Private Health Insurance: Millions Relying on Individual Market Face Cost
and Coverage Tradeoffs (Chapter Report, 11/25/96, GAO/HEHS-97-8).

Pursuant to a congressional request, GAO provided information on the
private individual health insurance market, focusing on the: (1) size of
the market and characteristics of its participants; (2) structure of the
market, including how individuals access the market, the prices, other
characteristics of health plans offered, and the number of individual
carriers offering plans; and (3) insurance reforms and other measures
states have taken to increase individuals' access to health insurance.

GAO found that: (1) about 10.5 million Americans under 65 years of age
relied on private individual health insurance as their only source of
health coverage during 1994; (2) when compared with those enrolled in
employer-sponsored group coverage, individual health insurance enrollees
are, on average, older and have lower income, but they are similar in
their self-reported health status; (3) individual insurance is more
prevalent among particular segments of the labor force, such as the
self-employed and farm workers; (4) individuals must identify and
evaluate multiple health insurance products and then obtain and finance
the coverage on their own; (5) individuals in the states reviewed could
select products from 7 to over 100 carriers, with deductibles ranging
from $250 to $10,000; (6) in the majority of states which permit medical
underwriting, individuals may be excluded from the private insurance
market, may only be able to obtain limited benefit coverage, or may pay
premiums that are significantly higher than the standard rate for
similar coverage; (7) carriers in these states determine premium price
and eligibility on the basis of the risk indicated by each individual's
demographic characteristics and health status; (8) carriers GAO visited
declined coverage to up to 33 percent of applicants because of medical
conditions, such as acquired immunodeficiency syndrome and heart
disease; (9) if they do not decline coverage, carriers may permanently
exclude from coverage certain conditions or body parts, or charge
significantly higher premiums to those expected to incur large health
care costs; (10) at least 43 states have sought to increase the health
coverage options available to otherwise uninsurable individuals; and
(11) a new federal law contains provisions intended to enhance access to
the individual insurance market, particularly regarding portability and
guaranteed renewal.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HEHS-97-8
     TITLE:  Private Health Insurance: Millions Relying on Individual 
             Market Face Cost and Coverage Tradeoffs
      DATE:  11/25/96
   SUBJECT:  Health insurance
             Demographic data
             Insurance companies
             Employee medical benefits
             Insurance premiums
             State law
             Insurance regulation
             Eligibility determinations
             Health care programs
IDENTIFIER:  Medicare Program
             Medicaid Program
             Arizona
             Colorado
             Illinois
             New Jersey
             New York
             North Dakota
             District of Columbia
             Iowa
             Montana
             Nebraska
             South Dakota
             Census Bureau Current Population Survey
             National Health Interview Survey
             Civilian Health and Medical Program of the Uniformed 
             Services
             CHAMPUS
             Alabama
             Delaware
             Hawaii
             Nevada
             Texas
             Vermont
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Labor and Human Resources, U.S. 
Senate

November 1996

PRIVATE HEALTH INSURANCE -
MILLIONS RELYING ON INDIVIDUAL
MARKET FACE COST AND COVERAGE
TRADE-OFFS

GAO/HEHS-97-8

Individual Health Insurance

(108263)


Abbreviations
=============================================================== ABBREV

  AIDS - acquired immunodeficiency syndrome
  CHAMPUS - Civilian Health and Medical Program of the Uniformed
     Services
  COBRA - Consolidated Omnibus Budget Reconciliation Act
  CPS - Current Population Survey
  EBRI - Employee Benefit Research Institute
  FFS - fee-for-service
  HIAA - Health Insurance Association of America
  HMO - health maintenance organization
  IHS - Indian Health Service
  MSA - medical savings account
  NAIC - National Association of Insurance Carriers
  NHIS - National Health Interview Survey
  PPO - preferred provider organization

Letter
=============================================================== LETTER


B-270759

November 25, 1996

The Honorable Nancy Landon Kassebaum
Chairman, Committee on Labor
 and Human Resources
United States Senate

Dear Madam Chairman: 

In response to your request, this report provides information on the
private individual health insurance market.  Specifically, the report
discusses the size of the market and characteristics of its
participants; the structure of the market, including a review of
carriers, health plans, premiums, underwriting practices, and market
accessibility; and the measures taken by states and the federal
government to improve accessibility. 

We are sending copies of the report to interested congressional
committees and are making copies available to others on request. 

This report was prepared under the direction of Michael Gutowski,
Assistant Director, who may be reached at (202) 512-7128 if you or
your staff have any questions.  Other contributors to this report are
listed in appendix IV. 

Sincerely yours,

William J.  Scanlon
Director, Health Financing
 and Systems Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

While most Americans obtain their health insurance coverage through
employer-sponsored group plans or government programs like Medicare
and Medicaid, a significant minority purchase health insurance
individually for themselves and their families.  These participants
in the individual health insurance market primarily rely on their own
resources to obtain information on insurance options and to finance
their health coverage. 

Integrating the individual market into legislative proposals for
reforming health insurance has been a thorny issue at both the state
and federal levels.  In part, this has stemmed from the paucity of
information on the nature of this market and the characteristics of
its participants.  Accordingly, the Chairman of the Senate Committee
on Labor and Human Resources asked GAO to report on

  -- the size of the individual market, recent trends in it, and the
     demographic characteristics of its participants;

  -- the market structure, including how individuals access the
     market, the prices, other characteristics of health plans
     offered, and the number of individual carriers offering plans;
     and

  -- the insurance reforms and other measures states have taken to
     increase individuals' access to health insurance. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Participants in the individual market include self-employed people;
people whose employers do not offer health insurance coverage; people
not in the labor force; early retirees who no longer have
employment-based coverage and are not yet eligible for Medicare; and
people who lose their jobs and have exhausted or are ineligible for
continuation of coverage.  There is considerable controversy
regarding simple questions such as how many people purchase
individual insurance.  Considerable variation in how the market
operates and is regulated at the state level further complicates the
picture. 

To fill this information void, GAO analyzed data from the Bureau of
the Census and other sources, and interviewed representatives of
insurance carriers and state regulators in seven states.  These
states--Arizona, Colorado, Illinois, New Jersey, New York, North
Dakota, and Vermont--were selected on the basis of variations in such
characteristics as their overall population and the extent of
individual insurance market reforms passed by the state.  In some of
these states, GAO interviewed relevant industry and consumer
representatives as well.  GAO also obtained information on those
states that passed individual insurance reforms from 1990 through
1995 and those states that undertook other measures to increase
individuals' access to health insurance. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

The family farmer, the recent college graduate, the early retiree,
and the worker for a firm that chooses not to offer health insurance
coverage are among those who are not generally covered in a
voluntary, employment-based insurance market.  About 10.5 million
Americans under 65 years of age (4.5 percent of the nonelderly
population) relied on private individual health insurance as their
only source of health coverage during 1994.  Individual insurance is
most common in the Mountain and Plains states, with at least 10
percent of the nonelderly in Iowa, Nebraska, North Dakota, and South
Dakota having individual insurance.  Also, individual insurance is
more prevalent among particular segments of the labor force, with
nearly 20 percent of the self-employed and 17 percent of farm workers
being covered by individual insurance.  When compared with those
enrolled in employer-sponsored group coverage, individual health
insurance enrollees are, on average, older and have lower income;
however, they are similar in their self-reported health status, with
three-quarters reporting their health condition as being very good or
excellent. 

The manner in which individuals access the individual insurance
market and the wide range of available products differentiate this
type of coverage from employer-sponsored coverage.  Unlike the
latter, which is generally obtained, administered, and largely
financed by the employer, individuals must identify and evaluate
multiple health insurance products and then obtain and finance the
coverage on their own.  Recognizing the importance of offering
affordable options to individuals with different economic resources
and health needs, carriers offer a wide range of health plans with a
variety of cost-sharing options.  Individuals in the states GAO
visited could select products from no fewer than 7 to over 100
carriers, with deductibles ranging from $250 to $10,000 or more. 
Typically, higher deductibles translate to lower premiums but at
increased financial risk to the consumer. 

In the majority of states, which permit medical underwriting,
individuals may be excluded from the private insurance market, may
only be able to obtain limited benefit coverage, or may pay premiums
that are significantly higher than the standard rate for similar
coverage.  Unlike employer-sponsored coverage for which risk is
spread over the entire group, carriers in these states determine
premium price and eligibility on the basis of the risk indicated by
each individual's demographic characteristics and health status. 
Carriers GAO visited declined coverage to up to 33 percent of
applicants because they had conditions such as acquired
immunodeficiency syndrome (AIDS) and heart disease.  Moreover, if
they do not decline coverage, carriers may permanently exclude from
coverage certain conditions or body parts, or charge significantly
higher premiums to those expected to incur large health care costs. 
For example, GAO found that conditions such as chronic back pain and
anemia are commonly excluded from coverage or result in higher
premiums. 

At least 43 states have sought to increase the health coverage
options available to otherwise uninsurable individuals, although
these options may cost considerably more than the standard rate. 
Twenty-five states have created high-risk insurance programs, while
many states have passed individual market insurance reforms.  In
eight states and the District of Columbia, all individuals may be
guaranteed coverage through a carrier that acts as insurer of last
resort.  In at least seven states, no safety net exists to provide
unhealthy individuals access to health insurance.  At the federal
level, the recently passed Health Insurance Portability and
Accountability Act of 1996 also contains provisions intended to
enhance access to the individual insurance market. 

Although it is far too early to assess all of the effects of the act,
it does include provisions that explicitly deal with both the
individual and employer-sponsored insurance markets.  Provisions
directly affecting the individual market include portability and
guaranteed renewal.  The success of further efforts to improve
access, affordability, and quality of health insurance for all
Americans will depend largely on continued growth in the
understanding of both of these health insurance markets. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      INDIVIDUAL INSURANCE IS AN
      IMPORTANT SOURCE OF COVERAGE
      FOR MANY AMERICANS
-------------------------------------------------------- Chapter 0:4.1

Individual health insurance covers a significant minority of the U.S. 
population.  For 10.5 million Americans under 65 years of age--4.5
percent of the nonelderly population--individually purchased health
insurance was their only source of health coverage in 1994, according
to GAO's analysis of the 1995 Current Population Survey.  Another 8.6
million nonelderly people (3.7 percent) were covered by individual
plans and were also covered by an employment-based plan or one
provided through a government program either concurrently or at
different periods during the year.  Because of the often transient
nature of this market, some of these people may have held individual
insurance temporarily and then had another source of coverage during
the remainder of the year, whereas others may have held both types of
health coverage simultaneously.  Because many of these other sources
of coverage may be narrower supplemental policies rather than
comprehensive health plans, GAO focused its data analysis on the 10.5
million people who exclusively held individual insurance in 1994. 

The individual market insures a substantial share of the population
in some states, particularly in the Mountain and Plains states.  In
North Dakota, nearly 14 percent of the population relies on the
individual market as its only source of health coverage.  In Iowa,
Montana, Nebraska, and South Dakota, the proportions of the
population participating in the individual market are all twice the
national average.  Also, most adults who purchase individual
insurance are employed and often work in particular industries.  For
example, about 17 percent of farm workers and 7 percent of
construction workers rely on this market for coverage.  In contrast,
less than 2 percent of workers in the durable goods manufacturing and
public administration sectors purchase individual plans. 

Those with individual health insurance tend to be older than those
with employment-based coverage but are similar in their self-reported
health status.  People between 60 and 64 years of age are nearly
three times as likely to have individual insurance as those 20 to 29
years old.  Also, a disproportionate share of early retirees and
people who have been widowed participate in the individual
market--9.8 percent and 9.2 percent, respectively.  Only 6 percent of
those with individual insurance reported their health condition as
fair or poor, while three-fourths indicated that their health was at
least very good--the same proportion as those with employment-based
coverage.  People with disabilities are less likely to purchase
individual coverage, reflecting greater reliance on
government-sponsored health insurance programs and possibly also
their higher costs for private coverage and medical underwriting and
preexisting condition limitations. 


      MULTIPLE POINTS OF ACCESS
      AND PRODUCT CHOICES
      DISTINGUISH THE INDIVIDUAL
      FROM THE EMPLOYER-SPONSORED
      INSURANCE MARKET
-------------------------------------------------------- Chapter 0:4.2

The many ways in which consumers access the individual insurance
market and the wide range of products available to them stand in
stark contrast to the limited options in the employer-sponsored group
insurance market.  Employees are typically offered one plan or a
choice among a few different health plans and cost-sharing options. 
Plans are typically selected and administered by an employee benefits
manager and are largely financed by the employer. 

In contrast, individuals must identify and compare health insurance
products and then obtain and finance the products chosen on their
own.  An individual may access the market in a variety of ways, such
as by contacting an insurance agent or a carrier directly in response
to advertising or name recognition, obtaining conversion coverage, or
joining a business organization or other group that pools the
purchasing power of a number of individuals.  For example, trade
associations and chambers of commerce may permit self-employed
individuals to participate in their small-employer pools.  Other
arrangements make use of individuals' common affiliation to provide
access to coverage.  For example, the largest individual market
carrier in North Dakota sells about 76 percent of its individual
coverage through a pooled "bank depositors" plan. 

Individuals typically may choose from products offered by multiple
carriers.  In states GAO visited, individuals could choose from plans
offered by at least 7 carriers in Vermont to well over 100 carriers
in Arizona, Colorado, and Illinois.  Blue Cross and Blue Shield plans
played a prominent role in the individual markets of most of the
states GAO visited.  And finally, the extent of managed care in this
market lags behind that in other insurance market segments, although
growth has accelerated recently. 

Recognizing that affordability is a paramount concern in this market
and that individuals have different health needs and economic
resources, carriers offer a variety of products with a wide range of
cost-sharing options.  Healthy consumers who do not expect to need
medical care are more likely to demand products with the lowest
possible monthly premiums.  These products will typically have
comparatively high copayments or deductibles.  Other individuals may
only be able to afford coverage with high cost-sharing options,
regardless of their health.  If they can afford to do so, consumers
who anticipate needing medical care may be willing to pay higher
premiums to protect themselves from large out-of-pocket costs. 
Products offered in the states GAO visited typically included a wide
range of cost-sharing alternatives.  Most commonly selected by
consumers were deductibles ranging from $250 to $2,500, although
deductibles of $5,000, $10,000, and higher were also available. 


      SOME CONSUMERS ARE DENIED
      INDIVIDUAL COVERAGE BECAUSE
      OF THEIR HEALTH STATUS
-------------------------------------------------------- Chapter 0:4.3

In the majority of states, which permit medical underwriting,
individuals may be denied coverage in the private insurance market,
have available to them only limited benefit coverage, or pay
considerably more than the standard rate for coverage, depending on
their demographic characteristics and health status.  Unlike
employer-sponsored coverage for which risk is spread over the entire
group, carriers in these states may assign rates to each individual
on the basis of the risk indicated by characteristics such as age,
gender, location, and smoking status.  These rates may then be
adjusted on the basis of a carrier's determination of the applicant's
health status. 

A carrier may deny coverage to an applicant determined to be of
substandard health.  The declination rates for carriers GAO visited
range from zero in states where guaranteed issue is required to about
33 percent, with carriers typically denying coverage to about 18
percent of all applicants.  Individuals with serious health
conditions such as AIDS and heart disease are virtually always denied
coverage, as those with such non-life-threatening conditions as
chronic back pain and attention deficit disorder may be.  At least
two carriers GAO visited almost always decline any applicant who
smokes. 

Carriers may also offer coverage that excludes a certain condition or
part of the body, or offer coverage only at a higher, nonstandard
rate.  Almost all the indemnity insurers GAO visited add riders to
policies to exclude certain conditions either temporarily or
permanently.  A person with a knee injury or glaucoma may have all
costs associated with treatment of those conditions excluded from
coverage.  More chronic conditions such as asthma may also be
excluded.  Some carriers GAO visited will accept applicants with some
health conditions but will charge a higher premium to cover the
higher expected costs.  For example, one Illinois carrier charges a
100-percent surcharge over the standard premium rates to about 2
percent of its individual enrollees determined to be of substandard
health. 


      STATE AND FEDERAL
      INITIATIVES ATTEMPT TO
      EXPAND ACCESSIBILITY
-------------------------------------------------------- Chapter 0:4.4

At least 43 states have attempted to increase the health coverage
options available to otherwise uninsurable individuals, although
these options may be available only at a considerably higher price. 
Currently, about 25 states have high-risk insurance pools that ensure
individuals who need coverage can obtain it, although this coverage
generally costs 50 percent more than the standard rate and may not
always be available.  Individuals who have been rejected for coverage
by at least one carrier generally qualify for the high-risk pool. 

Eighteen of the 25 states that passed some type of individual
insurance reform between 1990 and 1995 attempt to limit the range
over which premium rates may vary or the characteristics used to
determine these rates.  While New Jersey, New York, and Vermont
require carriers to accept any individual who applies and to use
community rating with limited or no qualification to determine
premium rates, most other states still allow carriers to deny
coverage to unhealthy individuals and permit premium rate variations
of up to 300 percent or more.  In eight states and the District of
Columbia, the local Blue Cross and Blue Shield plan offers at least
one product to individuals on an open enrollment basis as the insurer
of last resort.  Absent rating restrictions, however, carriers are
not necessarily limited in the premium prices they charge for these
plans.  In at least seven states, some individuals may have no access
to insurance coverage. 

At the federal level, the recently passed Health Insurance
Portability and Accountability Act of 1996 will affect the individual
health insurance market.  The act guarantees access to the individual
market to consumers with qualifying previous group coverage and
guarantees the renewability of individual coverage.  For
self-employed individuals, the act authorizes federally
tax-deductible medical savings accounts and increases the tax
deductibility of health insurance. 


   RECOMMENDATIONS
---------------------------------------------------------- Chapter 0:5

This report contains no recommendations. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:6

State insurance regulators GAO visited and the National Association
of Insurance Commissioners reviewed a draft of this report and
provided technical suggestions.  GAO incorporated their changes where
appropriate. 


INTRODUCTION
============================================================ Chapter 1

Most Americans rely on employer-sponsored health plans or government
programs like Medicaid and Medicare to help them select and finance
their family's health insurance coverage.  But about 10.5 million
Americans rely exclusively on their own resources to select and pay
for their family's coverage.  These participants in the market for
individual health insurance must make important decisions affecting
their family's health and welfare without the same supports provided
to the majority of Americans who obtain their health coverage through
employer-sponsored or government plans. 


   WHO RELIES ON THE INDIVIDUAL
   MARKET FOR COMPREHENSIVE HEALTH
   INSURANCE COVERAGE? 
---------------------------------------------------------- Chapter 1:1

Most participants in the individual market do not currently have
access to an employer-sponsored plan or a government insurance
program.  Those under 65\1 who may participate in the individual
market include

  -- self-employed people;

  -- people whose employers do not choose to offer health insurance
     coverage to workers and their families;

  -- part-time, temporary, or contract workers who are not eligible
     for health insurance coverage through their employers;

  -- early retirees without employer-sponsored coverage and not yet
     eligible for Medicare;

  -- people not in the labor force, including people with
     disabilities, who are not eligible for Medicare or Medicaid
     coverage;

  -- college students who are no longer eligible for coverage under
     their parents' health plans;

  -- unemployed people who are not eligible for Medicaid;

  -- people between jobs who have exhausted or are ineligible for
     continuation of their employer-sponsored coverage; and

  -- children, spouses, and other dependents ineligible for coverage
     or too costly to cover under an employer-sponsored plan. 

Some individuals falling into these categories can rely on spouses or
other family members to include them under the family coverage
options of their employer-sponsored plans.  Many others, however, do
not have this alternative. 


--------------------
\1 The elderly seldom rely on the individual market for comprehensive
health insurance coverage because almost all of them have Medicare
coverage upon attaining the age of 65.  Although many in the Medicare
population purchase supplemental coverage as individuals, the program
remains their primary source for health insurance. 


   THE INDIVIDUAL MARKET IS AN
   IMPORTANT SOURCE OF
   TRANSITIONAL COVERAGE FOR SOME
   AND THE PERMANENT SOURCE OF
   COVERAGE FOR OTHERS
---------------------------------------------------------- Chapter 1:2

The individual market often provides a short-term source of health
insurance coverage for people during transition points in their
lives.  Many people initially confront the individual market while
they are in college or at an entry-level job and discover that they
are no longer eligible for coverage under their parents'
employer-sponsored health insurance plan.  They may have the option
to obtain individual coverage through plans marketed through their
schools or training programs, or they may obtain policies through
insurance plans or health maintenance organizations (HMO) that
operate in their home or school communities. 

Transitional employment in part-time or temporary jobs or periods of
unemployment between jobs are other cases in which the individual
market is used.  In many entry-level jobs, employers do not provide
health insurance, requiring those who wish to obtain coverage to
access the individual market.  For some, the lower paying entry-level
jobs become their permanent source of employment, transforming the
individual market into their permanent source of coverage. 

For self-employed people, the individual market is often the only
viable source of coverage throughout their careers.  For example,
family farmers and those in other professions in which
self-employment is common often rely on the individual market as a
long-term source of health insurance coverage. 

Early retirees may rely on the individual market for transitional
coverage until they are eligible for Medicare.  Of course, many early
retirees benefit from continuation of coverage under their former
employers' plans.  A growing number of employers, however, have
increased retirees' contributions toward premiums, increased their
deductibles and copayments, or in some cases, entirely phased out
their financial support for health benefit plans for current and
future retirees.  Indeed, a recent study by the Employee Benefit
Research Institute suggests that the availability of a retiree health
benefit may become an increasingly important factor in an employee's
decision to retire early. 


   INSURANCE PREMIUMS LOOM LARGER
   AS INDIVIDUALS PAY FULL PREMIUM
   COSTS OUT OF POCKET
---------------------------------------------------------- Chapter 1:3

For the typical person with employer-sponsored coverage, health
insurance premium payments are shared by the employer and the worker. 
The typical employer pays about 80 percent of premiums (70 percent
for family coverage).  Participants in the individual market must pay
their entire premiums out of pocket.  Thus, an individual's ability
to pay for coverage largely determines which type of insurance
product is purchased or whether the individual can purchase coverage
at all. 

Those in employer-sponsored plans also benefit from the tax treatment
of these plans.  While health benefits are generally not considered
income to the employee, employers may deduct the expense of providing
such benefits to their workers.  Employers, who often pay 70 to 80
percent of the cost of their employees' health plans, typically may
deduct all of that contribution.  In contrast, participants in the
individual market generally cannot.\2 Self-employed individuals may
deduct a percentage of their expenses, ranging from 40 percent in
1997 to 80 percent in 2006 and thereafter.\3


--------------------
\2 Individual health insurance premiums may be tax deductible if
combined premiums and out-of-pocket health care expenses exceed 7.5
percent of an individual's adjusted gross income and itemized
deductions are used for income tax purposes. 

\3 These increases in the tax deductibility of health care expenses
for self-employed individuals were included in the recently passed
Health Insurance Portability and Accountability Act of 1996. 


   THE CONSUMER CONFRONTS A
   DIVERSE AND CONFUSING MARKET
   FOR INDIVIDUAL HEALTH INSURANCE
   COVERAGE
---------------------------------------------------------- Chapter 1:4

Employers and benefit managers often provide participants in
employer-sponsored plans with help in identification, selection,
assessment, and enrollment in plans as well as with the negotiation
of benefits and premiums.  In contrast, individual market
participants must access the market on their own. 

To help guide them through the broad range of insurance offerings
available to eligible individuals in most states, individuals often
enlist the assistance of professional insurance agents and brokers. 
In some states, Blue Cross and Blue Shield plans and other carriers
serve as direct writers of insurance.  Other individuals turn to
organizations such as trade associations, professional associations,
or farm cooperatives as access points to the health insurance market. 

In most states, a wide variety of carriers operates in the individual
market, offering a broad range of products.  Indeed, most healthy
individuals have a broader choice of offerings than those in
employer-sponsored plans.  But all consumers may not be fully aware
of their choices or of the avenues to access the market.  To many
consumers, insurance terms and options are easily misunderstood.  In
response, some states have issued consumer guides to help consumers
better understand the market. 


   UNIQUE CHARACTERISTICS OF
   INDIVIDUAL MARKET PARTICIPANTS
   CAN LEAD TO HIGHER PREMIUMS
---------------------------------------------------------- Chapter 1:5

While most individuals have a broad range of individual insurance
options available, a significant minority have few if any affordable
options.  An individual's health status can lead to sharply higher
premiums or result in outright rejection under many plans.  Medical
underwriting--through which preexisting health conditions or an
individual's health status may result in denial of coverage,
permanent exclusion from coverage of a preexisting condition, or
higher premiums--is still fairly common in the individual markets of
many states. 

Several states have attempted to deal with the effects of medical
underwriting by creating special insurance pools for high-risk
individuals or through state individual market reforms (see ch.  5). 
At the federal level, the Health Insurance Portability and
Accountability Act of 1996 recently passed by the Congress may reduce
the potential effects of medical underwriting and preexisting
condition exclusions for those making the transition from an
employer-sponsored plan to the individual market. 


   THE ROLE OF THE INDIVIDUAL
   MARKET IN ATTEMPTS TO IMPROVE
   ACCESS AND AFFORDABILITY OF
   HEALTH INSURANCE
---------------------------------------------------------- Chapter 1:6

States have been cautious or reluctant to extend many of the
protections incorporated into their small business reforms to the
individual health insurance market.  Extension of insurance
portability to the individual market was one of the most
controversial issues debated in recently passed insurance reforms at
both the state and federal levels.  In large measure, the continuing
debate reflects the paucity of reliable information on the individual
health insurance market. 

The interaction between the goals of improved access and
affordability of insurance takes on a magnified importance in the
individual market.  On the one hand, the individual market serves a
significant share of older people who are not yet eligible for
Medicare and individuals with poor or declining health who are most
concerned about access to health insurance without medical
preconditions.  On the other hand, the individual market is also an
important source of coverage for a significant number of younger and
often healthier individuals just entering the labor force or in lower
wage jobs that often do not provide employer-sponsored coverage.  For
most of them, premium costs are an important barrier to health
insurance coverage.  Yet some initiatives that improve access for the
older and sicker group might result in higher premiums for the
younger and healthier group, thus potentially pricing them out of the
market. 

The interaction between expanding access and improving affordability
varies among states and depends largely on the structure and relative
size of the insurance market, characteristics of its participants,
and its regulatory structure.  Numerous states and the federal
government have already introduced incremental reforms in the
individual health insurance market, but many legislators and other
observers believe that further adjustments may be needed. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:7

The Chairman of the Senate Committee on Labor and Human Resources
asked us to report on

  -- the size of the individual health insurance market, recent
     trends, and the demographic characteristics of its participants;

  -- the market structure, including how individuals access the
     market, the prices, other characteristics of health plans
     offered, and the number of individual carriers offering plans;
     and

  -- the insurance reforms and other measures states have taken to
     increase individuals' access to health insurance. 


      SCOPE
-------------------------------------------------------- Chapter 1:7.1

Our review included both national and state-specific data.  Our
estimates of the size and demographic characteristics of individual
market enrollees were based on nationally projectable data sets as
were data concerning individual market insurance reforms, high-risk
pools, and insurers of last resort.  Because other aspects of
individual insurance markets can vary significantly among states, we
relied on case studies of the individual insurance markets in seven
states.  Although findings from these states cannot be projected to
the nation at large, we believe they are reasonably representative of
the range of individual insurance market dynamics across the country. 
Our confidence is based on the criteria we used to select the seven
states as well as our contact with representatives of large, national
insurance carriers, trade groups, and regulatory bodies (discussed
further under methodology).  Finally, our report focused on
comprehensive major medical expense and HMO plans.  Therefore,
references to individual market products do not include more limited
benefit products unless specifically noted. 


      METHODOLOGY
-------------------------------------------------------- Chapter 1:7.2

To determine the size and demographic characteristics of individual
insurance market participants nationwide, we analyzed data from the
Bureau of the Census' March 1995 Current Population Survey (CPS), a
national random survey of about 57,000 households.  We also analyzed
the 1993 National Health Interview Survey (NHIS) conducted by the
Bureau of the Census for the National Center for Health Statistics. 
The findings of these two surveys were generally similar.  Unless
otherwise noted, we report CPS findings because the results were
available for a more recent year, the number of individuals surveyed
was greater, and state-level data were available.  Appendix I
contains more details on the methodology we used in our analyses. 

To understand the structure and dynamics of the individual insurance
market, we visited seven states---Arizona, Colorado, Illinois, New
Jersey, New York, North Dakota, and Vermont.  We selected these
states judgmentally on the basis of variations in their populations,
urban/rural compositions, and the extent of individual insurance
market reforms implemented.  In each state, we interviewed and
obtained data from representatives of the state insurance department
and at least one of the largest individual market carriers.  From
insurance department representatives, we obtained information
concerning the regulation and, where applicable, reform of the
individual insurance market and the number and market share of
individual market carriers in the state.  From carriers, we obtained
information concerning products offered, including their benefit
structure, cost-sharing alternatives, eligibility, and prices.  In
some states, we also interviewed health department officials,
insurance agents, and representatives of insurance industry trade
associations, consumer groups, and insurance purchasing cooperatives. 

To supplement state-specific data, we interviewed representatives or
obtained information from national insurance carriers and trade and
industry groups, including the American Academy of Actuaries,
American Chambers Life Insurance Company, the Blue Cross and Blue
Shield Association, the Health Insurance Association of America,
Mutual of Omaha Companies, Time Insurance Company, and Wellpoint
Health Networks, Inc.  We also reviewed published literature on the
individual insurance market. 

To identify states that passed, from 1990 through 1995, individual
insurance reforms or, as of year-end 1995, other measures designed to
expand access to coverage in the individual market, we obtained
summaries compiled by various industry and trade groups, including
the Blue Cross and Blue Shield Association and the Health Insurance
Association of America.  We then obtained and reviewed each state's
individual insurance reform legislation and, when necessary,
supplemented this review with telephone interviews of state officials
to clarify certain provisions. 

Our work was performed between February and September 1996 according
to generally accepted government auditing standards. 


INDIVIDUAL MARKET IMPORTANT SOURCE
OF HEALTH INSURANCE COVERAGE FOR
MILLIONS OF AMERICANS
============================================================ Chapter 2

Although most Americans obtain their health insurance through
employment-based health plans, individual insurance provides coverage
for many Americans who may not have access to employment-based
coverage.  We estimate that about 10.5 million Americans under 65 had
individual insurance as their only source of health coverage during
1994, with another 8.6 million having individual insurance as well as
some other type of health insurance.  While those with individual
insurance only represent a relatively small share of the nonelderly
population--
4.5 percent in 1994--individual insurance is a more prominent source
of health coverage in the Plains and Mountain states and among
self-employed people, agricultural workers, and early retirees. 


   FOR ABOUT 10.5 MILLION
   AMERICANS, INDIVIDUAL HEALTH
   INSURANCE WAS THEIR ONLY SOURCE
   OF HEALTH COVERAGE IN 1994
---------------------------------------------------------- Chapter 2:1

On the basis of our analysis of the March 1995 CPS, we estimate that
about 10.5 million Americans under 65 years of age (4.5 percent of
the nonelderly population) received health coverage through
individual health insurance as their only source of health coverage
during 1994.\4 That is, the health plan was purchased directly by an
individual, not through a current or past employer or union.  An
additional 8.6 million Americans (3.7 percent) had individual health
insurance in addition to employment-based coverage, Medicare,
Medicaid, or coverage through the Civilian Health and Medical Program
of the Uniformed Services (CHAMPUS) at some time in 1994. 

Many people purchase individual health insurance for only a short
period, such as when they are between jobs and without group
insurance coverage.  For example, a representative of one carrier
told us that 30 percent of enrollees maintain individual insurance
for less than 1 year.  Thus, the 8.6 million people who had
individual insurance coverage and another type of health insurance
during 1994 could either have (1) had individual health insurance for
part of 1994 and another type of health insurance for the remainder
of the year or (2) had both individual health insurance and another
type of coverage--employment-based or government-sponsored--at the
same time for part or all of the year.  In the latter case, it is
possible that the other type of health insurance would have been the
primary source of health coverage with the individual insurance being
a supplemental policy.  It is not possible, however, to identify how
many people would be in either of these groups.  For this reason, we
focused our analysis on the 10.5 million nonelderly Americans who had
private individual insurance as their only source of health coverage
at any time in 1994.\5


--------------------
\4 Because the vast majority of Americans 65 or older are covered by
Medicare, we focused our analysis on the nonelderly population. 

\5 Some of the group with individual health insurance as their only
source of health coverage in 1994 could have also been uninsured for
part of the year. 


   INDIVIDUAL HEALTH INSURANCE
   RELIED ON MORE IN MOUNTAIN AND
   PLAINS STATES
---------------------------------------------------------- Chapter 2:2

While 4.5 percent of the U.S.  nonelderly population had individual
health insurance as their only source of health coverage in 1994, the
importance of the individual insurance market varied considerably
among states.  (See fig.  2.1.) In some Mountain and Plains states,
individual insurance is relied on much more as a source of coverage. 
For example, we estimate that about one of every seven people under
65 in North Dakota has individual health insurance as his or her only
source of health coverage.  North Dakota is the only state where our
estimates of the number of participants in the individual health
insurance market exceed the estimated uninsured population.  Iowa,
Montana, Nebraska, and South Dakota also have estimated participation
rates in the individual insurance market that are at least twice the
national rate.  Appendix II presents rates of individual health
insurance enrollment by state. 

   Figure 2.1:  Individual Health
   Insurance Participation Rates
   by State, 1994

   (See figure in printed
   edition.)

Overall, individual insurance enrollment tends to be slightly lower
in metropolitan areas than in nonmetropolitan areas.  (See table
2.1.) In particular, individual health insurance is common among
people living on farms.  Nearly 30 percent of people indicating that
their residence was a farm had individual health insurance in 1993,
according to our analysis of the National Health Interview Survey. 



                         Table 2.1
          
             Percentage of Nonelderly Residents
           Having Individual Health Insurance by
                 Metropolitan Status, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Metropolitan                 4.2            66.0      17.5
Nonmetropolitan              5.7            62.9      18.3
==========================================================
U.S. average                 4.5            65.3      17.7
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

The pattern of higher enrollment in rural areas is not uniform
throughout the country.  The Southern region, for instance, has a
relatively large nonurban population, but the proportions of the
populations that had individual health insurance were lower than the
national average in 12 of its 17 states.  Florida is an exception;
the large number of retirees under age 65 there may help explain the
fact that a relatively large proportion of Florida's nonelderly
population has individual insurance (6.4 percent). 

In Hawaii, the only state with mandated employer-sponsored health
insurance, only 1.8 percent of the nonelderly population had
individual health insurance as the sole source of coverage in 1994. 
In several other states--Alaska, Arizona, Delaware, Kentucky, Nevada,
New Mexico, Virginia, West Virginia, and Wisconsin--less than 3
percent of the population relied on individual insurance as the only
source of coverage. 


   INDIVIDUAL HEALTH INSURANCE
   ENROLLEES ARE GENERALLY OLDER
   AND HAVE LOWER INCOMES THAN
   PEOPLE WITH EMPLOYMENT-BASED
   COVERAGE
---------------------------------------------------------- Chapter 2:3

The individual insurance market is an important source of health
coverage for people in their fifties and early sixties, particularly
early retirees and people who have been widowed.  The relative
importance of the individual insurance market to people of different
ages is illustrated in table 2.2.  Those in the 60 to 64 age group
are more than two-and-a-half times as likely to be covered by
individual insurance than those in their twenties (9.6 percent versus
3.4 percent).  The median age of people with individual insurance is
35, compared with 32 for people with employment-based coverage and 28
for uninsured people. 



                         Table 2.2
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                      Age Group, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Younger than 20              3.7            61.5      15.4
20 to 29                     3.4            58.0      27.5
30 to 39                     4.3            68.8      18.5
40 to 49                     5.1            73.6      14.7
50 to 59                     6.4            71.3      13.9
60 to 64                     9.6            61.5      14.9
Retired, under 65            9.8            58.6      16.0
==========================================================
U.S. average (0 to 64)       4.5            65.3      17.7
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

The individual insurance market is becoming increasingly important
for early retirees because fewer employers are providing health
coverage for them.\6 In 1994, nearly 10 percent of retirees aged 64
or younger had individual health insurance as the sole source of
health coverage.  A disproportionate share of people who had been
widowed (9.2 percent) also had individual insurance as the only
source of health coverage. 

The likelihood of having individual health insurance also varies
widely by race and ethnicity.  Whites are more than twice as likely
to have individual health insurance as are blacks or Hispanics. 
Blacks and Hispanics are also less likely to have employment-based
coverage and are more likely to be uninsured.  (See table 2.3.) The
higher median income of whites makes the potentially high cost of
individual health insurance more affordable for this group. 



                         Table 2.3
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                Race and Ethnic Group, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
White                        5.4            72.5      13.9
Black                        2.0            49.2      21.8
Hispanic                     2.2            40.6      35.6
Other                        4.3            58.3      21.9
==========================================================
U.S average                  4.5            65.3      17.7
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

The individual market is not a viable option for many of the nation's
low-income families.  As shown in table 2.4, those with income below
the federal poverty level are much more likely to be uninsured and
slightly less likely to purchase individual insurance.  For this
group, the cost is an important deterrent to purchasing health
insurance.  Moreover, Medicaid and other government programs are
potential alternatives for these lowest income households. 



                         Table 2.4
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                     Income Group, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Below poverty level          3.7            18.5      32.5
Poverty level and            4.7            74.5      14.7
 above
==========================================================
U.S. average                 4.5            65.3      17.7
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

Above the poverty level, the individual market becomes a more
important health insurance alternative.  Participation in the
individual insurance market exceeds the national average for families
with incomes between about $10,000 and $40,000.  (See fig.  2.2.)
Participation dips below the national average as income rises above
about $40,000, perhaps reflecting greater availability of
employment-based insurance.  For those with incomes above about
$90,000, participation is again at or above the national average. 
Overall, people with individual health insurance have a lower median
family income ($34,422) than people with employment-based coverage
($48,015) but higher than people who are uninsured ($20,014). 

   Figure 2.2:  Percentage of
   Nonelderly Population Having
   Individual Health Insurance by
   Family Income, 1994

   (See figure in printed
   edition.)


--------------------
\6 See Retiree Health Plans:  Health Benefits Not Secure Under
Employer-Based System (GAO/HRD-93-125, July 9, 1993). 


   INDIVIDUAL HEALTH INSURANCE
   MORE COMMON IN SOME SEGMENTS OF
   LABOR FORCE, INCLUDING
   SELF-EMPLOYED, CONTINGENT
   WORKERS, AND FARM WORKERS
---------------------------------------------------------- Chapter 2:4

About three-quarters of those aged 18 to 64 with individual health
insurance are employed, and some parts of the labor force depend more
extensively on the individual insurance alternative.  For example,
self-employed and contingent workers, including part-time and
temporary employees, are more likely to have individual health
insurance.  (See table 2.5.) These groups are often ineligible for
employer-sponsored health plans.  Furthermore, as shown in figure
2.3, individual insurance is more prevalent the smaller the
employee's firm is.  Employees in smaller firms are also less likely
to have employment-based coverage. 



                         Table 2.5
          
           Percentage of Population Aged 18 to 64
           Having Individual Health Insurance by
              Employment Characteristics, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Full-time
----------------------------------------------------------
Full year                    4.0            80.3      13.5
Part year                    4.4            59.9      27.6

Part-time
----------------------------------------------------------
Full year                    8.0            63.8      22.9
Part year                    6.6            58.7      23.8
Unemployed                   6.0            39.9      24.3
==========================================================
U.S. average (ages 18        4.9            67.1      18.9
 to 64)
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

   Figure 2.3:  Percentage of
   Population Aged 18 to 64 Having
   Individual Health Insurance by
   Firm Size, 1994

   (See figure in printed
   edition.)

The inverse relationship between individual and employment-based
coverage is particularly evident for selected industries.  (See table
2.6.) In particular, farm workers (17 percent), personal services
workers (8 percent), and construction workers (7 percent) are more
likely to have individual insurance than the national average and are
less likely to have employment-based coverage.  Among people employed
in industries in which large firms predominate, including
manufacturing, government, and transportation, individual insurance
is not very common.  Agricultural, personal services, and
construction industries tend to be dominated by smaller firms, and
individual insurance plays a more important role in these workers'
health coverage.  Self-employment is also particularly common among
agricultural workers, contributing to the high share of these workers
who have individual health insurance.\7



                         Table 2.6
          
           Percentage of Population Aged 18 to 64
           Having Individual Health Insurance by
                       Industry, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Agriculture, forestry,      16.9            44.7      33.3
 and fisheries
Personal services,           7.8            51.4      31.7
 including private
 households
Construction                 7.3            56.5      33.2
Business and repair          7.2            60.1      27.0
 services
Entertainment and            6.9            67.2      21.7
 recreation services
Finance, insurance,          5.4            81.7      10.6
 and real estate
Retail trade                 5.1            62.9      25.9
==========================================================
U.S. average (ages 18        4.9            67.1      18.9
 to 64)
Wholesale trade              4.7            78.2      14.9
Professional and             4.1            81.6      11.0
 related services
Transportation,              2.8            80.9      14.0
 communication, and
 other public
 utilities
Manufacturing:               2.5            80.0      14.7
 nondurable goods
Mining                       2.3            84.5      12.1
Manufacturing: durable       1.8            84.6      11.9
 goods
Public administration        1.2            82.5       4.5
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 


--------------------
\7 For additional information on industrial and other differences in
employment-based health coverage, see Employer-Based Health
Insurance:  High Costs, Wide Variation Threaten System
(GAO/HRD-92-125, Sept.  22, 1992). 


   SELF-REPORTED HEALTH STATUS OF
   INDIVIDUAL HEALTH INSURANCE
   ENROLLEES MIRRORS THAT OF
   EMPLOYMENT-BASED ENROLLEES
---------------------------------------------------------- Chapter 2:5

Most participants in the individual market (75 percent) rated their
health condition as excellent or very good.  Only about 6 percent
rated their health as fair or poor.  This pattern is nearly identical
to the self-reported health status of those with employment-based
health coverage.  Individuals who report poor health status are
disproportionately enrolled in government-funded health insurance
programs or are uninsured.  While 5.1 percent of those who assess
their health as excellent have individual insurance coverage, only
2.5 percent of those who believe they are in poor health have
individual health insurance.  (See table 2.7.)



                         Table 2.7
          
              Percentage of Population Having
            Individual Health Insurance by Self-
                Reported Health Status, 1994

                        Individu     Employment-  Uninsure
                              al           based         d
----------------------  --------  --------------  --------
Excellent                    5.1            71.8      14.5
Very good                    4.4            68.3      17.2
Good                         4.0            57.4      22.6
Fair                         3.7            47.5      21.9
Poor                         2.5            33.4      21.2
Disabled\a                   2.1            23.5      17.2
==========================================================
U.S. average                 4.5            65.3      17.7
----------------------------------------------------------
Note:  Rows do not total to 100 percent because Medicare, Medicaid,
and CHAMPUS categories are not included.  Employment-based and
uninsured categories are included for comparison purposes. 

\a Not in the labor force because of disability. 

Reflecting the pattern for people reporting poor health, individuals
who are unable to work because of disabilities are less likely to be
covered only by individual insurance.  This low rate reflects this
group's greater reliance on government-sponsored health insurance
programs and may reflect their higher cost for private coverage and
more tenuous attachment to the labor force.  Medical underwriting and
preexisting condition limitations are also more common with
individual insurance policies, making them unappealing for those with
disabilities. 


THE STRUCTURE AND DYNAMICS OF THE
INDIVIDUAL HEALTH INSURANCE MARKET
============================================================ Chapter 3

Fundamental structural differences exist between the individual
health insurance market and the employer-sponsored group insurance
market.  These differences can have significant implications for
consumers.  Individuals without employer-sponsored coverage usually
access the health insurance market on their own and face a variety of
ways of doing so.  Individuals must choose from among a multitude of
complex products that are often difficult to compare.  Once a product
is chosen, individuals must select from a wide range of cost-sharing
arrangements and pay the full price of coverage.  In contrast,
employees eligible for group health coverage do not face the task of
accessing the insurance market--this is done for them by the
employer.  And because employers typically offer only one or a few
health plans, the task of identifying and comparing products is
greatly simplified or eliminated.  Finally, the burden of selecting
cost-sharing options and paying for the products is significantly
eased by employer contributions and payroll deductions. 


   CONSUMERS CAN ACCESS THE
   INDIVIDUAL INSURANCE MARKET
   THROUGH A VARIETY OF ROUTES
---------------------------------------------------------- Chapter 3:1

One common approach consumers take is to purchase insurance through
an agent.  Agents may sell products from only one insurance carrier
or offer products from several competing carriers and assist
consumers in identifying the product that best meets their needs. 
Agents may also assist consumers in the application process. 

Consumers may also purchase insurance by contacting carriers
directly.  In many states, dominant carriers have high name
recognition and may focus marketing activities directly on individual
consumers.  Representatives from several Blue Cross and Blue Shield
plans and large HMOs we visited such as Kaiser and FHP told us they
regularly use television, radio, or print advertising to target
individual consumers.  Consequently, most of the individual market
business for these carriers is generated through direct contact with
applicants.  Indemnity carriers, like Mutual of Omaha and Time
Insurance, rely on agents to generate most of their individual market
business. 

Another important access route for individual consumers is through a
business or social organization.  Organizations such as chambers of
commerce, trade associations, unions, alumni associations, and
religious organizations may offer insurance coverage to their
members.  Through the pooled purchasing power of many individuals or
small employers, associations can negotiate with carriers for
competitively priced products that they then offer their members. 
For example, a small-employer health care purchasing group in Arizona
offers its products to the self-employed.  Through this program,
self-employed people have access to coverage on a guaranteed-issue,
community-rated basis with premium adjustments permitted only for age
and geography.  Other arrangements make use of individuals' common
affiliation to increase access to health insurance for individuals. 
For example, Blue Cross and Blue Shield of North Dakota has made
arrangements with essentially all the banks in the state to allow
depositors to obtain coverage by having their premiums deducted
directly from their bank accounts.  In operation since the 1960s,
this bank depositors plan covers about 76 percent of the carrier's
individual enrollees in the state. 

Individuals leaving most employer-sponsored group plans have access
to two different types of coverage.  First, federal law requires
carriers to offer individuals leaving group coverage the option of
continuing to purchase that coverage at no more than 102 percent of
the total policy cost for up to 18 months.  Required by the
Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985, the
law applies to employer groups of 20 or more.  Some state laws extend
similar requirements to groups of fewer than 20.  Secondly, several
states require carriers to offer individuals a product comparable to
their group coverage on a guaranteed-issue basis.  Conversion
coverage tends to be very expensive, however.  Because those who
elect to purchase conversion coverage tend to be in poorer health
than those who do not (a situation known as adverse selection), the
premium prices are generally higher than for comparable individual
market products. 

Finally, those determined by carriers to be uninsurable in the
insurance market may be able to purchase coverage through a state
high-risk program.  Many states offer high-risk programs that provide
subsidized coverage to uninsurable individuals at rates generally
about 50 percent higher than what a healthy individual would pay in
the private market.  These programs cover a very small percentage of
the insured population and are sometimes limited by the availability
of public funding. 


   SOME CONSUMERS FACE A BROAD
   RANGE OF PRODUCT CHOICES DRIVEN
   BY CONSUMER DEMAND AND MARKET
   SEGMENTATION
---------------------------------------------------------- Chapter 3:2

Purchasing insurance through the individual market can be a complex
process for even the most informed consumer.  In addition to the
multiple ways consumers can access the market, consumers are
confronted with products offered by dozens and sometimes a hundred or
more different carriers.  Once a carrier and product are chosen,
consumers must then select among a wide range of deductibles and
other cost-sharing options. 


      MULTIPLE CARRIERS OFFER
      INDIVIDUAL INSURANCE
      PRODUCTS
-------------------------------------------------------- Chapter 3:2.1

In each of the seven states we visited, individuals could choose
among products offered by multiple carriers.  Consumers could choose
from plans offered by no fewer than 7 to over 100 carriers. 
Generally, HMO coverage was available in addition to traditional
fee-for-service indemnity plans or preferred provider arrangements. 
Table 3.1 shows estimates of the number of individual market carriers
in each state's individual market.  Unless otherwise noted, carrier
estimates include only carriers that offer comprehensive coverage. 



                         Table 3.1
          
            Carriers Selling Individual Products

                                                 Number of
State                                             carriers
----------------------------------------  ----------------
Arizona                                              141\a
Colorado                                             140\a
Illinois                                             145\a
New Jersey                                             26\
New York                                               41\
North Dakota                                           12\
Vermont                                                  7
----------------------------------------------------------
\a Estimate also includes carriers that offer limited benefit plans
and may include a small number of carriers that offer only conversion
coverage in the individual market. 

While some states have fewer carriers than others, it is important to
note that fewer carriers do not necessarily equate to fewer choices
for consumers.  For example, although 145 carriers in Illinois may
offer individual products, these products are not available to all
consumers in the state because of medical underwriting.  In addition,
some of these carriers may not actively market their products or may
sell only limited benefit products.\8

In contrast, New Jersey has 26 carriers offering one or more
comprehensive products to which every individual market consumer in
the state has guaranteed access. 

The mix of carriers participating in the individual market also
differs from that of group insurance markets with respect to the role
of Blue Cross and Blue Shield (Blues) plans, the extent of HMO
penetration, and the size of carriers.  Blues plans continue to be
relatively important in the individual markets of many states.  In
six of the seven states we visited, the Blues were the largest single
carrier in the individual market.  In North Dakota and Vermont, the
Blues had a 76 and 58 percent share, respectively, of the market for
comprehensive individual market products.  Nationally, about a
quarter to a third of all individual enrollees obtained their
coverage from a Blues plan in 1993.\9

The HMO share nationally in the individual market is about half of
what it is in the employer-sponsored group market, although it is
increasing.\10 In New York, for example, the HMO share of the
individual health insurance market has increased from about 7 percent
in 1992 to 40 percent in 1996.  Partly in response to insurance
reforms enacted there, at least one large individual market carrier
withdrew its indemnity products altogether and replaced them with an
HMO product, according to a New York trade association official.  The
trend in New York is expected to continue in response to recent state
measures designed to encourage HMO participation in the individual
market.  In Illinois, a representative of one of the largest
individual market carriers told us the carrier soon expects to
introduce its first individual HMO product.  In Colorado, an HMO plan
is now the most popular product sold in the individual market. 

Finally, whereas the group market is dominated by large, national
carriers such as Aetna and Prudential, carriers in the individual
insurance market tend to be smaller or regional in focus.  Blues
plans are typically a dominant force in state individual markets. 
Also, few of the largest individual market carriers in the states we
visited were among the 100 largest U.S.  life and health insurance
carriers.\11


--------------------
\8 Limited benefit products are discussed in fig.  3.1. 

\9 Our analysis of 1993 National Health Interview Survey data. 

\10 Our analysis of 1993 National Health Interview Survey data. 

\11 Standard & Poor's, Ratings of Large U.S.  Insurers:  Life &
Health Insurers (1994 Assets Exceeding $1 Billion) (Insurance News
Network), http://www.insure.com/ratings/lh_size.html (cited Aug.  28,
1996). 


      THROUGH CHOICE OF
      COST-SHARING OPTIONS,
      CONSUMERS CAN LOWER PREMIUMS
      BUT AT INCREASED FINANCIAL
      RISK
-------------------------------------------------------- Chapter 3:2.2

In contrast to employment-based group insurance, individuals may
choose from multiple cost-sharing arrangements and are generally
subject to relatively high out-of-pocket costs.  Under
employer-sponsored coverage, the range of available deductibles is
narrower, and total out-of-pocket costs are capped at a lower level
than under most individual market products.  For plans offered by
medium and large employers, annual deductibles are most commonly
between $100 and $300, while limits on total out-of-pocket expenses
are $1,500 or less for most employees.\12 In the individual market,
annual deductibles are commonly between $250 and $2,500, while limits
on total out-of-pocket costs typically start at $1,200 and may exceed
$6,000 annually. 

Insurance contracts require policyholders to contribute to the cost
of benefits received.  Under traditional, major medical expense
plans, consumers must pay annual deductibles and coinsurance up to a
specified total limit on out-of-pocket expenses.  HMOs typically
require consumers to make copayments for each service rendered until
an annual maximum is reached.  The cost-sharing arrangement selected
by the consumer is a key determinant of the price of an individual
insurance product.  The more potential out-of- pocket expenses the
consumer could incur, the lower the premium will be.  To illustrate,
table 3.2 shows how premiums for a comprehensive major medical
expense policy offered by one Colorado carrier decrease as annual
deductibles increase.  Premiums shown are for a healthy 30-year-old,
nonsmoking male living in a major metropolitan area of the state. 



                               Table 3.2
                
                  Example of Relationship Between One
                Carrier's Deductibles and Premium Prices
                     for a Healthy 30-Year-Old Male

                                        Option  Option  Option  Option
                                             A       B       C       D
--------------------------------------  ------  ------  ------  ------
Annual deductible                         $250    $500  $1,000  $2,000
Annual premium                           1,073     835     713     565
----------------------------------------------------------------------
Products offered in the states we visited typically included a wide
range of cost-sharing alternatives.  Most commonly selected by
consumers were deductibles from $250 to $2,500, although deductibles
of $5,000, $10,000, $50,000, and even $100,000 were also available. 
(Under the recently enacted national Health Insurance Portability and
Accountability Act of 1996, high-deductible plans to be used in
conjunction with medical savings accounts are defined as those with
deductibles of between $1,500 and $2,250 for individuals.) HMO
copayment requirements were typically $10 or $15 for a physician
office visit and $100 to $500 per hospital admission.  Total annual
limits on out-of-pocket costs were most commonly between $1,500 and
$6,000.  Table 3.3 illustrates examples of cost-sharing options
available for selected commonly sold comprehensive products. 



                         Table 3.3
          
            Selected Commonly Sold Products and
                 Their Cost-Sharing Options

Sample            Coinsurance   Out-of-
product   Where   or copayment  pocket        Available
type      sold    options       maximums      deductibles
--------  ------  ------------  ------------  ------------
FFS       Arizon  20%           $2,500        $1,000,
          a       coinsurance                 $1,500

                  20%           $3,500        $2,500
                  coinsurance

PPO       Illino  0%            $1,000 +      $250, $500,
          is      coinsurance   deductible    $1,000,
                  in network                  $2,500

                  20%           $1,000 +      $250, $500,
                  coinsurance   deductible    $1,000,
                  out of                      $2,500
                  network

HMO       New     $15 office    $1,500 per    Not
          Jersey  visit         year          applicable
                  copayment;
                  $150 daily
                  hospital
                  copayment\a

FFS       North   20%           $1,500 for    $250, $500\b
          Dakota  coinsurance   coinsurance;
                                no maximum
                                for
                                copayments

FFS       Vermon  20%           $6,000 in     $1,000
          t       coinsurance   network,
                                $8,500 out
                                of network;
                                other
                                copayments
                                apply
----------------------------------------------------------
Note:  FFS stands for "fee-for-service"; PPO stands for "preferred
provider organization."

\a The daily hospital copayment applies only to the first 5 days per
each admission. 

\b Deductibles apply to each hospital admission and are not counted
toward the out-of-pocket maximums. 

Because consumers pay the entire cost of coverage, affordability is
often of paramount concern.  Consequently, consumers who perceive
their risk of needing medical care to be minimal but want coverage in
case of an accident or catastrophic illness may choose very high
cost-sharing provisions to obtain the lowest possible premium.  Other
consumers, regardless of their health status, may only be able to
afford insurance with very high cost-sharing provisions.  Consumers
who anticipate a greater likelihood of requiring medical care may be
willing to pay higher premiums to protect themselves from large
out-of-pocket expenses for coinsurance, deductibles, or copayments. 

Carrier and insurance department representatives with whom we spoke
suggested that the level of consumer cost-sharing has been increasing
in recent years, reflecting consumers' goal of keeping premiums
affordable.  One national carrier representative said that
deductibles seem to be increasing every year.  Among the carrier's
new enrollees in 1995, 40 percent chose $500 deductibles, 50 percent
chose $1,000 deductibles, and the remaining 10 percent chose
deductibles from $2,500 to $10,000.  A representative of another
national carrier said that the premiums for its $250- and
$500-deductible products had become too expensive and are thus no
longer offered. 

State regulation also influences the range in cost-sharing options
available to consumers.  For example, under individual market reforms
enacted in New Jersey, carriers are limited to offering only standard
plans with prescribed ranges of cost-sharing options.  All individual
market products sold in the state are limited to deductibles of $150,
$250, $500, or $1,000 for an individual enrollee.  In contrast, one
carrier in Arizona, where cost-sharing arrangements are not subject
to state regulation, offers deductibles ranging from $1,000 to
$100,000. 


--------------------
\12 U.S.  Department of Labor, Bureau of Labor Statistics, Employee
Benefits in Medium and Large Private Establishment, 1993, bulletin
2456 (Washington, D.C.:  U.S.  Government Printing Office, Nov. 
1994); KPMG Peat Marwick LLP, Health Benefits in 1995 (Washington,
D.C.:  KPMG, Aug.  1995). 


      BENEFITS COVERED UNDER MOST
      INDIVIDUAL COMPREHENSIVE
      PRODUCTS ARE GENERALLY
      COMPARABLE
-------------------------------------------------------- Chapter 3:2.3

Comprehensive individual coverage includes major medical expense
plans--traditional fee-for-service plans and preferred provider
organization (PPO) arrangements--and standard HMO plans.  While our
study focused on comprehensive individual insurance market products,
it should be noted that a wide range of less comprehensive, or
limited benefit products, are also sold in the individual market. 
These products, which are sometimes confused with comprehensive
products, are discussed in figure 3.1. 

   Figure 3.1:  Limited Benefit
   Products

   (See figure in printed
   edition.)

Note:  For more information on limited benefit products, see Health
Insurance:  Hospital Indemnity and Specified Disease Policies Are of
Limited Value (GAO/HRD-88-93, July 12, 1988). 

Under most major medical expense plans a wide range of benefits is
covered, including in- and outpatient hospital, physician, and
diagnostic services; specialty services, such as physical therapy and
radiology; and prescription drugs.  Standard HMO plans typically
cover an equally or more comprehensive range of benefits and are also
more likely to offer a broad range of preventive care, such as
periodic examinations, immunizations, and health education. 
Moreover, these benefits were generally comparable with benefits
covered under employer-sponsored group plans.\13

We reviewed the benefit structure of commonly sold comprehensive
products in the states we visited.  These products included
traditional indemnity or fee-for-service, PPO, and HMO plans.\14 Most
of the plans covered a wide range of benefits, as shown in figure
3.2.  Five benefits--hospice care, substance abuse treatment,
maternity services, preventive care for adults, and well baby/child
care--were less consistently covered.  The latter three benefits were
covered by each of the HMOs.  Among plans that did not offer
maternity coverage, half offered it as an additional rider. 

   Figure 3.2:  Summary of Covered
   Benefits

   (See figure in printed
   edition.)

Note:  Certain benefits are subject to additional limits such as a
50-percent copayment for mental health care with a $10,000 lifetime
limit or a $100 deductible for prescription drugs. 

\a Inpatient and outpatient hospital and medical/surgical services;
emergency care; diagnostic services; physical, occupational, and
speech therapy; home health care; skilled nursing facility care; and
organ transplants. 

\b Durable medical equipment. 


--------------------
\13 One notable exception may be maternity coverage.  Limited survey
data suggest this benefit is covered more frequently under group
plans. 

\14 Fourteen separate plans were reviewed that were representative of
the comprehensive individual market products sold in these states. 
The New Jersey plans we reviewed were standard and thus represent the
benefit structure of all plans sold in that state; likewise for the
HMO plan in New York.  In North Dakota and Vermont, the plans we
reviewed accounted for more than half of all comprehensive individual
plans sold in those markets.  In the remaining states, plans we
reviewed were the most popular plans sold by at least two of the
largest individual market carriers.  Among the plans reviewed were
six traditional indemnity or fee-for-service plans, three PPO plans,
and five HMO plans. 


HIGH PREMIUMS AND INDIVIDUAL
HEALTH STATUS MAY AFFECT ACCESS TO
THE PRIVATE INSURANCE MARKET
============================================================ Chapter 4

Beyond characteristics such as how consumers access the market, the
number and types of health plans available, and the multiple
cost-sharing options, other aspects of the individual market also
distinguish it from the employer-sponsored group market.  Aspects
such as restrictions on who may qualify for coverage and the premium
prices charged can have direct implications for consumers seeking to
purchase coverage and are often exacerbated by the fact that
individuals must absorb the entire cost of their health coverage,
whereas employers usually pay for a substantial portion of their
employees' coverage.  A consumer may find affordable coverage or may
find coverage only at prohibitive rates.  A consumer may find
coverage available only if conditioned upon the permanent exclusion
of an existing health condition or may be locked out of the private
health insurance market entirely.  Consumers may be forced to turn to
state high-risk programs or an insurer of last resort for
coverage--at a significantly higher premium--or go without any health
insurance coverage whatsoever. 


   EFFECT OF DEMOGRAPHIC
   CHARACTERISTICS AND HEALTH
   STATUS ON PREMIUM PRICES
---------------------------------------------------------- Chapter 4:1


      SUBSTANTIAL VARIATION IN
      PREMIUM PRICES DUE TO
      DEMOGRAPHIC DIFFERENCES
-------------------------------------------------------- Chapter 4:1.1

Unlike the employer-sponsored market where the price for group
coverage is based on the risk characteristics of the entire group,
prices in the individual markets of most states are based on the
characteristics of each applicant.  Characteristics commonly
considered to determine premium rates in both markets include age,
gender, geographic area, tobacco use, and family size.  For example,
on the basis of past experience carriers anticipate that the
likelihood of requiring medical care increases with age. 
Consequently, a 55-year-old in the individual market pays more than a
25-year-old for the same coverage.  Similarly, females in this market
may be charged a higher premium than males of the same age group
because of the costs associated with pregnancy and the treatment of
other female health conditions.  These individuals, however, if in
the group market, would usually pay the same amount as the other
members of their group, regardless of their specific age or gender. 
Premiums may also vary geographically.  In some states, premium
prices are higher in urban areas than in rural areas because of
higher medical costs.  Likewise, smokers are expected to incur
greater medical expenses than nonsmokers and are thus often charged
higher premiums in the individual market.  Finally, family
composition is also factored into premium price as a larger family
would be expected to incur higher medical expenses than a smaller
family.  Treatment of this last factor is generally similar between
the individual and the group markets.  Carriers establish standard
rates for each combination of demographic characteristics. 

Table 4.1 provides examples of the range in monthly premium rates
some carriers we visited charge individuals, depending on their age,
gender, or geographic location, in states that do not strictly
regulate carrier rating practices.  The low end of the range
generally represents the premium price charged to males about the age
of 25 who do not live in a metropolitan area.  In contrast, the high
end usually represents the most expensive insured in this market, a
male aged 60 to 64 who lives in a metropolitan area. 



                         Table 4.1
          
            Selected Examples of Variation in an
           Individual's Standard Monthly Premium
           Because of Differences in Age, Gender,
          or Geographic Area in States That Do Not
                 Restrict Rating Practices

                                                  Range in
                                                   monthly
                                Deductible         premium
------------------------------  ----------  --------------
Carrier A                       $250               $52-220
Carrier B                       Not                 85-210
                                 applicable
                                 (HMO
                                 plan)
Carrier C                       500                 65-532
Carrier D                       250                 74-234
----------------------------------------------------------
Note:  To determine premium rates, Carriers A and C use age, gender,
and geographic area; Carrier B uses age only; and Carrier D considers
age and geographic area. 


      MEDICAL UNDERWRITING AFFECTS
      PREMIUMS AND MAY BAR ACCESS
      TO THE INDIVIDUAL MARKET
-------------------------------------------------------- Chapter 4:1.2

Absent state restrictions, carriers also evaluate the health status
of each applicant to determine whether an applicant's health status
will result in an increase to the standard premium rate, the
exclusion of a body part or an existing health condition, or the
denial of the applicant altogether.  This process is called medical
underwriting. 

Under medical underwriting, carriers evaluate an applicant's health
status on the basis of responses to a detailed health questionnaire. 
On the questionnaire, applicants must indicate whether they or any
family member to be included on the policy have received medical
advice or treatment of any kind within their lifetime or within a
more limited time frame, such as the previous 5 to 10 years, and
whether they have experienced a broad range of specifically
identified symptoms, conditions, and disorders.  Applicants must also
indicate whether they have any pending treatments or surgery, are
taking any prescription medication, or have ever been refused or
canceled from another health or life insurance policy.  On the basis
of these responses, carriers may request additional
information--typically medical records--or require an applicant to
undergo a physical examination.  Some carriers require physical
examinations regardless of applicants' responses to their
questionnaires. 

The information obtained through this process is used by carriers to
determine whether to charge a higher than standard premium rate,
exclude from coverage a body part or an existing health condition,\15
or deny the applicant coverage altogether.  The criteria used to make
these determinations vary among carriers and are considered
proprietary.  Certain conditions are commonly treated by carriers in
the same manner, however.  Table 4.2 lists examples of some carriers'
treatment of certain health conditions in states that do not prohibit
medical underwriting. 



                         Table 4.2
          
          Examples of Health Conditions for Which
           Certain Carriers May Decline Coverage,
           Exclude a Condition From Coverage, or
                  Require a Higher Premium

                    Offer coverage but  Offer coverage but
Decline coverage    exclude condition   at higher premium
------------------  ------------------  ------------------
HIV/AIDS            Asthma              Attention deficit
                                        disorder

Rheumatoid          Cleft palate        Anemia
arthritis

Parkinson's         Glaucoma            25% to 40%
disease                                 overweight

Diabetes            Ulcers              Hypertension
                                        (controlled)

Down's syndrome     Varicose veins      Arteriosclerosis
                                        (mild)
----------------------------------------------------------
The carriers we visited generally accepted the majority of applicants
for coverage at the standard premium rate.  Where state mandates did
not exist, however, these carriers denied coverage to a significant
minority of applicants.  Denial rates ranged from zero for carriers
in states such as New Jersey, New York, and Vermont where the law
guarantees coverage, to about 33 percent, with carriers in those
states that do not prohibit medical underwriting typically denying
coverage to about 18 percent of all applicants.  Individuals with
acquired immunodeficiency syndrome (AIDS) or other serious
conditions, such as heart disease and leukemia, are virtually always
denied coverage.  We also found examples in which individuals with
less severe conditions, such as attention deficit disorder and
chronic back pain, could also be denied coverage by some of the
carriers.  Furthermore, at least two HMOs we visited almost always
deny coverage to any applicant who smokes.  Table 4.3 lists the
estimated declination rates for some of the largest carriers we
visited. 



                         Table 4.3
          
          Declination Rates of Selected Individual
                      Market Carriers

                                             Percentage of
                                                applicants
                                                  declined
State                                           coverage\a
--------------------------------------  ------------------
Arizona
----------------------------------------------------------
Carrier A                                               18
Carrier B                                               13

Colorado
----------------------------------------------------------
Carrier A                                                5
Carrier B                                               15

Illinois
----------------------------------------------------------
Carrier A                                             17.5
Carrier B                                             33\b

New Jersey
----------------------------------------------------------
All carriers\c                                           0

New York
----------------------------------------------------------
All carriers\c                                           0

North Dakota
----------------------------------------------------------
Carrier A                                             22.5

Vermont
----------------------------------------------------------
All carriers\c                                           0
----------------------------------------------------------
\a Carrier representatives provided these as approximations of the
percentage of applicants who are denied coverage.  The declination
rates for at least two carriers include those applicants declined for
medical reasons as well as those denied for nonmedical reasons, such
as incomplete applications. 

\b This is the carrier's declination rate for all individual products
sold nationwide, not just for those sold in Illinois. 

\c The declination rate is zero since state laws require carriers to
guarantee issue all products they sell to all individuals who apply
for coverage. 

Some officials suggested that these declination rates could be
understated for at least two reasons.  First, insurance agents are
usually aware of which carriers medically underwrite and have a sense
as to whether applicants will be accepted or denied coverage. 
Consequently, agents will often deter individuals with a health
condition from even applying for coverage from certain carriers.  In
fact, officials from one carrier in Arizona told us that since agents
discourage those who would not qualify for coverage from applying,
their declination rate is not an accurate indicator of the proportion
of potential applicants who are ineligible for coverage.  Secondly,
the declination rates do not take into account carriers that attach
riders to policies to exclude certain health conditions or carriers
that charge unhealthy applicants a higher, nonstandard rate for the
same coverage.  Thus, although a carrier may have a comparatively low
declination rate, it may attach such riders and charge higher,
nonstandard premiums to a substantial number of applicants.  In fact,
a national survey of insurers showed that 20 percent of all
applicants were offered a policy with an exclusion rider, a rated-up
premium, or both.\16

The majority of the indemnity insurers we visited will add riders to
policies that exclude certain conditions either temporarily or
permanently.  For example, knee injuries related to skiing accidents
may be explicitly excluded from coverage as may be a more chronic
condition such as asthma.  Also, a person who suffers from chronic
back pain may have all costs associated with treatment of that part
of the body excluded from coverage.  Similarly, some carriers we
visited will accept an applicant with certain health conditions but
will charge him or her a significantly higher premium to cover the
higher expected costs.  For example, an Illinois carrier charges 2 to
3 percent of its enrollees a nonstandard rate.  This 2 to 3 percent,
however, pays approximately double the standard rate.  Also, at least
one carrier we visited charges individuals, depending on their
medical history, a standard or nonstandard rate for its HMO product. 
The nonstandard rate is approximately 15 percent higher. 


--------------------
\15 This exclusion is separate from the 6- or 12-month preexisting
condition exclusion period carriers typically impose upon all new
applicants. 

\16 U.S.  Congress, Office of Technology Assessment, Medical Testing
and Health Insurance, OTA-H-384 (Washington, D.C.:  U.S.  Government
Printing Office, Aug.  1988). 


   ACCESS TO THE INDIVIDUAL
   INSURANCE MARKET VARIES AMONG
   STATES AND AFFECTS CONSUMERS
   DIFFERENTLY
---------------------------------------------------------- Chapter 4:2

Individual consumers may be affected differently by the varying
methods carriers use in determining eligibility and price.  A
consumer may find affordable coverage, may only find coverage that
explicitly excludes an existing health condition, or may find
coverage only at prohibitive rates.  Many consumers may be locked out
of the private health insurance market entirely. 

Tables 4.4 and 4.5 provide examples of what individuals may face,
given particular demographic characteristics and health conditions,
when attempting to purchase individual insurance from carriers in the
states we visited.  In addition to demographic characteristics and
health status, the extent to which the state regulates the individual
insurance market also influences eligibility and premium price
decisions.  Price comparisons among states, however, can be
misleading.  Premium prices also vary among states because of
regional and state-specific factors.  For example, differences among
states in cost of living and health care utilization, among others,
may also contribute to premium price differences. 


      PREMIUM RATES MAY VARY
      DEPENDING ON CERTAIN
      DEMOGRAPHIC CHARACTERISTICS
-------------------------------------------------------- Chapter 4:2.1

As discussed, carriers, absent regulation that prohibits the
practice, generally base standard premium rates on the demographic
characteristics of each applicant.  Such demographic characteristics
may include age, gender, geographic area, and family composition. 
Table 4.4 shows this price variation.  Using the monthly premium
charged to a healthy, 25-year-old male as a baseline, it compares the
differences in prices certain carriers will charge to other healthy
individuals on the basis of their age and gender. 



                                        Table 4.4
                         
                          Examples of Selected Carriers' Monthly
                         Premium Price Variation Attributable to
                               Demographic Characteristics


                                                              Female,   Female,   Female,
Plan type/deductible           Male, 25  Male, 40  Male, 55        25        40        55
-----------------------------  --------  --------  --------  --------  --------  --------
Arizona
-----------------------------------------------------------------------------------------
PPO/$250                            $57       $32      $134       $31       $50      $122
FFS/$2,500                           63        25       117        15        56       116

Colorado
-----------------------------------------------------------------------------------------
HMO                                  99        34       108         0        34       108
FFS/$500                             63        34       118        36        87       110

Illinois
-----------------------------------------------------------------------------------------
PPO/$500                            100        66       243        31        92       195

New Jersey
-----------------------------------------------------------------------------------------
FFS/$1,000 low end                  155         0         0         0         0         0
FFS/$1,000 high end                 565         0         0         0         0         0

New York
-----------------------------------------------------------------------------------------
HMO rural\a                         164         0         0         0         0         0
HMO New York City area              234         0         0         0         0         0

North Dakota
-----------------------------------------------------------------------------------------
FFS/$250                             77        37       111         0        37       111

Vermont
-----------------------------------------------------------------------------------------
FFS/$1000                         175\b         0         0         0         0         0
-----------------------------------------------------------------------------------------
Note:  FFS stands for "fee for service"

\a The premium listed is the median price of the standard HMO product
in most areas outside New York City.  Similarly, the premium listed
for New York City is the median price of the standard HMO product
sold in the metropolitan area. 

\b The selected carrier in Vermont does not vary its premium rates
for any of the listed demographic characteristics, although state law
permits limited variation. 

Carriers anticipate that the likelihood of needing medical care
increases with age.  In the states we visited, all the carriers
except those that were prohibited by law from doing so, charged
higher premiums to older applicants.  For example, an Arizona PPO
plan cost a 25-year-old male $57 a month and a 55-year-old male $191
a month for the same coverage, a difference of $134.  Similarly, a
55-year-old male would have paid $243 more than a 25-year-old male
for a PPO product from one Illinois carrier.  The carriers we visited
were not as consistent in their treatment of gender.  Several
carriers charged females a higher premium than males of the same age
group because of the costs associated with the female reproductive
system and pregnancy.  For example, 25-year-old females in Illinois
and Arizona paid $31 more each month than males of the same age for
the same PPO coverage and $36 more each month for a fee-for-service
plan in Colorado.  All applicants to a Colorado HMO and a North
Dakota fee-for-service plan, however, paid the same monthly premium,
regardless of gender.  Premium prices also varied depending on the
geographic area where the applicant resides.  For example, the
monthly premium for the standard HMO product in New York may cost as
much as $289 in metropolitan New York City or as little as $145 in
more rural areas of the state. 

As the table indicates, all applicants in New Jersey, New York, and
Vermont, regardless of age or gender, would pay exactly the same
amount for the same insurance coverage from the same carrier.  In
these states, the individual insurance reform legislation requires
community rating, a system in which the cost of insuring an entire
community is spread equally among all members of the community,
regardless of their demographic characteristics or health status. 
Reform legislation in New York does allow for limited adjustments by
geographic regions.  In New Jersey's individual market, the premium
price of the sample product for the carriers in the state ranges from
$155 to $565.  Although this is a fairly wide price range, all
applicants are eligible for and may select from among any of these
plans. 

The prices listed in table 4.4 generally are carriers' standard rates
charged to individuals with the specified demographic
characteristics.  Absent state restrictions, most carriers will also
evaluate the health status of each applicant to determine whether to
charge an increase over the standard premium rate, to exclude a body
part or existing health condition from coverage, or to deny the
applicant coverage altogether.  Some carriers also regard smoking to
be a risk characteristic and consider it when they determine an
applicant's eligibility and premium price.  Table 4.5 provides
examples of what a 25-year-old male with varying habits or health
conditions might experience in terms of availability and
affordability of coverage in the individual insurance market in the
states we visited.  Again, the baseline is the monthly premium price
charged to a healthy, 25-year-old male. 



                                        Table 4.5
                         
                          Examples of Selected Carriers' Monthly
                          Premium Price Variation for a 25-Year-
                             Old Male, Attributable to Health
                                     Characteristics


                                                   Preexist  Preexist  Cancer    High-
                                                   ing knee  ing       within 3  risk
Plan type/deductible           Healthy   Smoker    injury    diabetes  years     pool\a
-----------------------------  --------  --------  --------  --------  --------  --------
Arizona
-----------------------------------------------------------------------------------------
PPO/$250                       $57       $0        Exclude   Exclude   Deny      Not
                                                   conditio  conditio  coverage  availabl
                                                   n or      n or                e
                                                   deny      deny
                                                   coverage  coverage

FFS/$2,500                     63        27        Exclude   Deny      Deny      Not
                                                   conditio  coverage  coverage  availabl
                                                   n                             e


Colorado
-----------------------------------------------------------------------------------------
HMO                            99        Deny      $0        Deny      Deny      $52\b
                                         coverage            coverage  coverage

FFS/$500                       63        7         Exclude   Exclude   Deny      88
                                                   conditio  conditio  coverage
                                                   n         n


Illinois
-----------------------------------------------------------------------------------------
PPO/$500                       100       25        0         Charge    Deny      122
                                                             higher    coverage
                                                             premium


New Jersey
-----------------------------------------------------------------------------------------
FFS/$1,000 low end             155       0         0         $0        $0        Not
                                                                                 applicab
                                                                                 le

FFS/$1,000 high end            565       0         0         0         0         Not
                                                                                 applicab
                                                                                 le


New York
-----------------------------------------------------------------------------------------
HMO rural\c                    164       0         0         0         0         Not
                                                                                 applicab
                                                                                 le

HMO New York City area         234       0         0         0         0         Not
                                                                                 applicab
                                                                                 le


North Dakota
-----------------------------------------------------------------------------------------
FFS/$250                       77        0         0         Deny      Deny      69\d
                                                             coverage  coverage


Vermont
-----------------------------------------------------------------------------------------
FFS/$1,000                     175       0         0         0         0         Not
                                                                                 applicab
                                                                                 le
-----------------------------------------------------------------------------------------
Note:  FFS stands for "fee-for-service."

\a The price differential is for a 25-year-old, healthy male.  Older
individuals in the three states we visited with high-risk pools may
pay considerably more for this same coverage.  For example, a
60-year-old male in Illinois will pay $895 a month for coverage
through the high-risk pool--$673 more than what the 25-year-old pays
for the same plan and $467 more than a healthy, 60-year-old man would
pay for coverage from one large carrier in the state. 

\b This difference may be understated because the high-risk pool plan
also has a $300 deductible, whereas the HMO plan with which we
compared it has no deductible. 

\c The premium listed is the median price of the standard HMO product
in most areas outside New York City.  Similarly, the premium listed
for New York City is the median price of the standard HMO product
sold in the metropolitan area. 

\d This difference may be understated because the high-risk pool plan
has a $500 deductible, whereas the plan with which we compared it has
a $250 deductible. 

Three of the 11 carriers shown in table 4.5 charge smokers $7 to $27
more each month for the same coverage, and one HMO automatically
denies coverage to all smokers.  At least two of the carriers will
attach a rider to a policy that explicitly excludes coverage of a
preexisting knee condition and will not cover any costs associated
with treatment of that part of the body.  While three of the carriers
automatically deny an applicant with preexisting diabetes, one will
accept the applicant but will charge him or her a significantly
higher premium to cover the higher expected costs.  And finally, an
applicant who had cancer within the past 3 years would almost always
be denied coverage from all carriers except those in the
guaranteed-issue states of New Jersey, New York, and Vermont. 
Individuals in these states, regardless of their health condition,
will generally pay the same amount as healthy individuals for similar
coverage. 

In non-guaranteed-issue states, applicants who have a history of
cancer or other chronic health conditions are likely to have a
difficult time obtaining coverage.  In many of these states,
high-risk insurance pools have been created to act as a safety net to
ensure that these otherwise uninsurable individuals can obtain
coverage, although at a cost that is generally 50 percent higher than
the average or standard rate charged in the individual insurance
market for a comparable plan.  Individuals in Colorado, Illinois, and
North Dakota who are denied coverage from one or more carriers can
obtain insurance through the high-risk pool for $52 to $122 more each
month.\17 Arizona is the only state we visited that did not have
guaranteed issue or a high-risk pool.  Unhealthy individuals in this
state who are most in need of coverage are not guaranteed access to
any insurance product and will most likely be uninsured. 


--------------------
\17 Each of these states has a mechanism to subsidize the operation
of their respective high- risk pool.  Absent these subsidies, the
difference in premium prices would probably be significantly higher. 


   ONCE COVERED, INDIVIDUALS MAY
   FACE OBSTACLES TO CONTINUED
   COVERAGE
---------------------------------------------------------- Chapter 4:3

Several state insurance regulators and a representative of the
National Association of Insurance Commissioners (NAIC) expressed
concern that some carriers may use closed block durational rating, a
carrier rating practice used in the individual health insurance
markets of many states.  Under this practice, carriers offer a
guaranteed renewable product at an artificially low rate to attract
large numbers of new enrollees and increase their market share. 
These carriers eventually increase premium rates to more adequate
levels and close the block of business by no longer accepting any new
applicants.  Because insurance pools rely on a steady influx of new,
healthy applicants to maintain rates, the rates in the closed block
rise even faster.  Healthy members of the block tend to migrate--and
are sometimes actively solicited by the carriers--to lower priced
products that are not similarly available to the unhealthy members of
the block.  The unhealthy members must either remain in the closed
block with its spiral of poorer risks and increasing rates or leave
the carrier and face the uncertain prospect of obtaining coverage
from another carrier on the open market.  Consequently, this practice
allows carriers to shed poorer risks and retain favorable risks. 

Though legal in most states, some regulators strongly object to this
practice.  They suggest it penalizes those individuals who have
dutifully purchased and maintained their health coverage but
eventually become unhealthy.  Some states, through guaranteed-issue
requirements and premium rate restrictions, have prohibited this
practice. 


   CARRIERS SUGGEST MEDICAL
   UNDERWRITING HELPS KEEP PRIVATE
   HEALTH INSURANCE AFFORDABLE
---------------------------------------------------------- Chapter 4:4

Although medical underwriting results in the exclusion of individuals
from the private health insurance market, many carrier
representatives and analysts suggest that it plays a role in keeping
insurance premiums more affordable for most individuals.  They
contend that coverage of uninsurable individuals is a public policy
concern and should be addressed through public initiatives such as
high-risk pools, not through the private sector insurance market. 

Insurance industry representatives explain that where states prohibit
carriers from using medical underwriting, individuals are essentially
guaranteed access to insurance regardless of their health status. 
They suggest that guaranteed access to coverage can result in adverse
selection.  Adverse selection refers to the tendency of some
individuals to refrain from purchasing insurance coverage while they
are younger or healthier because they know it will be available to
them in the future should their health status decline.  If a
significant number of younger, healthier individuals decide to forgo
coverage, the average health status of those remaining in the insured
pool diminishes.  Higher claims costs for this less healthy group
will result in higher premium prices, which in turn, could force
additional healthy individuals to forgo coverage.  The resulting
spiral of poorer risks and higher premiums could make insurance less
affordable for everyone. 

Many state insurance regulators and analysts disagree with this
premise or suggest that its impact is overstated by the insurance
industry.  They present data to support their position as do
insurance industry representatives to support theirs.  The
appropriate degree of regulatory intervention in private insurance
markets will continue to be a subject of debate, underscoring the
importance of thorough, ongoing evaluation of the impact of various
state insurance reforms. 


STATE AND FEDERAL INITIATIVES
ATTEMPT TO EXPAND ACCESS TO
COVERAGE FOR INDIVIDUALS
============================================================ Chapter 5

A wide range of initiatives to increase access to various segments of
the heath insurance market have been undertaken by states and more
recently the federal government.  While almost all of the states have
enacted insurance reforms designed to, among other things, improve
portability, limit waiting periods for coverage of preexisting
conditions, and restrict rating practices for the small employer
health insurance market,\18 they have been slower to introduce
similar reforms to the individual market.  From 1990 through 1995, a
number of states passed similar insurance reforms in the individual
market, and by year-end 1995, about 25 states created high-risk
insurance pools to provide a safety net for otherwise uninsurable
individuals.  Eight states and the District of Columbia have Blue
Cross and Blue Shield plans that provide all individuals a product on
an open enrollment basis.  At least seven states have no insurance
rating restrictions, operational high-risk pool, or an insurer of
last resort.  Table 5.1 catalogs state initiatives to increase
individuals' access to health insurance.  Recent legislative efforts
at the federal level also attempt to increase individuals' access to
this health insurance market. 



                                        Table 5.1
                         
                         State Initiatives to Increase Individual
                          Insurance Market Access as of Year-End
                                           1995


                     Operational   Blues act as
                     high-risk     insurer of    Guaranteed    Rating        Other
State                pool\a        last resort   issue         restrictions  reforms\b
-------------------  ------------  ------------  ------------  ------------  ------------
Alabama

Alaska               X

Arizona

Arkansas             X

California           X             X                                         X

Colorado             X                                                       X

Connecticut          X                                                       X

Delaware

District of                        X
Columbia

Florida              X

Georgia                                                                      X

Hawaii

Idaho                                            X             X             X

Illinois             X

Indiana              X                                                       X

Iowa                 X                           X             X             X

Kansas               X

Kentucky                                         X             X             X

Louisiana            X                                         X             X

Maine                                            X             X             X

Maryland                           X

Massachusetts                      X

Michigan                           X

Minnesota            X                                         X             X

Mississippi          X

Missouri             X

Montana              X

Nebraska             X

Nevada

New Hampshire                                    X             X             X

New Jersey                                       X             X             X

New Mexico           X                                         X             X

New York                                         X             X             X

North Carolina                     X

North Dakota         X                                         X             X

Ohio                                             X             X             X

Oklahoma             X

Oregon               X                                         X             X

Pennsylvania                       X

Rhode Island                       X

South Carolina       X                                         X             X

South Dakota

Tennessee

Texas

Utah                 X                           X             X             X

Vermont                                          X             X             X

Virginia                           X                                         X

Washington           X                           X             X             X

West Virginia                                                  X             X

Wisconsin            X

Wyoming              X                                                       X
-----------------------------------------------------------------------------------------
\a Communicating for Agriculture, Inc., Comprehensive Health
Insurance for High-Risk Individuals, ninth edition, 1995.  Georgia
and Texas have also passed legislation creating high-risk pools, but
have yet to fund them.  We have not included Maine and Tennessee in
this column although they had high-risk pools in operation since 1988
and 1987, respectively.  Maine terminated all remaining policies in
its high-risk pool as of December 31, 1994, largely because of the
passage of its individual insurance reforms, which included a
guaranteed-issue provision.  Also, Tennessee merged the participants
in its high-risk pool into the TennCare Medicaid program as of June
30, 1995. 

\b See table 5.2 for a detailed listing of enacted insurance reforms. 


--------------------
\18 For more information about the various reforms passed in the
small employer market, see Health Insurance Regulation:  Variation in
Recent State Small Employer Health Insurance Reforms
(GAO/HEHS-95-161FS, June 12, 1995). 


   ABOUT HALF OF THE STATES HAVE
   PASSED INDIVIDUAL INSURANCE
   REFORMS, BUT PROVISIONS VARY
---------------------------------------------------------- Chapter 5:1

To improve the availability and affordability of health insurance
coverage to individual consumers, a number of states have passed
legislation in recent years to modify the terms and conditions under
which health insurance is offered to this market.  These reforms may
seek to restrict carriers' efforts to limit eligibility and charge
higher premiums because of an individual's health history or
demographic characteristics.  We identified 25 states that from 1990
through 1995 had passed one or more reforms in an effort to improve
individuals' access to this market.  We found substantial variations
in the ways states approached reform in this market, although reforms
commonly passed included guaranteed issue, guaranteed renewal,
limitations on preexisting condition exclusions, portability, and
premium rate restrictions.  More states may soon enact reforms in
this market because of NAIC's recent recommendation of two model laws
for reforms in the individual insurance market. 

An explanation of the reforms follows.  Table 5.2 catalogs the
reforms passed by each state.\19



                                        Table 5.2
                         
                            State Individual Market Insurance
                          Reforms Passed From 1990 Through 1995

                                                       Preexistin              Premium
                                                       g                       rate
                    Effective  Guaranteed  Guaranteed  condition   Portabilit  restrictio
State                    date  renewal     issue       exclusion   y           ns
-----------------  ----------  ----------  ----------  ----------  ----------  ----------
California             1/1/94  --          --          12/12       --          --

Colorado               7/1/94  --          --          12/12       90          --

Connecticut           10/1/93  --          --          12/12       --          --

Georgia               4/21/95  X\a         --          --          --          --

Idaho                  1/1/95  X           X 2 plans   6/12        30          X

Indiana                1/1/96  --          --          12/18\b     30          --

Iowa                   4/1/96  X           X 2 plans   12/12\c     --          X

Kentucky              7/15/96  X           X\ all      12/12       60          X
                                           plans\d

Louisiana              1/1/94  X           --          12/12       60          X

Maine                 12/1/93  X           X all       12/12       90          X
                                           plans

Minnesota              7/1/93  X           --          6/12\e      30          X

New Hampshire          1/1/95  X           X all       3/9\f       0\g         X
                                           plans

New Jersey             8/1/93  X           X 5         6/12        30          X
                                           plans\h

New Mexico             1/1/95  X           --          6/6         31          X

New York             4/1/93\i  X           X all       6/12        60          X
                                           plans

North Dakota           8/1/95  X           --          6/12        90          X

Ohio                  1/14/93  X           X 1 plan    6/12        30          X

Oregon                10/1/96  X           --          6/6         60          X

South Carolina       1/1/92\j  --          --          5 yr/2 yr   --          X

Utah                   1/1/96  X           X 1 plan\k  6/12        90          X

Vermont                7/1/93  Not         X all       12/12       0\m         X
                               applicable  plans
                               \l

Virginia               7/1/95  --          --          12/12       30          --

Washington           1/1/95\n  X           X all       3/3         3 months    X
                                           plans

West Virginia          6/9/95  X           --          --          --          X

Wyoming                7/1/95  X           --          --          --          --
-----------------------------------------------------------------------------------------
Note:  For details on the premium rate restriction reforms that
states passed, see appendix III. 

\a Coverage cannot be terminated because of individual claims
experience. 

\b This provision changes to 12/12 on January 1, 1998. 

\c Applies only to the standard and basic benefits plans. 

\d Under the recent legislative changes, products only have to be
offered on a guaranteed-issue basis to applicants who have been
Kentucky residents for the 12 months immediately preceding the
policy's effective date. 

\e It is 6/18 for individuals not previously covered by a health
insurance plan. 

\f The waiting period may be no more than 3 months for individuals
who incur no medical treatment expenses for the preexisting condition
within that time.  Otherwise, the waiting period may be no more than
9 months. 

\g If the individual, employee, or dependent did not have a health
benefits plan during a period of unemployment prior to the effective
date of new coverage, the lack of coverage during the period of
unemployment shall be disregarded. 

\h One plan must be a basic benefits plan, one a managed care plan,
and the three other plans will include enhanced benefits of
proportionally increasing actuarial value.  A federally qualified HMO
is permitted to offer a basic benefits plan in lieu of the five
plans. 

\i The preexisting condition and portability provisions took effect
on January 1, 1993. 

\j The preexisting condition provision was effective July 13, 1981. 

\k The guaranteed-issue provision will be phased in beginning May 1,
1997. 

\l Vermont has continuous open enrollment. 

\m The preexisting condition period must be waived if substantially
similar coverage under a prior policy was in effect for the previous
9 months.  The law does not provide for a lapse in coverage. 

\n Guaranteed-issue and rating restriction provisions went into
effect January 1, 1996. 


--------------------
\19 Certain limited consumer protection measures may predate 1990 and
therefore not be included in table 5.2.  For example, some states
have preexisting condition limitations applicable to the individual
market included under existing state insurance statutes. 


      GUARANTEED ISSUE
-------------------------------------------------------- Chapter 5:1.1

Guaranteed issue requires all carriers that participate in the
individual market to offer at least one plan to all individuals and
accept all applicants, regardless of their demographic
characteristics or health status.  We found that 11 states required
all carriers participating in the individual market to guarantee
issue one or more health plans to all applicants.  This provision,
however, did not necessarily guarantee coverage to all individuals on
demand.  To limit adverse selection, carriers in most states did not
have to accept individuals who qualify for employer- or
government-sponsored insurance.  Also, some states only required
carriers to accept all applicants during a specified and usually
limited open enrollment period. 

States also varied in the number of plans they required carriers to
guarantee issue.  In states such as Idaho, the legislation explicitly
defined a basic and standard benefits plan that each carrier must
offer all individuals.  Other states, like Maine and New Hampshire,
required carriers to guarantee issue all health plans they sold in
the individual market.  New Jersey explicitly defined and limited the
number and type of plans carriers offered in the market. 


      GUARANTEED RENEWAL
-------------------------------------------------------- Chapter 5:1.2

Guaranteed-renewal provisions prohibit carriers from not renewing
coverage to plan participants because of their health status or
claims experience.  Exceptions to guaranteed renewal include cases of
fraud or failure to pay premiums.  A carrier may choose not to renew
all of its individual policies by exiting a state's market but is
then prohibited from reentering the market for at least 5 years. 


      PREEXISTING CONDITION
      LIMITATIONS
-------------------------------------------------------- Chapter 5:1.3

Twenty-two states limited the period of time coverage can be excluded
for a preexisting condition.  States typically defined a preexisting
condition as

  -- a condition that would have caused an ordinarily prudent person
     to seek medical advice, diagnosis, care, or treatment during the
     12 months immediately preceding the effective date of coverage;

  -- a condition for which medical advice, diagnosis, care, or
     treatment was recommended or received during the 12 months
     immediately preceding the effective date of coverage; or

  -- a pregnancy existing on the effective date of coverage.\20

Most reform states allowed carriers to exclude coverage for a
preexisting condition for up to 12 months.  Some states, however,
such as Oregon and Washington, limited this exclusionary period to 6
or 3 months. 


--------------------
\20 Not all states explicitly list a pregnancy as a preexisting
condition in their legislation, which may leave pregnancy defined as
a preexisting condition open to interpretation in these states. 


      PORTABILITY
-------------------------------------------------------- Chapter 5:1.4

Portability provisions require carriers to waive any preexisting
condition limitations for covered services if comparable services
were previously covered under another policy, and this previous
policy was continuous to a date not more than a specified number of
days before the new coverage went into effect.  Among states that had
passed portability reforms, the specified number of days ranged from
0 to 90.  Six states had enacted portability provisions of 30 days,
the most common duration among reform states. 


      PREMIUM RATING RESTRICTIONS
-------------------------------------------------------- Chapter 5:1.5

Eighteen of the 25 states included provisions in their legislation
that in some way attempted to limit the amount carriers can vary
premium rates or the characteristics that can be used to vary these
rates.  Among the seven states we visited, New Jersey, New York, and
Vermont restricted carriers' rating practices and generally required
all carriers to community rate their individual products with limited
or no qualifications.  Under community rating, carriers must set
premiums at the same level for all plan participants.  That is, all
participants are generally charged the same price for similar
coverage regardless of age, gender, health status, or any other
factor.  North Dakota had limited rating restrictions, and Arizona,
Colorado, and Illinois essentially had no rate limitations in place. 

Most of the 18 states with restrictions, however, allowed carriers to
vary, or modify, the premium rates charged to individuals within a
specified range according to differences in certain demographic
characteristics, such as age, gender, industry, geographic area, and
smoking status.  For example, New Hampshire only allowed carriers to
modify premium rates for differences in age, while South Carolina
allowed carriers to use differences in age, gender, geographic area,
industry, smoking status, occupational or avocational factors, and
any additional characteristics not explicitly specified, to set
premium rates. 

Most of the 18 states, however, limited the range over which carriers
may vary rates among individual consumers.  Carriers usually
establish an index, or base rate, and all premium prices must fall
within a given range of this rate.  For example, in Idaho premium
rates were permitted to vary by no more than +/-25 percent from the
applicable index rate and only for differences in age and gender. 
Carriers in Louisiana were allowed to vary premium rates more
liberally.  The state's legislation allowed carriers to vary premium
rates +/-10 percent because of health status and allowed unlimited
variation for specified demographic characteristics and other factors
approved by the Department of Insurance. 


   HIGH-RISK POOLS MAY BE AN
   OPTION FOR THOSE DENIED
   COVERAGE BUT REMAIN RELATIVELY
   EXPENSIVE AND ENROLL FEW
---------------------------------------------------------- Chapter 5:2

In addition, about 25 states have created high-risk insurance
programs that act as a safety net to ensure that individuals who need
coverage can obtain it, although at a cost that is generally 50
percent higher than the average or standard rate charged in the
individual insurance market for a comparable plan.  To qualify for
the high-risk pool, applicants generally have to demonstrate they
have been rejected by at least one carrier for health reasons or have
one of a number of specified health conditions.  Officials from at
least two of the state insurance departments we visited suggested
that their states' high-risk pools ensure the availability of health
insurance to all who needed it and prove that no access problem
exists--provided the individual can afford the higher priced
coverage. 

Although high-risk pools exist as a safety net for otherwise
uninsurable individuals, they essentially enroll an insignificant
number of individuals.  In fact, in at least 22 of these 25 states,
less than 5 percent of those under 65 with individual insurance
obtain coverage through the high-risk pool.  Only in Minnesota does
the pool's enrollment exceed 10 percent of the individually insured
population.  The low enrollment in these high-risk pools may be due
in part to limited funding, lack of public awareness, and their
relative expense.  Some states limit enrollment and may have waiting
lists.  For example, California has an annual, capped appropriation
to subsidize the cost of enrollees' medical care and curtails
enrollment in the program to ensure that it remains within its
budget.  Also, insurance department officials in each of the states
we visited with high-risk pools recognized the public is often
unaware that these pools exist, even though carriers are often
required by law to notify rejected applicants of it.  Officials in
two of these three states were generally unaware of the extent to
which carriers complied with this requirement.  And finally, although
these programs provide insurance to individuals who are otherwise
uninsurable, they remain relatively expensive, and many people are
simply unable to afford this higher priced coverage. 


   SEVERAL BLUES PLANS ACT AS
   INSURERS OF LAST RESORT
---------------------------------------------------------- Chapter 5:3

In addition to the 11 states that require all carriers to guarantee
issue at least one health plan to all individuals, the Blue Cross and
Blue Shield plans in 8 states and the District of Columbia
voluntarily offer at least one product to individuals during an
annual open enrollment period, which usually lasts 30 days.  Although
these plans accept all applicants during this open enrollment period,
they are not limited in the premium price they can charge an
individual applicant. 


   SEVEN STATES HAVE PASSED NO
   INITIATIVES TO ENSURE UNHEALTHY
   INDIVIDUALS ACCESS TO THE
   MARKET
---------------------------------------------------------- Chapter 5:4

Our analysis also shows that by the end of 1995, seven states neither
had passed reforms that attempted to increase access to the
individual insurance market\21 nor had an operational high-risk pool
or a Blues plan that acted as insurer of last resort.  In these
states, individuals who are unhealthy, and thus most likely to need
insurance coverage, may be unable to obtain it.  These states are
Alabama, Arizona, Delaware, Hawaii,\22 Nevada, South Dakota, and
Texas. 


--------------------
\21 Of these seven states, South Dakota has since passed
comprehensive individual insurance reform. 

\22 As stated in ch.  2, Hawaii is the only state with mandated
employer-sponsored health insurance.  Therefore, all employed
individuals have access to health insurance through their employer. 


   FEDERAL LEGISLATIVE EFFORTS MAY
   ALSO INCREASE INDIVIDUALS'
   ACCESS TO COVERAGE
---------------------------------------------------------- Chapter 5:5

In addition to state efforts, recently passed federal legislation
also attempts to increase access to the individual health insurance
market.  The Health Insurance Portability and Accountability Act of
1996 will affect the individual market in several ways.  It will,
among other things, guarantee access to the individual market to
consumers with previous qualifying group coverage, guarantee the
renewal of individual coverage, authorize federally tax-exempt
medical savings accounts (MSA), and increase the tax deduction for
health insurance for self-employed individuals. 

Under this act, individuals who have had at least 18 months of
continuous coverage\23 have guaranteed access to an individual market
product and do not need to fulfill a new waiting period for
preexisting conditions if they move from a group plan to an
individual market plan.  It is important to note that although this
law guarantees portability, it in no way limits the premium price
carriers may charge individuals for this coverage.  Also, with some
exceptions, the legislation requires all carriers that provide
individual health insurance coverage to renew or continue in force
such coverage at the option of the individual. 

In addition, self-employed individuals who purchase health insurance
will, beginning in 1997, have the option of establishing
tax-deductible MSAs.  An MSA is an account into which an individual
deposits funds for later payment of unreimbursed medical expenses. 
To be eligible for the tax deduction, self-employed individuals must
be covered under a high-deductible health plan (defined as a health
plan with an annual deductible of $1,500 to $2,250 for an individual
and $3,000 to $4,500 for family coverage) and have no other
comprehensive coverage.  As noted in chapter 3, many participants in
the individual market already purchase high-deductible health
coverage.  An individual with an MSA can claim a tax deduction for 65
percent of his or her health plan's deductible for self-only coverage
and 75 percent for family coverage. 

Finally, the act increases the tax deductibility of health insurance
for self-employed individuals, who constitute about one-fourth of
individual market participants.  Currently, self-employed individuals
may deduct 30 percent of the amount they paid for health insurance
for themselves as well as for their spouse and dependents.  Beginning
in 1997, these individuals may deduct 40 percent of this cost; 45
percent in 1998 through 2002; 50 percent in 2003; 60 percent in 2004;
70 percent in 2005; and 80 percent in 2006 and thereafter. 


--------------------
\23 Breaks in coverage of up to 63 days are permitted under the
statute. 


CONCLUDING OBSERVATIONS
============================================================ Chapter 6

While employer-sponsored group plans are still the dominant source of
health insurance coverage for most Americans, millions depend on an
accessible and affordable individual market outside the workplace. 
Many Americans, including family farmers, self-employed individuals,
and those working for small firms that do not offer coverage, must
rely on the individual market as their permanent source of health
insurance coverage.  Others rely on this market between jobs and
during other periods of transition.  Recent trends suggest a growing
share of the U.S.  population will probably turn to the individual
market at some point in their lives.  The days of rapid expansion of
both private employer and government program coverage are probably
behind us.  Meanwhile, employer downsizing continues, job mobility
increases, and the ranks of part-time and contract workers grow. 

The individual insurance market is complex, and consumers, unlike
those who have access to employer-sponsored plans, are largely on
their own in obtaining and financing coverage.  Consumers can access
the market in a variety of ways; must choose among multiple, usually
nonstandardized, products offered by multiple carriers; and must
select one of many cost-sharing options, each of which will have a
different impact on the amount of money consumers will ultimately
pay.  Further adding to the complexity of this market is its high
geographic variability.  Depending on the state or even on the
markets within a state, consumers may face an entirely different set
of choices. 

Many consumers face barriers to coverage in the individual market. 
Absent state restrictions, carriers base coverage and pricing
decisions on each individual's demographic characteristics and health
status.  Thus in most states, those who are older or in poor health
may be charged significantly higher premiums or may be denied
coverage altogether.  Among those with coverage in the individual
market, many may be underinsured.  Increasingly sold are very high
deductible plans with lower premiums but greater financial risk for
consumers.  Many consumers may purchase these plans because they
cannot afford premiums otherwise, suggesting that, unlike under
medical savings accounts, a reserve to pay the high deductibles may
not exist.  Some consumers can only obtain coverage that permanently
excludes the very medical condition for which they are most likely to
need care.  And other consumers--intentionally or
unintentionally--purchase limited benefit policies as their only
source of coverage. 

Twenty-five states have recently passed legislative reforms for their
individual health insurance markets and more are likely to follow. 
The reforms vary widely in scope from limited measures, such as those
intended only to limit the length of preexisting condition waiting
periods a carrier may impose, to comprehensive reforms requiring
carriers to provide coverage to all who apply and use community
rating to set premiums.  Some states use other measures to increase
individual market access or affordability, such as high-risk pools
and insurers of last resort.  At the federal level, the Health
Insurance Portability and Accountability Act of 1996 is a recent
example of federal legislation that will affect the individual health
insurance market.  The act guarantees access to the individual market
to consumers with qualifying previous group coverage and guarantees
the renewability of individual coverage.  For the self-employed, the
act authorizes federally tax-deductible medical savings accounts and
increases the tax deductibility of health insurance.  The importance
of the individual insurance market to millions of Americans is a
factor to be considered in weighing any further incremental measures
to improve the accessibility and affordability of private health
insurance. 


METHODOLOGY FOR ESTIMATES OF
INDIVIDUAL HEALTH INSURANCE
ENROLLMENT
=========================================================== Appendix I

Our estimates of the number and percentage of people with individual
health insurance in 1994 and their characteristics are based on data
from the Bureau of the Census' March 1995 Current Population Survey
(CPS).  The CPS sample for the March 1995 survey of about 57,000
households with over 150,000 individuals was designed to be
nationally representative of the civilian noninstitutional population
of the United States.  Because the elderly rely on Medicare rather
than on individual or other types of insurance, we excluded people
aged 65 and over from our analysis.  As a result, our analysis was
based on 131,455 people under 65 years of age, weighted to reflect
the U.S.  population of about 231 million nonelderly people. 

Because our estimates are based on a sample of the population, they
are subject to sampling errors.  The standard errors (a measure of
sampling error) for our estimates are generally about 1 percentage
point or less.  To minimize the chances of citing differences that
could be attributable to sampling errors, we only highlight
differences that are statistically significant at the 0.05 level. 

The March 1995 CPS questions concerning health insurance coverage
were significantly revised from previous annual surveys.  These
revisions improved the questions that focus on individual health
insurance coverage but make it misleading to compare trends in the
size and characteristics of the individual health insurance market
with previous CPS surveys.  The 1995 questionnaire asked:  "At
anytime during 1994, (were you/was anyone in this household) covered
by a plan (you/they) PURCHASED DIRECTLY, that is, not related to
current or past employer?"\24 Previously, the survey did not ask
specifically about health coverage purchased directly.  Instead,
earlier surveys asked (1) whether anyone in the household was covered
by private health insurance and (2) whether this coverage was offered
by a current or former employer or union. 


--------------------
\24 The March 1995 CPS, for the first time, also reported on what
type of health insurance coverage respondents had during the past
week.  Because of discrepancies in these results, however, Census has
acknowledged that the results of this question remain subject to
revision. 


   NATIONAL HEALTH INTERVIEW
   SURVEY DATA ON INDIVIDUAL
   HEALTH INSURANCE
--------------------------------------------------------- Appendix I:1

The National Health Interview Survey (NHIS), a nationally
representative survey of the civilian noninstitutionalized population
conducted by the Bureau of the Census for the National Center for
Health Statistics, periodically asks questions regarding health
insurance coverage.\25 In general, our analysis of the NHIS data
provided results regarding individual health insurance similar to
those we found using the CPS data.  For example, using the 1993 NHIS
data, we estimated that about 4.3 percent of the nonelderly
population had individual insurance compared with 4.5 percent in 1994
using CPS data.  As for CPS, estimates based on NHIS also indicate
higher than national average rates of individual insurance coverage
for particular segments of the population, including self-employed
individuals and agricultural workers. 

Tables I.1 to I.8 show the CPS estimates along with estimates based
on NHIS.  While the estimates are generally similar, observed
differences could be attributable to several factors, including
sampling errors and the slightly different populations and time
periods covered (1994 for CPS versus second half of 1993 for NHIS). 
Furthermore, several important differences in the design of the two
surveys can influence their results.  For example, in contrast to
CPS, which asked about insurance coverage held over the past year,
NHIS asked about insurance coverage held over the past month.  In
addition, NHIS did not specifically ask whether the respondent
directly purchased individual health insurance.  Instead, the survey
asked whether anyone in the family was covered by a private health
insurance plan and whether that coverage was obtained through a
current or former employer or union.  In preparing the NHIS
estimates, we assumed that the individual policy was directly
purchased if the private insurance was not obtained through an
employer or union. 



                               Table I.1
                
                Comparison of CPS and NHIS Estimates of
                     Type of Insurance, Nonelderly


                                        Millio  Percen  Millio  Percen
                                            ns       t      ns       t
--------------------------------------  ------  ------  ------  ------
Employment-based                         150.8    65.3   151.5    67.8
Medicare                                   2.8     1.2     2.3     1.0
Medicaid                                  21.6     9.3    20.0     8.9
CHAMPUS/IHS\b                              4.4     1.9     4.3     1.9
Individual                                10.5     4.5     9.6     4.3
Uninsured                                 40.8    17.7    35.4    15.8
======================================================================
Total                                    230.8   100.0   223.6   100.0
----------------------------------------------------------------------
Notes:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993.

Some people may receive coverage from several sources.  To avoid
double counting, we prioritized the source of coverage reported by
CPS.  For our analysis, employment-based coverage was considered
primary to other sources of coverage, and respondents were classified
as having employment-based coverage even if they also have other
types of coverage.  The other types of health insurance coverage were
prioritized in the following order:  Medicare, Medicaid, CHAMPUS/IHS,
and individual insurance. 

\a Estimated percentages were based only on the number of people
whose insurance status could be categorized from survey responses
(approximately 90 percent of weighted sample).  Population estimates
were obtained by applying these percentages to the entire nonelderly
population (223.6 million). 

\b The CHAMPUS category also includes Indian Health Service (IHS) and
direct military health coverage. 



                         Table I.2
          
             Percentage of Nonelderly Residents
          Having Individual Insurance Coverage by
                    Metropolitan Status

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Metropolitan                             4.2           3.9
Central city                              --           3.5
Noncentral city                           --           4.1
Nonmetropolitan                          5.7           5.8
Farm                                      --          29.3
Nonfarm                                   --           4.6
U.S. average                             4.5           4.3
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.3
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                            Age

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Younger than 20                          3.7           3.5
20 to 29                                 3.4           4.1
30 to 39                                 4.3           3.8
40 to 49                                 5.1           4.3
50 to 59                                 6.4           5.9
60 to 64                                 9.6           8.7
U.S. average (0 to 64)                   4.5           4.3
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.4
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                   Race and Ethnic Groups

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
White                                    5.4           4.8
Black                                    2.0           1.9
Hispanic                                 2.2           2.9
Other                                    4.3           5.3
U.S. average                             4.5           4.3
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.5
          
            Percentage of Nonelderly Population
           Having Individual Health Insurance by
                        Income Group

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Below poverty level                      3.7           3.8
At or above poverty level                4.7           4.4
U.S. average                             4.5           4.3
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.6
          
           Percentage of Self-Employed Population
           Aged 18 to 64 Having Individual Health
                         Insurance

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Self-employed                           19.7          19.7
U.S. average (ages 18 to 64)             4.9           4.7
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.7
          
           Percentage of Population Aged 18 to 64
           Having Individual Health Insurance by
                          Industry

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Agriculture, forestry, and              16.9          19.1
 fisheries
Personal services, including             7.8           8.2
 private households
Construction                             7.3           6.3
Business and repair services             7.2           5.2
Entertainment and recreation             6.9           8.3
 services
Finance, insurance, and real             5.4           4.7
 estate
Retail trade                             5.1           5.0
Wholesale trade                          4.7           5.0
Professional and related                 4.1           4.3
 services
Transportation, communication,           2.8           1.7
 and other public utilities
Mining                                   2.3           3.8
Manufacturing                            2.1           1.8
Public administration                    1.2           1.4
U.S. average (ages 18 to 64)             4.9           4.7
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 



                         Table I.8
          
              Percentage of Population Having
           Individual Health Insurance by Health
                         Condition

                                  CPS (1994)   NHIS (1993)
------------------------------  ------------  ------------
Excellent                                5.1           4.9
Very good                                4.4           4.4
Good                                     4.0           3.6
Fair                                     3.7           3.2
Poor                                     2.5           1.9
U.S. average (ages 0 to 64)              4.5           4.3
Not in labor force due to                2.1           2.3
 disability
U.S. average (ages 18 to 64)             4.9           4.7
----------------------------------------------------------
Note:  CPS asked about insurance coverage at any time during 1994;
NHIS asked about insurance coverage during the preceding month in
1993. 


--------------------
\25 The 1993 NHIS surveyed about 43,000 households, but the health
insurance coverage questions were implemented as a supplement in the
second half of the year so that the sample size for these data is
approximately half that of the entire survey. 


   OTHER ESTIMATES OF THE SIZE OF
   INDIVIDUAL INSURANCE MARKET
--------------------------------------------------------- Appendix I:2

The Health Insurance Association of America (HIAA) estimates that
10.4 million Americans receive individual health insurance.  In
addition, HIAA notes that an additional 5.4 million Americans
received individual "hospital only" indemnity coverage in 1992.\26

While HIAA's results are similar to our findings, the estimates are
not directly comparable.  First, our analysis of CPS is based on how
many people received individual health insurance only at some point
during the previous year, whereas HIAA's estimate is compiled from
insurer-reported enrollment figures.  In addition, HIAA excludes
health coverage that is obtained through an association of other
individuals (not employers).  From an insurer's perspective, these
association plans are group health insurance.  From many enrollees'
perspectives, however, these plans are similar to individual health
insurance since they generally pay the entire premium and the plan is
not offered through their employment.  In addition, some states are
beginning to regulate these health plans as individual health
insurance.  We anticipate this trend will accelerate as states adopt
standardized individual reform statutes based on the model act
recently recommended by the National Association of Insurance
Commissioners. 

The Employee Benefit Research Institute (EBRI) reports that 16.4
million nonelderly Americans received "other private" health
insurance during 1994, based on an analysis of the March 1995 CPS,
and notes that "this category consists primarily of individually
purchased private insurance."\27 Several differences in methodology
account for the differences in EBRI's estimates and ours.  Most
importantly, EBRI's analysis was based on the original Census data
from the March 1995 CPS, whereas our analysis included supplemental
data provided by Census after EBRI's analysis was completed.  The
supplemental data enabled us to more accurately identify people with
individual insurance coverage.  For example, it enabled us to
excluded people who received health coverage through a person in
another household from the individual health insurance category
because only a small minority of these people would have had
individual health insurance.  This could result in a small
underestimate of the number of people with individual health
insurance during 1994.  Assuming that the same share of this group
had individual health insurance as the nonelderly population with
health coverage, then our estimates would be understated by about
400,000 people.  Another difference in the numbers reported by EBRI
is that their "other private" category also includes people who would
have received Medicare, Medicaid, or CHAMPUS as well as individual
health insurance, whereas our analysis is based on people who had
individual health insurance only. 

On the basis of EBRI's analysis, the American Academy of Actuaries
estimated that 13.1 million to 14.8 million Americans received
individual health insurance.  This estimate assumed that 80 to 90
percent of those privately insured in the United States by means
other than through an employer would be considered to have individual
health insurance.\28


--------------------
\26 See Health Insurance Association of America, "The Cost of
Group-to-Individual Portability:  Why Do HIAA and AAA Estimates
Differ?"; and Source Book of Health Insurance Data:  1994
(Washington, D.C.:  1995), p.  37. 

\27 "Sources of Health Insurance and Characteristics of the
Uninsured:  Analysis of the March 1995 Current Population Survey,"
EBRI Issue Brief Number 170 (Washington, D.C.:  EBRI, Feb.  1996). 

\28 American Academy of Actuaries, "Comments on the Effect of S. 
1028 on Premiums in the Individual Health Insurance Market"
(Washington, D.C.:  1996). 


ESTIMATES OF INDIVIDUAL HEALTH
INSURANCE ENROLLMENT BY STATE,
NONELDERLY POPULATION, 1994
========================================================== Appendix II


                          Number of
                        people with
                         individual
State                     insurance      Individual      Employment-based       Uninsured
-------------------  --------------  --------------  --------------------  --------------
New England                 490,137             4.3                  72.7            13.9
Maine                        72,714             7.1                  65.3            16.1
New Hampshire                48,668             4.9                  74.9            12.6
Vermont                      28,445             5.4                  73.6            10.9
Massachusetts               185,794             3.5                  72.4            15.0
Rhode Island                 33,356             4.1                  72.0            13.9
Connecticut                 121,160             4.4                  75.3            12.2
Middle Atlantic           1,542,709             4.7                  67.2            15.7
New York                    751,529             4.7                  62.5            18.2
New Jersey                  380,968             5.5                  70.8            14.9
Pennsylvania                410,212             4.0                  71.8            12.5
East North Central        1,545,573             4.0                  72.2            13.0
Ohio                        322,895             3.3                  72.2            13.0
Indiana                     388,907             7.3                  70.6            12.1
Illinois                    427,344             4.1                  70.4            14.7
Michigan                    275,104             3.3                  71.9            12.7
Wisconsin                   131,323             2.9                  79.0            10.7
West North Central        1,096,972             7.0                  70.1            13.1
Minnesota                   313,749             7.8                  72.2            12.8
Iowa                        238,726            10.0                  71.2            11.4
Missouri                    129,170             3.0                  71.8            13.9
North Dakota                 74,895            13.7                  64.3            10.6
South Dakota                 65,125            10.0                  68.1            12.3
Nebraska                    149,477            10.1                  68.3            12.6
Kansas                      125,829             5.6                  65.3            15.0
South Atlantic            1,778,284             4.4                  65.3            17.2
Delaware                     12,048             2.0                  73.7            15.5
Maryland                    169,876             3.8                  73.9            13.7
District of                  16,760             3.1                  58.7            17.6
 Columbia
Virginia                    170,355             2.8                  71.0            13.7
West Virginia                36,838             2.4                  62.0            20.0
North Carolina              266,574             4.4                  65.3            15.5
South Carolina              112,911             3.5                  69.4            16.5
Georgia                     229,063             3.5                  64.9            18.2
Florida                     763,859             6.4                  58.9            20.4
East South Central          578,592             4.1                  63.4            18.3
Kentucky                     77,441             2.3                  64.5            17.5
Tennessee                   244,798             5.1                  65.1            15.1
Alabama                     115,974             3.1                  65.0            22.1
Mississippi                 140,379             6.2                  55.7            19.9
West South Central        1,062,166             4.1                  57.3            25.5
Arkansas                     68,797             3.3                  62.4            21.5
Louisiana                   205,693             5.2                  55.5            21.3
Oklahoma                    148,818             5.3                  59.8            22.1
Texas                       638,858             3.7                  56.7            27.4
Mountain                    714,485             5.1                  65.7            18.7
Montana                      66,295             9.1                  64.1            17.8
Idaho                        69,849             6.9                  67.1            16.6
Wyoming                      39,882             8.9                  64.3            17.6
Colorado                    230,434             6.7                  69.8            13.8
New Mexico                   43,672             2.9                  53.4            26.6
Arizona                     109,664             2.9                  60.2            24.0
Utah                        116,847             6.7                  74.7            12.8
Nevada                       37,843             2.8                  72.6            17.7
Pacific                   1,642,223             4.4                  58.6            21.7
Washington                  337,995             7.2                  63.7            15.2
Oregon                      123,039             4.4                  67.2            19.3
California                1,150,284             4.1                  56.4            23.4
Alaska                       14,147             2.5                  63.2            17.2
Hawaii                       16,758             1.8                  71.4            11.6
United States            10,451,139             4.5                  65.3            17.7
-----------------------------------------------------------------------------------------
Notes:  Standard errors for our estimates of the percentage of the
nonelderly population with individual health insurance range from 0.3
in California and New York to 1.3 in North Dakota.  Therefore,
confidence intervals at the 95-percent level for the state estimates
range from about +/-0.6 to 2.6 percentage points, and small
differences between states may not be statistically significant.

Percentages do not total to 100 across the rows because Medicare,
Medicaid, and CHAMPUS categories are not included.  Employment-based
and uninsured categories are included for comparison purposes.

This table groups states according to standard Census regions.  For
the sake of simplicity, in the body of this report we use "Plains
states" to refer to the 7 states in the West North Central Census
region and "Southern region" to refer to the 17 states in the South
Atlantic, East South Central, and West South Central Census regions. 


STATE RESTRICTIONS RELATED TO
PREMIUMS
========================================================= Appendix III

State               Premium rate restriction
------------------  --------------------------------------
Idaho               Premium rates may not vary by more
                    than 25 percent of the applicable
                    index rate for age and gender only.
                    The Director of Insurance may approve
                    additional case characteristics.

Iowa                Premium rates may not vary by more
                    than 100 percent from the applicable
                    index rate for demographic
                    characteristics approved by the
                    Commissioner of Insurance. The
                    legislation does not specify these
                    characteristics, but they include age,
                    gender, and geographic location.

Kentucky            Premium rates may not vary by more
                    than a 5:1 ratio for all case
                    characteristics. Allowable case
                    characteristics (and maximum allowable
                    variation if specified) are age (300
                    percent), gender (50 percent),
                    occupation or industry (15 percent),
                    geography, family composition, benefit
                    plan design, cost containment
                    provisions, whether or not the product
                    is offered through an alliance, and
                    discounts (up to 10 percent) for
                    healthy lifestyles.

Louisiana           Adjusted community rating is required
                    with variation of +/-10 percent
                    currently allowed for health status,
                    and unlimited variation allowed for
                    specified demographic characteristics
                    and other factors approved by the
                    Department of Insurance.

Maine               Adjusted community rating is required
                    with variation allowed of no more than
                    +/-20 percent of the community rate
                    for age, smoking status, occupation,
                    industry or geographic area.

Minnesota           Premium rates may vary from the index
                    rate +/-25 percent for health status,
                    claims experience, and occupation, and
                    +/-50 percent of the index rate for
                    age. Premium rates may also vary by up
                    to 20 percent for three geographic
                    areas.

New Hampshire       Adjusted community rating is required
                    with a maximum variation of 3:1
                    allowed for age only.

New Jersey          Community rating is required.

New Mexico          Until July 1, 1998, premium rates may
                    vary for age, gender (no more than 20
                    percent), geographic area of the place
                    of employment, smoking practices, and
                    family composition (by no more than
                    250 percent). Thereafter, every
                    carrier shall charge the same premium
                    for the same coverage to each New
                    Mexico resident, regardless of
                    demographic characteristics or health
                    status. The only allowable rating
                    factor will be age--whether the person
                    is over or under the age of 19.

New York            Pure community rating is required
                    within specified geographic regions.

North Dakota        Premium rates charged to individuals
                    within a class for the same or similar
                    coverage may not vary by a ratio of
                    more than 5:1 for differences in age,
                    industry, gender, duration of
                    coverage, geography, family
                    composition, healthy lifestyles, and
                    benefit variations. Gender and
                    duration of coverage may not be used
                    after January 1, 1997.

Ohio                Premiums charged to individuals may
                    not exceed 2.5 times the highest rate
                    charged to any other individual with
                    similar case characteristics.

Oregon              Each carrier must file a geographic
                    average rate for its individual health
                    benefit plans. Premium rates shall not
                    vary from the individual geographic
                    average rate, except for benefit
                    design, family composition, and age.
                    Legislation does not limit this
                    variation but indicates that age
                    adjustments must be applied uniformly.

South Carolina      Premium rates charged to individuals
                    with similar demographic
                    characteristics may not vary by more
                    than 30 percent. The legislation
                    specifically states that age, gender,
                    area, industry, smoking, and
                    occupational or avocational factors
                    may be used to set premium rates but
                    does not prohibit the use of
                    additional characteristics. The only
                    exception is durational rating, which
                    is explicitly prohibited.

Utah                A variation of +/-25 percent is
                    allowed for health status or duration
                    of coverage. Carriers may also vary
                    premiums because of differences in
                    age, gender, family composition, and
                    geographic area by actuarially
                    reasonable rates, as defined in NAIC
                    guidelines. Premiums may also be
                    rated-up 15 percent for industry. The
                    index rates carriers use for their
                    individual business may be lower than
                    or equal to, but not any higher than,
                    the index rates they use for their
                    small-employer business.

Vermont             Adjusted community rating is required
                    with maximum allowable variation of +/
                    -20 percent for limited demographic
                    factors.

Washington          Adjusted community rating is required
                    with variation allowed for geographic
                    area, family size, age, and wellness
                    activities. Permitted rates for any
                    age group cannot exceed 425 percent of
                    the lowest rate for all age groups on
                    January 1, 1996; 400 percent on
                    January 1, 1997; and 375 percent on
                    January 1, 2000, and thereafter. The
                    discount for wellness activities
                    cannot exceed 20 percent.

West Virginia       Premium rates charged to individuals
                    with similar demographic
                    characteristics may not vary by more
                    than 30 percent. The legislation
                    specifically states that age, gender,
                    area, industry, smoking, and
                    occupational or avocational factors
                    may be used to set premium rates but
                    does not prohibit the use of
                    additional characteristics. The only
                    exception is durational rating, which
                    is explicitly prohibited.
----------------------------------------------------------

GAO CONTACTS AND STAFF
ACKNOWLEDGMENTS
========================================================== Appendix IV

GAO CONTACTS

Michael Gutowski, Assistant Director, (202) 512-7128
Susan Thillman, Evaluator-in-Charge, (312) 220-7666
John Dicken, (202) 512-7135
Randy DiRosa, (312) 220-7671

STAFF ACKNOWLEDGMENTS

In addition to those named above, the following individuals made
important contributions to this report:  Paula Bonin provided
computer programming for the analysis of the Current Population
Survey; Steve Machlin provided general statistical review as well as
computer programming for the analysis of the National Health
Interview Survey; Craig Winslow provided legal review; Leslie Albin
edited the report; and Jonathan Blum assisted in data analysis and
presentation. 


RELATED GAO PRODUCTS
============================================================ Chapter 1

Health Insurance Portability:  Reform Could Ensure Continued Coverage
for Up to 25 Million Americans (GAO/HEHS-95-257, Sept.  19, 1995). 

Health Insurance Regulation:  National Portability Standards Would
Facilitate Changing Health Plans (GAO/HEHS-95-205, July 18, 1995). 

Health Insurance Regulation:  Variation in Recent State Small
Employer Health Insurance Reforms (GAO/HEHS-95-161FS, June 12, 1995). 

Blue Cross and Blue Shield:  Experiences of Weak Plans Underscore the
Role of Effective State Oversight (GAO/HEHS-94-71, Apr.  13, 1994). 

Health Insurance Regulation:  Wide Variation in States' Authority,
Oversight, and Resources (GAO/HRD-94-26, Dec.  27, 1993). 

Employer-Based Health Insurance:  High Costs, Wide Variation Threaten
System (GAO/HRD-92-125, Sept.  22, 1992). 

Access to Health Care:  States Respond to a Growing Crisis
(GAO/HRD-92-70, June 16, 1992). 

Access to Health Insurance:  State Efforts to Assist Small Businesses
(GAO/HRD-92-90, May 14, 1992). 

Small Group Market Reforms:  Assessment of Proposals to Make Health
Insurance More Readily Available to Small Businesses
(GAO/HRD-92-27BR, Mar.  12, 1992). 

Private Health Insurance:  Problems Caused by a Segmented Market
(GAO/HRD-91-114, July 2, 1991). 

Employee Benefits:  Improvements Needed in Enforcing Health Insurance
Continuation Requirements (GAO/HRD-91-37, Dec.  18, 1990). 

Health Insurance:  Cost Increases Lead to Coverage Limitations and
Cost Shifting (GAO/HRD-90-68, May 22, 1990). 

Health Insurance:  Hospital Indemnity and Specified Disease Policies
Are of Limited Value (GAO/HRD-88-93, July 12, 1988). 


*** End of document. ***