Changes in Coverage in the Individual and Group Health Insurance Markets and the Effect of Health Status - Executive Summary


Bradley Herring, Ph.D.

Johns Hopkins University, Bloomberg School of Public Health

Xue Song, Ph.D.
Thomson Medstat

Mark Pauly, Ph.D.
University of Pennsylvania, Wharton School

This report was prepared under contract #HHS-100-03-0022 between the U.S. Department of Health and Human Services (HHS), Office of Disability, Aging and Long-Term Care Policy (DALTCP) and the MEDSTAT Group. For additional information about this subject, you can visit the DALTCP home page at or contact the ASPE Project Officer, John Drabek, at HHS/ASPE/DALTCP, Room 424E, H.H. Humphrey Building, 200 Independence Avenue, S.W., Washington, D.C. 20201. His e-mail address is:

The authors are grateful to John Drabek and Bill Marder for helpful comments on this work. The opinions and views expressed in this report are those of the authors. They do not necessarily reflect the views of the Department of Health and Human Services, the contractor or any other funding organization.


Although the vast majority of privately-insured people in the United States obtain their coverage in the employment-based group market, about 17 million people under age 65 were insured in the individual health insurance market in 2006. About 47 million people, or 16 percent of the total United States population, were without health insurance coverage in 2006. Researchers know relatively little about how the group and individual markets actually function for those with chronic health conditions, and much of what we know is based on point-in-time analyses of insurance coverage. However, insurance coverage is actually very dynamic due to changes in employment and because eligibility for public programs typically depends on income and other criteria. This paper provides an in-depth look at the impact of health status on changes in coverage in these insurance markets using data from the Medical Expenditure Panel Survey (MEPS). We also use these data to examine the effect of health status on changes in premiums in the individual insurance market.



The effect of health status on insurance coverage is complex. People who are in poor health have greater need for insurance, but being in poor health can be a barrier in obtaining coverage. Sicker people are thought to be more likely than healthy people to seek insurance if the amount paid for coverage does not fully reflect their poor health. Expecting this adverse selection, private health insurers are thought to engage in medical underwriting to attempt to screen out some high-risk people from obtaining coverage or charge them higher premiums. For those with coverage in the individual market, provisions ensuring guaranteed renewal prohibit insurers from dropping coverage for high-risk people. However, if insurers increase the premium for all renewals at a rate higher than general medical inflation, this may make healthy people more likely to drop coverage. For those with coverage in the group market, the ability to work can be affected by health status, so some people in poor health may lose their access to group insurance.



The MEPS is an ideal data set to examine these complex relationships. It is a nationally-representative household survey conducted by the Agency for Healthcare Research and Quality since 1996 that collects information on health insurance coverage, health spending, health status, and general demographic, employment, and economic characteristics of a nationally-representative population. Monthly data on insurance coverage were collected from survey respondents for two full years, so it is possible to examine changes in insurance coverage, health status, and premiums paid over time. The rich data regarding chronic health conditions of the survey respondents enables us to construct detailed forecasts of medical spending. Finally, the relatively large sample size of the MEPS (approximately 70,000 non-elderly people from 1996 to 2004) enables us to better examine certain relatively uncommon populations -- namely those with high levels of expected expense and those insured in the individual insurance market.



This paper begins by examining descriptive data for the “stability” of coverage over a two year period. We examine transitions in insurance coverage by the source of initial coverage (e.g., Medicaid, employment-based insurance, and individual insurance), employment type (e.g., “health insurance units” (HIUs) comprised of non-workers, the self-employed, small-firm wage-earners, or large-firm workers earners), and income. Overall, the individual market appears to be less stable than the group market for the population as a whole, but retention rates for coverage are actually comparable between the self-employed in the individual market and wage-earners in the group market, implying that the individual market can be a stable source of coverage for a sub-set of the population best-suited for that market. For example, 91 percent of those with employment-based insurance still have it two years later, compared to 65 percent of those with individual insurance. However, if an individually-insured person is in self-employed HIU, the figure rises to 83 percent. (About 10 percent of those insured in the individual market are in a non-employed HIU, 44 percent are in a self-employed HIU, and 46 percent are in a wage-earning HIU.) We also observe marked differences in baseline insurance status by income level. Almost 85 percent of those above 300 percent of poverty have coverage through employer plans, and only 10 percent are uninsured. However, only 44 percent of those below 300 percent of poverty are covered by employer plans, and 21 percent are covered by Medicaid or the State Children’s Health Insurance Program (SCHIP), and 31 percent are uninsured.

Second, we examine the impact of health status on both insurance coverage at a “point-in-time” and changes in coverage over time. One specification for health status uses a set of 15 chronic health conditions (e.g., diabetes), while a second specification for health status also includes prior-period self-reported health (i.e., excellent, very good, good, fair, or poor). For both specifications of health, unhealthy people appear to be significantly more likely to be covered than healthy people in the group market relative to the individual market. For the first specification of expected expense, we observe a positive relationship between being sick and being insured in the group market and no relationship between being sick and being insured in the individual market. For the second specification of expected expense, we observe no relationship between being sick and being insured in the group market, and a negative relationship between being sick and being insured in the individual market. The addition of self-reported health status appears to reduce the baseline level of coverage (negatively), but the relative effect of health status on group versus individual coverage is the same. When we examine changes in coverage over time, we observe that unhealthy people who are initially-uninsured are significantly more likely to obtain coverage in both the individual market and the large-group market. In addition, sicker people who are initially-insured in the large-group market are significantly more likely to lose their coverage. We speculate that this loss in coverage is due to a loss in employment, but we do not examine this formally.

Third, we examine whether sicker people have more generous coverage (e.g., lower deductibles and copayments) by examining the fraction of total spending covered by private health insurance. Consistent with our expectations, sicker individuals tend to obtain more generous coverage than their healthy counterparts, all else equal. However, the magnitude of this effect does not appear to be large. We also find that the larger the firm one is employed with, the more generous coverage one obtains.

Finally, we investigate whether individual market premiums are higher for those in poor health. We find no evidence that being in poor health is associated with a higher premium, or that the onset of a chronic condition is associated with an increase in the premium from one year to the next. These findings suggest that guaranteed renewability is successful in providing protection against “reclassification risk” in individual insurance markets.