A Proposal to Create Personal and Portable Insurance in Texas

Published March 1, 2002

Managing editor’s note: In the February 2002 issue of Health Care News, we presented a discussion of Texas’ uninsured problem written by John C. Goodman of the National Center for Policy Analysis.

Here, Goodman offers a brief outline of a proposed solution to the uninsured problem in Texas … and nationwide.

How can the purchase of health insurance be changed to allow greater consumer satisfaction with the health care coverage? This is a proposal to combine the advantages of individual insurance with the advantages of group insurance and avoid the disadvantages of both. This new, hybrid form of insurance will be called New System Plans (NSPs). Employers who assist their employees in entering NSPs through the payment of premiums will be called Defined Contribution Employers (DCEs).

Advantages, Disadvantages of Group Insurance

The advantages of group insurance are

  • employers’ premiums are paid with pretax dollars;
  • economies of scale in purchasing; and
  • avoidance of the costs of underwriting.

However, because such contracts are typically only one year in duration, the insureds have no reasonable expectation that if they get sick they will be able to see the same doctor or remain in the same network the following year. Employers can choose a different plan with different benefits and different provider networks. Also, employees eventually lose the right to continue participation in the plan if they quit work or are fired.

Advantages, Disadvantages of Individual Insurance

The advantages of individual insurance are

  • guaranteed renewability (once in a health plan, insureds have the right to remain there indefinitely);
  • premium increases reflect the costs of the plan as a whole and not the changes in health status of individual members; and
  • the insurance is portable (unaffected by job changes).

The disadvantages of individual insurance are

  • premiums must be paid with after-tax dollars (except for a partial deduction for the self-employed);
  • higher administrative costs; and
  • the costs of medical underwriting

Best of Both Worlds

Texas law should be changed to allow employers to buy personal and portable insurance for their employees. Even though employers initially would pay the premiums (as they do today), this insurance would be owned by the employees and would travel with them as they move through the labor market. Thus employees would get portable insurance (a characteristic of individual insurance), but they would get it at premiums that are closer to the norms of group insurance.

Although it is envisioned that employers initially will buy all their employees into the same NSP, with the passage of time some of those employees will leave and go to work for other firms. Employers will also hire new employees who are members of other NSPs. And, in most cases, the employer’s initial group of employees will be able to switch to other NSPs after a transition period.

The typical defined contribution employer, therefore, can eventually expect to have employees in different NSPs. Indeed, it is possible that every employee will be in a different NSP.