Should Congress look to the states? – health insurance market – Health Reform 2

Should Congress look to the states? – health insurance market – Health Reform 2 – Cover Story

Steven Findlay

Sweeping changes are out, incremental reform is in. Most of the ideas for revamping the insurance market for small busineses. have been tried at the state level What will those experiences teach Washington lawmakers?

Congress may finally be getting down to the hard business of health reform. Either this year or next, legislators are almost certain to enact a law that will reform and regulate the health insurance market for small businesses nationwide. This is the essential component of so-called “incremental” reform and the fallout from last year’s failed effort at larger changes.

A package of insurance regulations is included in almost every serious health reform bill proposed this year. President Clinton has endorsed such reforms, as have Speaker of the House Newt Gingrich (R-Ga) and Senate Majority Leader Robert Dole (R-Kan).

The proposed bills, about 10 at last count, would require insurers and managed care plans to sell to all applicants in the small-group market–a measure widely known as guaranteed issue. They would limit exclusions for pre-existing conditions, and most would guarantee renewal and portability of coverage. A few would create rating bands that limit the difference between the lowest and highest premiums charged to different groups of employers. And several would phase in modified community rating. Others propose purchasing alliances and medical savings accounts.

If these measures sound familiar, there’s good reason. Forty-seven states have passed some, most, or all of them since 1990. (See the map and table on pages 34 and 36 respectively.)

What impact have these laws had? Have they made coverage more accessible and affordable? Have they stabilized an increasingly shaky small-group insurance market? And why should the federal government pass a major new regulatory law in an area already addressed by the majority of states?

The answers to these questions are, alas, not terribly straightforward. The fact is no state has formally assessed the impact of its small-market reforms, and few private studies have attempted to do so either. At a major conference on the issue in March–convened by the Alpha Center, a Washington, D.C.-based state health policy think tank-experts bemoaned the lack of data in such a crucial public policy area. “What we know is almost all anecdotal at this point, and the confounding variables are so numerous that we cannot yet be sure what’s really going on out there,” said John Colmers, executive director of the Health Care Access and Cost Commission for the State of Maryland.

Stephen Bandeian, a senior manager at Lewin-VHI, a health economics research group in Fairfax, Va., and co-author of the keynote paper at the Alpha Center conference, agreed. He added that the data is “not going to be easy to get, because many states don’t even know where they started out before the reforms were passed.”

A study released in March underscored this problem even as it raised new questions about the true impact of some insurance market reforms. Conducted by the Intergovernmental Health Policy Project (IHPP), a Washington, D.C.-based research group specializing in state health policy, the study found that in 12 states, reforms such as guaranteed issue, renewability, and portability had not appeared– yet–to lower (or raise) premiums or extend coverage to a significant number of small employers or their employees.

The reason, concluded the researchers: Market reforms don’t put money in the pockets of small business owners to buy health insurance. And cost, says co-author Kala Ladenheim, is the single biggest reason small employers give for their inability to purchase coverage.

But Ladenheim and her cob leagues are quick to acknowledge that their methodology was severely limited. The study was not based on analysis of insurance or employer data but on interviews with insurance commissioners in the 12 states.

Nevertheless, some valuable insights emerged. The commissioners told the researchers, for example, that the reforms had not “destabilized” the insurance market, as some had feared they might.

Only two states, Rhode Island and North Dakota, reported that a significant number of carriers (six and 10, respective]y) left the market. In Indiana, one insurer canceled its small-group coverage. But on average about 25 to 30 carriers continued to serve the small group market in each state. Most insurers also appeared to be complying with the regulations, although Arkansas, New Mexico, and North Dakota had all suspended some for non-compliance.

What concerned the commissioners far more, however, were strategies small businesses were using to circumvent the regulations and preserve a risk-segmented market. The three routes noted were: becoming self-insured and thus avoiding, under the terms of ERISA, any state regulation; forming unauthorized associations (MEWAs, or multiple employer welfare associations) or purchasing groups to buy insurance not covered under the regulations; and purchasing high-deductible policies sold as stop-loss or reinsurance, which are not subject to the small-group market laws.

“There was a lot of concern that these practices could ultimately erode the small-group market,” says Ladenheim. A typical strategy for a small business, she says, might be to self-insure up to $1,000 and buy a stop-loss policy for larger amounts. This approach has already prompted some states to consider limiting the circumstances under which stop-loss coverage or reinsurance can be purchased. Employer groups argue that small businesses should have the right to self-insure and pursue any strategy that will reduce their cost. “Frankly, we don’t see the problem here,” says Jim Weldman, a spokesman for the National Federation of Independent Business, which represents 600,000 small businesses nationwide. “The aim of insurance reform is to extend coverage to small businesses. If they are covering their workers this way rather than the way states want them to, well, why not?”


Another reason insurance market reforms may have had limited impact so far is simply ignorance. A study of 2,800 small businesses found that in 1993 an astonishing 98 percent were unaware of changes in insurance underwriting laws enacted in their states between 1900 and 1993. The study was conducted by Gail Jensen at Wayne State University in Detroit, who thinks it’s very likely that a much higher proportion of small employers are aware of these reforms today.

Indeed, a couple of states have more recently reported promising spurts of new coverage in the small-group market. In Florida, for example, the number of lives covered through small-group plans totaled 840,000 in March, up from 605,545 in December 1994. And that doesn’t include the lives covered under the state’s new voluntary community health purchasing alliances (CHPAs). Since they formed last year, 8,326 employers have sought coverage through the alliances; 45% of these businesses previously did not provide it.

New Jersey has also reported a boost in coverage from reforms aimed at the individual market but attracting mostly people who work for small businesses. Leon Moskowitz, special deputy of insurance in New Jersey, says about 47,000 people have become insured since August 1993. The state is now phasing in regulations that apply to companies with two to 49 full-time employees.

In assessing potential impact, however, Jensen and other researchers point out that some insurance reforms aim at problems that afflict a minority of small businesses. Only about one in five small employers in two recent surveys– one by Jensen and another by Catherine McLaughlin and Wendy Zellers of the University of Michigan-said they had ever been denied coverage because they were a bad risk or had employees in ill health or with pre-existing conditions.

Jensen and McLaughlin (who studied 2,400 urban, small businesses with two to 25 workers) also found that three out of four had been solicited to buy coverage. “Most small firms have ample opportunity to obtain coverage if they want it,” concludes Jensen.

Overall, the studies showed that 45 to 55 percent of businesses with one to nine workers offer coverage, as do 70 to 80 percent of firms with 10 to 25 workers. That may sound like a lot, but nearly 20 million of the 41 million uninsured Americans are either self-employed or work in firms with 25 or fewer employees.

Both research efforts revealed the chief reasons small-business owners don’t purchase or offer coverage: Besides the price tag, there are the administrative hassles, the fear of having to cancel coverage if profits erode or a recession hits, and the fact that employees don’t demand it so employers don’t see it as a high priority.

Concludes McLaughlin, “Small-group market reforms alone can’t and won’t solve the problem of the uninsured. They are a quick fix that really only has an effect at the margin.”

If money is a major obstacle, will financial aid help? Some states have supplemented their insurance reforms with subsidies or tax breaks tied to the purchase of health insurance. But most of these programs have offset no more than 10 to 30 percent of the price, says Joel Cantor, director of evaluation research at the Robert Wood Johnson Foundation, Princeton, N.J. “You do get a small uptick in the number of businesses that will offer coverage but, as seems logical, you do not see a large effect with small subsidies. The price still remains too high for most of the smallest businesses,” Cantor says.

A demonstration project in Tampa, Fla., for example, subsidized 25 to 40 percent of the cost of HMO coverage for businesses with two to 19 workers. After a year, 43 percent of small businesses had heard of the program but only 9 percent had enrolled. A subsidy program in New York delivered premium discounts of up to 50 percent but still enrolled only 3.5 percent of businesses with fewer than 20 workers.

Lack of participation aside, there’s a key concern with subsidy programs: What the state gives, the state can take away. Indeed, 11 states had subsidy or tax credit programs in 1991. By 1993, the number was down to eight. Maine and Michigan dropped their programs in the past year, and subsidies are on the ropes in Washington and Florida.


About 25 states took another tack to try and help small businesses. Beginning in the late 1980s, they passed laws exempting uninsured small businesses from state health insurance mandates–effectively letting carriers sell so-called “bare bones” or “basic” policies at reduced prices.

This effort was mostly a flop, says Patricia Butler, a consultant for the National Academy for State Health Policy. Waiving mandates reduced premiums by only about 10 percent. To get them down 20 to 40 percent, carriers raised deductibles and co-payments to levels that small businesses found unattractive. “Small employers want both good coverage and good value,” Butler says. “They don’t want inferior products and policies.”

Many states now are headed in the opposite direction, toward relatively comprehensive standard policies and modified community rating. In 1991, the National Association of Insurance Commissioners (NAIC) put forth a model reform law with a nine-tier risk and rate stratification system for carriers serving the small-business market. Between 1991 and 1993, 24 states enacted reforms based on this model, but many found that rates varied too much under the NAIC system. As a result, eight states have moved to stricter rating bands and more will follow in the next two years.

In March, NAIC itself voted to replace its band approach with a modified community rating model. The measure would allow insurance premiums to vary with age, family composition, and geographic location only. And it calls for a maximum 200 percent variation between the lowest and highest cost plans, to be phased-in over five years.

Not incidentally, the new model would ultimately apply insurance reforms and modified community rating to the selfemployed and part-time workers. Although the current model does not, many states have acted on their own to enfold the self-employed. In addition, NAIC would reduce the limit on pre-existing condition exclusions from 12 to six months. Versions of this new model are almost certain to be adopted by a majority of states over the next few years, given the emerging consensus that rating bands are too confusing, allow insurers to rig the system, and permit too much price variation. Indeed, 14 states already have imposed modified community rating.

The larger question is whether this puts states on a path to pure community rating–that is, with all small groups paying essentially the same rate, regardless of age and health risks. Six states have enacted this approach. One–Washington–voted to repeal community rating last month. In two states, Virginia and New Jersey, it is being phased in over the next several years.

But the state that made the boldest move and drew the most attention is New York. Its pure community rating regulation, affecting individuals and employers with three to 50 workers, went into effect in 1993.

The prediction, of course, was that rates would rise for the young and healthy and for those who had benefited from experience rating. That did occur. Some small firms saw premiums rise 20 to 30 percent, but for most the rise was 10 percent or less; and just as many saw their rates decline. Then last year a study by the actuarial firm Milliman and Robertson concluded that some 500,000 fewer people were covered by individual and group contracts in the state one year after the law was implemented.

New York’s insurance commissioner said the study was flawed because it compared Census Bureau estimates of the number of people insured at any point in 1992 with insurance company figures for the number of policies in force at a single point in 1993. He denied vigorously that many people had dropped out. “We don’t believe the legislation has had a major impact in terms of increasing or decreasing the numbers of uninsured,” says Fred Bodner, the state’s assistant deputy superintendent of insurance. A study released earlier this year by Deborah Chollet of the Alpha Center backs up that claim. She found the number of individual and small-group policies in force in New York between March 31, 1993 and January 1, 1994 declined by just 1.2 percent. This included a drop of 43,666 individual policies and an increase of 4,286 small-group policies.


Over the long haul, states view ERISA as the most serious limiting factor in insurance reform– and health reform in general. This is where the federal government might play an all-important role.

Most analysts agree that state efforts to create a level playing field could be undermined by the trend toward self-insurance among small businesses. Those with healthy young workers will increasingly opt out of the regulated system by forming ERISA-qualifying benefit plans.

“This will over time drive rates in the regulated market higher and higher and actually cause small businesses that can’t self-insure to terminate coverage,” predicted Lee Greenfield, a representative in the Minnesota legislature, in testimony to a congressional committee last March. Greenfield also chairs the Reforming States Group, made up of lawmakers from 24 states.

The group wants Congress to establish a national framework for health insurance and benefits, one that includes most of the elements of small-market reform. Within the framework, large companies could continue to self-insure but small employers could not, and states could implement their own reforms to extend coverage or contain costs.

NAIC and the National Governors’ Association endorse a similar approach.

Needless to say, this idea would require substantial revisions to ERISA. Business groups of all sizes are adamantly opposed, and the small-business community, represented by the National Federation of Independent Business (NFIB), supports a bill that would go in the opposite direction.

Proposed by Rep. Harris Fawell (R-Ill), that bill would amend ERISA and permit small businesses to form purchasing co-ops in order to self-insure and create ERISA-qualifying health benefit plans. A companion bill, also proposed by Fawell, would impose national insurance regulations pretty much along the lines that most states have passed.

The bill has two things going for it: Fawell chairs the House Subcommittee on Employer-Employee Relations, which has jurisdiction over ERISA. And NFIB, a powerful player on Capitol Hill, backs it to the hilt. NFIB President Jack Faris enthuses: “This is an excellent starting place for health reform. We endorse the concept of extending ERISA to give small employers parity with big business in the purchase of health coverage.”

There are three other reasons Congress might (some say should) consider enacting federal insurance and health benefit reforms.

(1) Only the federal government can establish rules that guarantee policies are “portable” for people who move from one state to another.

(2) States alone cannot assure continuity of coverage for workers who move from, say, a full-time job with a small business to a part-time job with a large self-insured firm.

(3) Federal legislation might better regulate trade and professional association plans and self-insured multiple-employer purchasing cooperatives. Only a handful of states require that association plans conform to the new insurance rules, allowing a form of risk selection based on occupation even while insurers are barred from using such criteria to experience-rate.

Co-ops formed by small businesses present a different set of problems. Intended to pool purchasing power and risk, some enroll only employers with healthy workers. Others permit only self-insured companies to join. And some are multi-state.

Finally, notes Rick Curtis, president of the Washington, D.C.-based Institute for Health Policy Solutions, lawmakers may simply want to establish uniform health insurance consumer protection for all Americans.

What will Congress do? Last year, insurance reforms were considered the easy part of remaking the health-care system. Sentiment against insurers and their most egregious discriminatory practices was strong. But despite some political momentum, it’s becoming increasingly evident they won’t be easy to enact this year.

For one thing, some conservative Republicans are bound to notice sooner or later that reform entails sweeping federal regulation of a major industry. Granted, it’s an industry that is already regulated thoroughly by the states. But the political impetus in Washington since last November has been to devolve control to the states, not the other way around.

For another, once the issue takes the national political stage, those who benefit from experience rating could fight fiercely to preserve the status quo. Several groups representing small insurers (notably, not the Health Insurance Association of America) have already come out with ads saying that guaranteed issue is tantamount to guaranteed premium hikes for many small businesses.

The lack of hard evidence from the states could complicate matters further. But lawmakers don’t always demand results from the “laboratories of democracy.” Sometimes it’s sufficient that the states have taken action, even if those actions haven’t yielded substantial benefit

Writing in the Spring 1995 issue of the journal, Health Affairs, Judy Feder and Larry Levitt, both of the Department of Health and Human Services, warn that we could see a replay of last year’s conflicts when the debate on incremental changes gets down to brass tacks: “The fact is that the specifics of insurance reform are highly controversial.”

A bold Congress acting decisively and with bipartisan consensus could cut its way through both the political morass that ERISA will pose and the more pedantic but equally confusing sludge that insurance market reform will present. But it’s also possible that ERISA will evolve into the political “third rail” of incremental health reform: Touch it and you die.

Working in favor of action this year is the fact that insurance reforms don’t cost the federal government any money. In addition, Republicans want badly to deliver what Clinton couldn’t. The outcome of the budget and Medicare/Medicaid battles now underway will also determine the political dynamic on health issues for the remainder of the year. In all, it may be another summer of health-care discontent in Washington. [TABULAR DATA OMITTED]

Insurance reforms:

A glossary of key measures

Community rating

Requires insurers to charge all employers in a defined community the same premium, despite variations in actuarial risk, age composition, or health status; allows family status to be used in rate setting, however.

Fair market practices

Prohibit insurers from giving brokers explicit incentives or penalties to sell only to low-risk employers.

Guaranteed issue

Requires small-group insurers to offer coverage to any employer that applies regardless of the present health of its employees.

Guaranteed portability

Allows people who switch jobs and/or insurers to have continuous coverage without fulfilling a new waiting period for pre-existing conditions.

Guaranteed renewal

Requires renewal of coverage for previously insured employers; prohibits cancellation of a policy because of changes in enrollees’ health status or submission of claims.

Modified community rating

Prohibits insurers from using the health status, actuarial risk profile, or claims experience of individual employers to set premium rates. Permits the use of demographic factors, within limits.

NAIC rating model

Permits insurers to form up to nine classes of risk; limits the difference between highest and lowest rates to 25 percent within classes and the variation between classes to 20 percent (adopted by the National Association of Insurance Commissioners).

Pre-existing condition exclusions

Specify the maximum period of time–typically, six or 12 months– that an insurer can exclude a new policyholder from coverage for care relating to a condition he has had diagnosed or been treated for in the past.

Rate bands

Limit the difference between the lowest and highest premium rates an insurer can charge. Allow risk factors and prior experience to be used in setting rates.


Either requires or allows insurers to take out their own policies as protection against excessive loss in the event of unanticipated large claims.

Source: Intergovernmental Health Policy Project; The George Washington University, Washington, D.C.

Linda Loranger writes frequently about health care. She lives in Washington, D.C.

COPYRIGHT 1995 A Thomson Healthcare Company

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