The ripples that will reach your desk – federal insurance reform
About once a decade, the federal government feels the urge to make a serious alteration in our nation’s health care system. In 1948, the McCarran-Ferguson Act gave states broad powers to regulate insurance. In 1954, Congress pronounced employment-based health benefits tax-exempt. Medicare and Medicaid were born in 1965, and 1974 was the birthdate of ERISA. In 1985, a budget amendment required employers to offer terminated workers the 18 months of extended coverage commonly referred to as COBRA. That some change was coming in the ’90s has long been a foregone conclusion.
Talk of health care reform began in earnest in 1990 and was moved to the front burner with the election of Bill Clinton in 1992. The end result of six years of sometimes tortuous policy-making and politics came in August, when the president signed the Health Insurance Portability and Accountability Act of 1996.
The law is too new and complex to fully digest. Dozens of regulations based on its provisions are still to be written, as is a “technical corrections” bill that may be needed to clarify its murkier aspects. With most of its provisions going into effect in 1997 and 1998, it will be years before we know the law’s full impact.
Meanwhile, employers have their work cut out for them, understanding the nitty-gritty of the law and figuring out what they have to do to comply. And that work needs to begin sooner than you may think. A section concerning the way businesses keep track of health benefits is retroactive to October of this year. We have prepared this special section to help you get started.
The new federal law is something of a chimera. As the first national statute on health insurance since ERISA’s 1974 enactment, it is unquestionably important; It establishes new rules for products and benefits and consumer protections in the small group and individual markets, which comprise some 5 million small businesses and 10 to 15 million people who are self-employed.
At the same time, its impact is blunted by the trade-offs that pas@ sage demanded. It mandates accessibility but leaves the hard work of making insurance affordable to the states, and it sanctions a new insurance product – medical savings accounts (MSAs) – that could undermine its other provisions. Most notably, the law is unlikely to extend coverage to the vast majority of the nation’s 40 million uninsured.
The core elements are fairly straightforward. Their primary aim is to make it easier for individuals – particularly the many Americans with chronic conditions – to continue to get health insurance if they change or lose a job or strike out on their own. The measures meant to achieve such portability are similar to those passed in some 45 states over the last decade, and familiar to most employers@ guaranteed issue and renewal of health coverage regardless of health or claims experience and limits on exclusions for preexisting conditions.
Unlike many state statutes, the federal law does not limit the prices health insurers can charge. This despite clear evidence that access without cost constraints is not enough. Even the rating rules in effect in many states have done little to stem the rising tide of individuals and small business owners who can’t afford the premiums. Before we further explore the law’s likely impact on the business community, here’s a review of its core provisions.
Beginning on July 1, insurers (including managed care organizations) must accept any firm with between two and 50 employees that applies for coverage, regardless of the group’s overall health or claims experience. This is called guaranteed issue. This and the other key provisions of the new law also apply to self-insured employers (regardless of size), although the firms retain their ERISA exemption from state mandates. As a practical matter, small businesses that self@ insure will be affected by this change far more than their larger counterparts, since most of the latter group already comply.
Insurers and employers are also barred from basing enrollment or contribution requirements on any employee’s health, and insurers have to renew group health plans except in the case of non-payment or fraud. AH group plans must limit preexisting condition waiting periods to 12 months, with this exception: The time frame for “late enrollles” – eligible employees who initially refuse coverage but later sign on – may be extended to 18 months. In any case, only illnesses diagnosed or treated within six months of the date the new coverage takes effect can be counted as preexisting.
New enrollees get credit for previous coverage, too. That means someone who has had continuous coverage for the past 12 months or fulfilled a 12-month preexisting condition exclusion in a group plan, for instance, is spared an additional waiting period. if that same individual had fulfilled only six months of the exclusionary period, the new employer or insurer could impose another six months, wait.
In considering previous insurance, the law limits breaks in coverage to 63 days. That means an employee who left a job of many years without opting for COBRA coverage and went without insurance for more than the 63-day limit could be stuck with another year-long exclusionary period.
It’s worth noting, though, that the new law does not dictate what an employer-based health plan includes. If a new Worker had been getting reimbursed for infertility treatment, say, under a previous plan after a 12-month preexisting condition delay, the new employer is under no obligation to provide such specialized coverage.
Individual (and sparse)
Under certain circumstances, insurers selling individual policies must cover anyone who has lost group coverage, regardless of health or claims experience, but this protection is quite limited. It extends only to people who have at least 18 months of prior coverage in a group plan, are not eligible for other coverage (through a spouse, Medicaid or Medicare, for example) and have exhausted any COBRA coverage they are eligible for.
Even that guarantee is not absolute. The law permits states to adopt alternative mechanisms, primarily high-risk pools like those described in the article that follows, to fulfill its individual guaranteed issue provision.
Changes for the
Extending insurance reforms to self-funded health plans is one of the new law’s major initiatives. This action helps level the playing field and signals an end to – or at least a weakening of – the government’s habitual reluctance to regulate the private health insurance market.
There’s other evidence, too, that Congress has been emboldened. Last month both chambers passed bills that would guarantee a minimum 48-hour hospital stay for new mothers and their babies and a scaled-back mental health parity measure. Lawmakers are poised to take up measures that would bar managed care plans from restricting open dialogue between doctors and patients, and a bipartisan group introduced a bill in both chambers that would give Medicare beneficiaries guaranteed access to Medigap policies. President Clinton has pledged to introduce legislation that would help COBRA beneficiaries and people temporarily out of work pay for continuing health coverage – assuming, of course, that he’s reelected.
As for ERISA, many state lawmakers and insurance regulators will continue to lobby Congress to do away with the preemption for small businesses, or at least to let the executive branch issue ERISA waivers. That’s become increasingly important to the states as more and more small businesses have begun self-insuring, often with very low threshold stop-loss coverage – typically, in the $2,000 to $5,000 range. Although it’s hard to know how many people or employers would be affected by such a change, a 1995 General Accounting Office report estimated that about a third of the nation’s businesses with 100 or fewer employees have self-insured health plans. The percentage is apt to be considerably lower among firms with no more than 50 workers.
While many state lawmakers aim to diminish ERISA, several federal legislators hope to expand it. They intend to reintroduce a bill next year that would broaden ERISA preemption to include small group health purchasing co-ops, a component that was dropped this year.
The majority of small businesses are still fully insured, though, and subject to state health insurance mandates. So the effect of the federal law depends on which state they’re in. Experts agree that the change will be nil in the many states that have small group reforms, including availability and rate limits. That’s because the laws in these states exceed the new federal mandates (see the State-by-state scorecard on pages 38 and 39).
In the few states that have not adopted insurance reforms and those that have put restrictions on health-based ratings but have not added guaranteed issue, the new law will at least ensure broader access to coverage. Small firms with indemnity coverage are expected to see their indemnity rates go up by an average of 1 to 5 percent, mostly because insurers will have to cover more people with preexisting conditions. The law’s effect on individual health insurance is more uncertain. Although the federal measure doesn’t demand much of insurers, only 10 states now guarantee that those who want coverage can get it. And only I E@ limit what insurers can charge individuals who are considered high risk.
For the business community, one thing is certain: The law will require all employers, large and small, to review the terms, of their health benefits to make sure they comply with its requirements. For large employers, new administrative burdens could raise benefit costs, but by how much is anybody’s guess. And these extra expenses could be offset by savings as workers with preexisting conditions feel free to leave their corporate positions, possibly to join smaller firms – effectively chipping away at the job lock the law was meant to address.
At the same time, more high-risk employees are likely to opt for COBRA coverage so they can eventually reap the benefit of the guaranteed individual coverage. Here, too, the costs are expected to vary from state to state.
A hard look at the numbers
No one knows how many people will benefit from the new law. During the protracted congressional debate, Democrats routinely stated – and newspapers widely reported – that “as many as 25 million” could benefit. They took that number from a 1995 GAO report, but the report actually used it as a ballpark estimate of how many people change jobs each year and could, in theory, benefit from guarantees that they could still get coverage. What’s more, the 25 million number was generated before the specifics of the legislation were hammered out.
The real number who will be affected is far less. The Lewin Group ran a computer simulation of the effect of the new law matched against current state laws and came up with an estimate of a national pool of 8 million “potential” beneficiaries. That includes all workers in the small group market (2-50) in the 35 states that have not already adopted all the guaranteed issue and portability provisions imposed by the federal law.
But Lewin researcher John Sheils reports that the number of workers who will directly benefit will be substantially lower. It depends on how many of those 8 million actually change or leave a job, he says. And most of the people who leave a company to become self-employed are unlikely to be able to afford the COBRA coverage they’ll need to use up before they qualify for individual coverage (which could be too expensive, too).
It’s not surprising, then, that the American Academy of Actuaries projects that only 150,000 people will benefit from the law’s group-to-individual portability provision. Or that the Congressional Budget Office estimated earlier this year that around 400,000 people will benefit directly from the new curbs on pre-existing condition exclusions.
Nor is it surprising that businesses may not know for months, even years, exactly how this bill is going to affect them, since the regulations required to implement much of it are stiff to come. At a seminar last month, Brian Graff, legislative counsel to the Joint Committee on Taxation, referred to the 75-odd regulations federal agencies are supposed to have completed by next April as “an enormous undertaking.”
If, as they say, the past is prologue, many of the final rules will not be ready by that deadline. That will leave employers – and their accountants, attorneys and assorted consultants – to deal with the technical questions that are certain to arise.
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