Do-It-Yourself Insurance

There is a competitive market for individual insurance policies. But you may want to think twice before sending your employees off on their own.

For more than six years, the PGA Tour searched for a way out of a vexing sand trap: how to provide health insurance to the tour's 200 caddies. Like players, caddies are independent contractors. Sure, the PGA Tour could cover them under the group insurance policy it offers its 3,000 full-time employees, but since caddies work some years and not others, that would be an administrative nightmare. And then there was the cost: an estimated $1.4 million a year.

But not covering the caddies no longer seemed like a good option either. "As an organization, we want to support the caddies' well-being," says Andrea King, the tour's vice president of treasury and administration. Indeed, the caddies' health insurance woes already had proved to be a public relations problem for the PGA, when golf legend Tom Watson's longtime caddy, Bruce Edwards, died of Lou Gehrig's disease in 2004. Because Edwards had no health insurance, Watson paid tens of thousands of dollars out of his own pocket for his caddy's treatment. Heartwarming. But a player's generosity isn't exactly an insurance policy.

So King was intrigued when a benefits consultant suggested a new strategy last year: Give the caddies a predetermined amount of cash and let them buy their own individual policies from insurance companies. The caddies would have coverage, whether or not they were working, and the tour would avoid administrative annoyances and keep a lid on costs. "The light bulbs started popping," King says. "We started to realize that this could really work."

Individual health insurance? Aren't such policies hopelessly complicated and prohibitively expensive? Not necessarily. As the number of people without employer-sponsored insurance grows, and as so-called consumer-directed health care plans like health reimbursement arrangements (HRAs) and health savings accounts (HSAs) become more popular, insurance companies are rolling out new policies geared to people buying on their own--with little to no employer involvement. And benefits consultants are increasingly encouraging business owners to consider them.

Contrary to their reputation, individual insurance policies are often less expensive than group policies. In 2004, annual premiums for plans purchased individually averaged $2,268 for a single person and $4,424 for a family, according to America's Health Insurance Plans, an industry trade group in Washington, D.C. That's about half as much as the average annual premium for employer-sponsored coverage of individuals ($4,024) and families ($10,880). "Individuals can purchase a wide range of affordable coverage," says AHIP CEO Karen Ignagni, who expects insurers to offer more individual policies in the years to come as the trend toward consumer-directed health care gathers momentum.

Here's how it works: Companies create accounts for employees and each year fund the accounts with enough cash for employees to pay for all or a portion of their own policies. Under the plan the PGA Tour launched in 2005, caddies get an annual subsidy of $1,000 each, which should cover about half of the average single person's individual policy or about a quarter of the average family policy. The cost to the tour: $200,000, about one-seventh of the cost of the group plan. Paul Zane Pilzer, an economist and author of The New Health Insurance Solution, argues that with savings like that, employers should move toward canceling their group policies and encourage all of their employees to purchase their insurance individually.

But before you rush to cancel your group policy, there are some important factors to consider. For one, individual insurance is cheaper than group policies because, in 46 states, insurers may "medically underwrite" individual applicants--that is, examine the health of each applicant and adjust the premium accordingly. (In the four states that forbid underwriting--New York, New Jersey, Washington, and Maine--individual policies tend to be extremely expensive, even for healthy applicants.) Those who make it through the medical underwriting process--about 85% of all applicants, according to AHIP--tend to be young and healthy, and therefore worthy of a cheaper premium. They're also more likely to be willing to take bare-bones policies--hence the relatively low average premiums.

An applicant with a chronic condition or one who is at risk for developing one, on the other hand, may face what's known as an uprating--a boost in the premium of 15% to 50%. Or the applicant may face an exclusion, in which the insurer provides coverage for everything except for what's likely to be an expensive health problem. (In other words, a diabetic may be able to obtain only a policy that doesn't cover expenses relating to the diabetes.) An insurer can also reject an application and deny coverage altogether. At this point, 88% of insurance applicants are approved, about three-quarters of them without uprating or exclusions, according to AHIP. It sounds promising, but bear in mind that most brokers discourage likely rejects from even bothering to apply.

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