The Affordable Care Act (ACA) and the California Health Benefit Exchange that the health care reform law spawned could increase the market size for individual health insurance in California by more than five times by 2020, raising the number of individual policy holders in California to approximately
 10 million by 2020. Much of this increase will likely be net new additions as many for the state’s 7 million uninsured enter the market through federally subsidized private insurance. At the same time, it is likely that the rise of the individual insurance market will disrupt the existing employer group market serving 15 million Californians
.

Employers Will Substitute Individual Coverage

As the individual market evolves with the advent of Covered California and subsidized individual plans for lower-income workers, smaller employers are likely substitute individual for group coverage. Should the individual market advance sufficiently, many employers will be able to drop group health benefits altogether without suffering in the market for talent. Also, despite the tax credits available for providing insurance to employees, in some cases, it may be more economically attractive for larger employers to terminate the benefit and pay the penalty ($3,000 per person per year). This will lead many more individuals to find their way to the Exchanges and the individual market.

Individual Consumers Not Well Served Today

Historically, the commercial health insurance industry’s primary customer has been employers. The individual insurance market has been a relatively immaterial fraction of industry revenue. The ways that an individual and an employer make purchase decisions are different, each values the coverage and service trade-offs with a different yardstick. Individuals only care about their own family’s needs 
and balancing their health care requirements with their household budgets. Most workers feel they have no choice in the selection of their coverage. However, the employers make up for the lack of choice by paying most of the cost. Consequently, since the health insurance market traditionally has been largely a business- to-business wholesale transaction, it has evolved into a complex system with limited flexibility for employee customization.

Build-Your-Own Customization Demanded

The byword in the individual market is customization so that consumers can make the choices they feel are best for them. Product variables, such as higher cost-sharing levels, health savings accounts, a more limited or lower-cost group of network providers, different plan designs, patient compliance and wellness incentives, and lower-cost self-service options, are examples of choices that would lower the overall cost of the premium. A successful health plan operating model and enabling technology that gives the subscriber the opportunity to make these choices real-time and online is a very different model than the mature employer-based model currently 
in use. Today, there simply is no model in the health plan world of “build- your-own,” but there is no good reason why, other than the market served by health insurers did not demand it. The new individual market will.