to 5 7.6% 7.1% 6 to 17 13.1% 16.3% 18 to 24 8.0% 8.5% 25 to 34 12.6% 13.5% 35 to 54 36.9% 33.5% 55 to 64 20.4% 9.5% 65 + 1.4% 11.7% Race/Ethnicity White 95.9% 92.4% Black 1.4% 3.3% Asian 1.6% 2.5% American Indian 0.7% 1.5% Other Race 0.5% 0.4% Hispanic/Latino 2.2% 3.2% See note* See note* Region Twin Cities 40.4% 46.3% Greater Minnesota 59.6% 53.7% Northwest 4.4% 3.3% Northeast 4.4% 6.6% West Central 7.0% 4.3% Central 13.2% 12.4% Southwest 11.6% 5.8% Southeast 19.0% 13.8% Twin Cities 40.4% 53.7% Family Income as % of Poverty Guidelines <100% 5.1% 6.0% 101% to 200% 16.5% 14.6% 201% to 300% 19.5% 19.5% 301% to 400% 18.1% 17.5% >400% 40.8% 42.4% Education** Less than high school 3.5% 6.3% High school 29.8% 26.8% Some college 32.2% 32.6% College graduate 23.9% 23.4% Postgraduate 10.7% 10.9% Employment Status Self Employed 51.6% 10.8% Employed by Someone Else 25.1% 64.7% Not Employed 8.0% 8.0% Retired 9.3% 13.0% Full Time Student 6.0% 3.5% Health Status Excellent 46.4% 40.3% Very Good 30.0% 31.8% Good 17.9% 19.5% Fair 5.4% 6.2% Poor 0.4% 2.1% *Distribution adds to more than 100 percent since people were allowed to choose more than one race/ethnicity **For children, refers to parent Numbers in bold indicate statistically significant difference (95% level) between the population as a whole and those with individual coverage Source: MDH, Health Economics Program, 2001 Minnesota Health Access Survey 3
Enrollees in the individual health insurance market are usually people who cannot access health insurance through an employer. Table 1 summarizes the demographic characteristics of enrollees in Minnesota s individual market. As shown in the table, compared to the general population, people who have individual coverage are more likely to: Be older adults between the ages of 55 and 64 (20 percent of individual market enrollees compared to 9 percent of the general population); Be white (96 percent compared to 92 percent); Live in Greater Minnesota (60 percent compared to 54 percent); Be self-employed (52 percent compared to 11 percent); and Indicate that they are in excellent health (46 percent compared to 40 percent). The disproportionate number of enrollees in the individual market who are between the ages of 55 and 64 is likely related to the fact that early retirees who are not yet eligible for Medicare often purchase individual coverage. 5 As noted above, the majority of individual market enrollees (60 percent) live in Greater Minnesota; in particular, the west central and southern regions of the state have the highest rates of individual coverage as a share of the population (see Figure 2). One reason for this is that these areas are more heavily dominated by agriculture, and employer-based health insurance is less widely available in these areas. 12% Figure 2 Percent of Population Enrolled in Individual Coverage, by Region, Minnesota, 2001 10% 9.8%* 8% 7.9%* 6% 6.5% 5.2% 6.7%* 4.9% 4% 3.3%* 3.7%* 2% 0% Northwest Northeast West Central Central Southwest Southeast Twin Cities Total *Indicates statistically significant difference (95% level) from rate for state as a whole Source: MDH, Health Economics Program, 2001 Minnesota Health Access Survey 4
Not surprisingly, over half of the enrollees in the individual market are self-employed (52 percent). This reflects the fact that the individual market is often the only health insurance option for people who are self-employed. The fact that 25 percent of enrollees in the individual market are employed by someone else likely reflects gaps in the availability and affordability of employer based coverage. The majority of enrollees in the individual market indicated that they are in excellent or very good health (76 percent). This may be related to the fact that people in poor health are often denied coverage in the individual market through the underwriting process. Enrollment and Premiums As shown in Figure 3, enrollment in Minnesota s individual insurance market declined quickly in the mid-1990s, then slowed and stabilized in the late 1990s. The reduction in individual market enrollment is likely the result of several factors, including market reforms that increased the availability of small employer coverage, and the strong economy and low unemployment in the late 1990s, which likely increased enrollment in employer-based policies. Figure 3 Minnesota Individual Market Enrollment, 1994 to 2002 300,000 268,489 250,000 200,000 249,499 225,711 212,036 206,560 200,353 196,992 194,122 198,215 150,000 100,000 50,000 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 Source: MCHA Premium Survey More recently, rapid premium increases may also have contributed to declining enrollment. Figure 4 and 5 illustrate the rapid increase in premiums since 1998. Premiums increased by 81 percent from 1998 to 2002, or an average of 16 percent per year. In 2002, the average premium per person per year was almost $1,750. 5
Figure 4 Change in Average Premium in Minnesota's Individual Market, 1998 to 2002* (Premium Per Member Per Year) 20% 16.9% 16.7% 15% 15.4% 13.9% 10% 5% 0% -5% -3.5% 1998 1999 2000 2001 2002 Source: MCHA Premium Survey and Minnesota Department of Commerce, loss ratio reports. Figure 5 Average Premium Per Member Per Year in Minnesota's Individual Market, 1997 to 2002* $2,000 $1,800 $1,747 $1,600 $1,533 $1,400 $1,329 $1,200 $1,000 $1,009 $974 $1,138 $800 $600 $400 $200 $0 1997 1998 1999 2000 2001 2002 Source: MCHA Premium Survey and Minnesota Department of Commerce, loss ratio reports. * The average premium per member per year is affected by many factors, including premium increases for a given product, shifts in the mix of products that enrollees purchase, and changes in the characteristics of the enrollee population (e.g. average age, health status). 6
Financial and Industry Performance As in the nation, Minnesota s individual health insurance market is characterized by a relatively high degree of market consolidation (see Figure 6). In 2002, 17 firms offered products in Minnesota s individual health insurance market and the largest carrier, Blue Cross Blue Shield of Minnesota (BCBSM), held 54 percent of the market. The top three carriers (BCBSM, Fortis and HealthPartners) held a combined 80 percent of the market in 2002. In 1997, the most recent year for which comparison is available, Minnesota was ranked twenty-eighth in the nation by share of the individual market held by the largest three insurers (at the time, the top three carriers held 76 percent of the market). 6 Figure 6 Minnesota's Individual Market: Top 10 Carriers by Market Share, 2002 60% 50% 53.5% 40% 30% 20% 10% 14.4% 11.9% 7.1% 3.4% 3.2% 2.3% 1.2% 0.7% 1.2% 0.6% 1.2% 0% BCBSM, Inc. Fortis HealthPartners Medica World Insurance Co. American Family Mutual Insurance Co. State Farm Mutual Automobile Insurance Co. Golden Rule Insurance Co. American Fidelity Assurance Co. Pioneer Life Insurance Co. Thrivent Financial for Lutherans Other (6 Companies) *Note: Companies with common ownership have been consolidated for purposes of this analysis. Fully insured market only, market share based on premium volume. Source: Minnesota Department of Commerce, "Report of 2002 Loss Ratio Experience in the Individual and Small Employer Health Plan Markets for: Insurance Companies Nonprofit Health Service Plan Corporations and Health Maintenance Organizations," June 2003. Figure 7 shows the overall industry loss ratio for insurers in Minnesota s individual market and the loss ratio of the three largest companies in that market. As shown in the figure, both the top three companies and the industry as a whole have had loss ratios that are consistently higher than the statutory minimum. The individual market s high overhead costs, in conjunction with these high loss ratios, make it likely that the industry has incurred net losses throughout this period. 7
Figure 7 Loss Ratio Experience in the Individual Market, 1997 to 2002 120% 100% Total Market BCBSM HealthPartners Fortis 80% 60% 40% 72% statutory minimum for large firms 20% 0% 1997 1998 1999 2000 2001 2002 *Note: Companies with common ownership have been consolidated for purposes of this analysis. Source: Minnesota Department of Commerce, loss ratio reports, 1998 to 2003. Summary and Conclusion The individual market is often the only health insurance option for people who are not offered coverage through an employer. Compared to the population as a whole, enrollees in the individual market are older, more likely to live in Greater Minnesota and more likely to be self-employed. Enrollment in the individual market declined throughout the 1990s, due in part to gains in employer-sponsored insurance and, more recently, to rapid premium increases. Because of the key role of the individual market as a source of coverage for people without other options, it is particularly important to ensure that coverage remains affordable. Like the private health insurance market as a whole, premiums and underlying medical expenses in this market have increased rapidly in the last few years, giving rise to renewed concerns about affordability of coverage. The Health Economics Program will continue to monitor trends in the individual health insurance market to determine the impact of rising costs on affordability and coverage. 8
Endnotes 1 Pauly, M. et al. Individual versus Job-Based Health Insurance: Weighing the Pros and Cons, Health Affairs, November/December, 1999. 2 Chollet, Deborah. Understanding Individual Health Insurance Markets. Henry J. Kaiser Family Foundation, March 1998. 3 Minnesota Statutes Chapter 62A.65. 4 For more information on the financing and funding of MCHA see Minnesota Department of Health, Health Economics Program, Health Care Coverage and Financing in Minnesota: Public Sector Programs, January 2003. 5 Thirty percent of Minnesotans aged 55 to 64 who purchase insurance in the individual market report their employment status as retired compared with 25% of all Minnesotans aged 55 to 64. This difference is statistically significant at a 95% confidence level. 6 Chollet, Deborah, Adele Kirk and Marc Chow. Mapping State Health Insurance Markets: Structure and Change in the States Group and Individual Health Insurance Markets, 1995-1997, State Coverage Initiatives; December, 2000. 9
h ealth e conomics p rogram The Health Economics Program conducts research and applied policy analysis to monitor changes in the health care marketplace; to understand factors influencing health care cost, quality and access; and to provide technical assistance in the development of state health care policy. For more information, contact the Health Economics Program at (651) 282-6367. This issue brief, as well as other Health Economics Program publications, can be found on our website at: http://www.health.state.mn.us/divs/hpsc/hep/hepindex.htm Minnesota Department of Health Health Economics Program 121 East Seventh Place, P.O. Box 64975 St. Paul, MN 55101 (651) 282-6367 Upon request, this information will be made available in alternative format; for example, large print, Braille, or cassette tape. Printed with a minimum of 30% post-consumer materials. Please recycle.