Why Grow the Nongroup Insurance Market: It's the (Freelance) Economy, Stupid
In late October 2018, the Trump Administration announced a policy that may stabilize, and strengthen, the nongroup health insurance marketplaces created by the Affordable Care Act (ACA). The nongroup market refers to a private insurance market where individuals and families can shop for health insurance plans if they are not eligible for public programs and do not have the option to purchase adequate health insurance from their employer because they are unemployed, self-employed, or their employer does not offer comprehensive plan options.
Strengthening the nongroup health insurance market could be a catalyst for entrepreneurship and a necessity if the freelance economy continues to grow. Today, nearly one-third of Americans work in freelance-type positions, which often do not offer health benefits. A robust individual market for health insurance could allow more workers the flexibility to leave corporate positions for smaller businesses without losing their benefits.
The Administration’s new policy, which was first laid out by President Trump via executive order a year earlier, would allow Health Reimbursement Arrangements (HRA) to be used for health care expenses and premiums on nongroup health insurance plans. HRAs are financial accounts, funded by employers with pre-tax money, that employees can use for health-related expenditures. Previously, HRAs were restricted from being used in conjunction with nongroup insurance plans. The new policy would allow employers to fund HRAs for use in the nongroup market in lieu of offering employees an employer-sponsored health plan. This policy change could create a shift away from employer-sponsored health insurance towards nongroup health insurance.
Under the new policy, employers that offer a class of employees HRAs for use in the nongroup market would have to provide the same HRA benefits to the entire group, regardless of health status. This provision would prevent employers from offering insurance plans to healthy employees while driving less healthy employees to the nongroup market. As employers switch from offering health plans to offering nongroup HRAs, more consumers will purchase plans in the nongroup market, expanding the risk pool and potentially lowering costs. An affordable insurance market requires a broad risk pool of consumers. For all types of insurance (life, fire, auto, etc.), entities that provide insurance charge a premium for coverage, the cost of which is calculated based on expectations of risk, and magnitude of payout, across the covered population. A larger covered population means that the risk of any single payout is mitigated by additional premiums from other consumers. Although premiums are affected by the average health risk of the consumer pool, a larger pool would make it more likely that there are young, healthy consumers in the pool.
Currently, the nongroup market only covers about 10 percent of US citizens, though it will be a market segment with growing importance should freelance employment continue to increase. There was a “substantial rise in the incidence of alternative work arrangements for U.S. workers from 2005 to 2015,” as reported by a National Bureau of Economic Research (NBER) paper. The increase is at least partially attributable to technological changes, greater use of contractors, and worker demand for flexibility, all trends with the potential to continue. Freelance jobs are appealing in that they often offer more flexibility and freedom. However, as these alternative work arrangements are usually part-time or do not require the worker to be an official employee, they often do not come with benefits.
In the United States, most people purchase health insurance through their employer. Employer-sponsored health insurance came about during World War II; as part of the war effort, businesses were barred from raising wages, so they turned to fringe benefits to attract talent. Today, employer-sponsored insurance is attractive to consumers because premiums can be purchased using pre-tax dollars. The HRA policy would extend preferential tax treatment of health insurance premiums to the nongroup market, which would increase interest in plans purchased in this market.
In economics, the term “job lock” refers to the constraints felt by employees to stay in a job so as not to lose health insurance benefits. Pre-ACA, workers, especially the one-third of Americans with pre-existing conditions, would have to weigh receipt of health benefits against entrepreneurship, small business opportunities, or freelance work, knowing that in the nongroup market their conditions likely would not be covered (or not affordably covered). By requiring insurers to cover all pre-existing conditions, the ACA created opportunities for entrepreneurship and freelance work by allowing workers to venture out of large corporate jobs with the confidence they could still purchase quality health insurance.
Letting employees use HRAs to purchase plans in the nongroup health insurance market would expand the nongroup risk pool, which could stabilize the insurance markets and foster an atmosphere conducive to entrepreneurship and movement in the job market. As long as the nongroup market is regulated so pre-existing conditions are protected and consumers are aware of the coverage they are purchasing, a more robust nongroup market could spur economic development.