People who want health insurance but don't get it from their job or the government must buy coverage on what's called the individual insurance market.
Unfortunately, it can be an unhappy place for consumers.
"A lot of people who have never tried to get their own insurance really have no idea how challenging it can be," said Kris Lang, 47, of Minneapolis.
In Minnesota and most states, insurance companies can deny policies to individuals because of an applicant's health status or risk factors. But that will change in 2014 when the federal health law requires insurers to offer policies to all comers, regardless of their health status.
The change excites consumers like Lang, who recently was diagnosed with thyroid cancer and expects to be buying an individual health insurance policy again in the future. But it's just one part of a complicated transition for the individual market that leaves insurers -- and even some patients -- apprehensive.
"The rates for individuals are going to skyrocket because health insurance plans are worried that all the sick people are going to flock to them," predicted Kay Malchow, a 52-year-old Minneapolis resident who has shopped on the individual market.
Traditionally, the individual insurance market has served as the place where people go for coverage during times of transition, said Karen Pollitz of the Kaiser Family Foundation, a health policy group in Washington, D.C.
People need individual health insurance, she said,when things like a divorce or a decision to become self-employed lead people away from job-based benefits. Young workers in jobs without health insurance turn to individual policies, Pollitz said, as do people who find their access to government or job-based coverage is lost with a change in income.
About two-thirds of those with individual policies hold them for less than two years. That's because people tend to prefer the subsidies and richer benefits that come with coverage through employers or the government, Pollitz said.
"The individual insurance market has been kind of the weak link in the system because it's lacked subsidies, and it discriminates against people with pre-existing conditions," Pollitz said. "With the health law, they're rewiring the individual insurance market. ... It is supposed to be more like the employer and government markets."
Nationally, about 15 million people buy individual insurance policies compared with about 49 million people who lack health insurance altogether, Pollitz said. One of the primary goals of the health law is to offer both incentives and tax penalties that will get more individuals to buy coverage through health exchanges -- new marketplaces that will start operating late next year.
On the incentive side, the law offers premium credits to people with incomes up to 400 percent of the federal policy level. In today's dollars, that would mean subsidies for individuals with incomes up to $44,680 and families of four with incomes up to $92,200.
Subsidies will be bigger for individuals and families that are closer to the poverty line.
People with incomes at 300 percent to 400 percent of the poverty level, for example, will be expected to contribute 9.5 percent of their income to the overall premium, with the government contributing the rest. Those with incomes at 133 percent to 150 percent of poverty, meanwhile, will get a bigger subsidy and be required to contribute only 2 percent to 3 percent of their income for premiums.
The subsidies make it complicated to explain exactly what will happen to an individual's out-of-pocket cost for health insurance in 2014.
On the one hand, individual insurance premiums in Minnesota are expected to increase by 26 percent to 42 percent, according to an analysis completed in April by MIT economist Jonathan Gruber for the Minnesota Department of Commerce. But most won't see an increase in out-of-pocket costs, Gruber predicted, because of subsidies.
"Approximately 70 percent of the individual market will experience either no change or premium decreases," his report stated. "The tax credits available to low income families through the (federal health law) and the exchange will offset overall premium increases."
Even so, health insurers remain concerned that healthy people who currently don't have coverage still won't be drawn by the subsidies to buy insurance. That's where the federal health law's controversial mandate for individuals to buy coverage or pay a tax comes into play.
In 2014, those who lack coverage must pay a tax penalty that's the greater of 1 percent of income or $95 per year, up to a maximum of three times that amount per family. The size of the penalty increases by 2016 to the greater of 2.5 percent of income or $695 per year (with the flat fee reaching up to $2,085 for families).
Will the stick be big enough?
"Even when the health law was initially passed, there was a general sense in the industry that the amount of the penalty wouldn't be a large enough stick to get everyone in the market," said Geoff Bartsh, vice president for public policy at Medica, a Minnetonka-based health insurance company.
Insurers assume that people with health problems will jump at the chance to buy coverage more easily in the individual market once pre-existing condition exclusions go away. For the new individual market to work, however, it also must attract people who don't have health problems, Bartsh said.
"If the people who are buying individual insurance are only sick people, it's going to be really expensive," he said. "You always need people paying into the risk pool who aren't taking as much out in order to spread the costs of those who need more health services."
Premiums in the individual market will go up for a number of reasons, predicted Andrea Walsh, executive vice president of Bloomington-based HealthPartners.
First, the federal health law imposes new taxes on insurance policies. Second, most individual insurance policies currently come with leaner benefits than will be required under the health law, so richer benefits will drive higher costs.
Third, the individual market is expected to absorb the bulk of patients currently covered through the Minnesota Comprehensive Health Association (MCHA), a nonprofit group that operates a high-risk pool for some 26,400 state residents. Patients covered through MCHA have higher average medical costs, so the nonprofit group hopes to transfer patients into the individual market over several years.
If MCHA patients were to move into the individual market all at once "that would create a significant amount of marketplace disruption and greater challenges to affordability," Walsh said.
Another unknown for the individual market, Walsh said, is how many employers will continue offering health insurance coverage once the federal law kicks in. If firms drop their health plans, those employees will move to the individual market or the state-federal Medicaid health insurance program, depending on their income level.
"You can't say the individual market gets bigger by 'x' percent because there are so many pieces that come into play," Walsh said.
Currently, about 250,000 people in Minnesota purchase coverage through the individual insurance market. By 2016, the number of people buying individual policies through the state's health exchange is expected to reach 340,000 people, according to the Minnesota Department of Commerce.
State officials who are planning a health exchange for Minnesota have likened it to Expedia, Travelocity or other websites where individuals can purchase airplane tickets. The exchange will include a phone-based system for people to shop for coverage, but the new website is what intrigues Roger Feldman, a health insurance expert at the University of Minnesota's School of Public Health.
"Let's hope the experience of shopping will basically be: One click and you've bought your policy," Feldman said.
The exchange itself offers another set of unknown changes for the individual market, Feldman said, since the marketplace could boost efficiency by letting consumers do a better job with comparison shopping. Currently, administrative costs for individual insurance policies are quite high, he said.
Pollitz of the Kaiser Family Foundation said it's understandable that insurance companies have fears about whether healthy uninsured consumers will resist the call to buy coverage on exchanges. But the concerns might not materialize, she said.
In Massachusetts, a similar law with relatively modest penalties in the early years nonetheless drove most people to get coverage, Pollitz said.
"People have life changes, and that's when they need the individual market," she said. "Now, people can kind of flow -- your life can change and there will always be a place for you."
Christopher Snowbeck can be reached at 651-228-5479. Follow him at twitter.com/chrissnowbeck.
AFFORDABLE CARE ACT
This is the second of two reports on the impact of the new federal health law.
Today: A look at the issues individuals face in buying health coverage under the law.
Sunday: A look at the issues employers face with the law. Story can be found at TwinCities.com