Regulation of the Small Group Regulation of the Small Group and Individual Health Insurance and Individual Health Insurance

Markets: Why, Why Not, and Markets: Why, Why Not, and What Could Be Better?What Could Be Better?

Len M. Nichols, Ph.D.Director, Health Policy ProgramNew America Foundation

Nichols # 2

OverviewOverview

Relative sizes of insurance markets History of insurance market regulation State and Federal roles Unique importance of Health Insurance Portability

and Accountability Act (HIPAA) Offer rates by firm size Some worrisome trends The search for solutions

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Relative Sizes of Group and Non-Relative Sizes of Group and Non-Group Insurance MarketsGroup Insurance Markets

MillionsPercent

Offered employer coverage 18075%

Enrolled in employer coverage 16268%

Candidates for nongroup 3414%

Enrolled in nongroup 8.64%

Source: CTS Household Survey, 2001, cited in Nichols and Pauly, Health Affairs, 2002.

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History of Federal Insurance History of Federal Insurance Market RegulationMarket Regulation

Constitution U.S. vs. Southeast Underwriters, 1944 McCarran-Ferguson, 1945 HMO Act, 1973 Employee Retirement Income Security Act

(ERISA), 1974 Omnibus Budget Reconciliation Act (OBRA),

1990 (Medigap) HIPAA, 1996

Background: Nichols and Blumberg, Health Affairs, 1998.

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State and Federal Roles in State and Federal Roles in Insurance RegulationInsurance Regulation

States Solvency Consumer protection/market conduct Benefit mandates Market reforms (unless contradict HIPAA)

Federal Market opportunities and rules Exemptions from State law Enforcement of HIPAA if State is unwilling

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Health Insurance Market ReformsHealth Insurance Market Reforms

Theory of market regulation Insurance is about pooling risk

• Expenditure distribution is highly skewed (1/30, 10/70) Voluntary purchase selection is key issue Competing views of “just” risk pools

• Libertarian• Communitarian

Regulation is about forcing more pooling than the free market would offer up if left alone

Your job as legislators is about deciding how much forced risk pooling there will be

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Why State Reforms PassedWhy State Reforms Passed

Small business owners were outraged Premium inflation Instability of insurance offers

Non-group insurance stories are harsh, sad, and true Adverse selection is a real threat Selection management is profitable Insurers do what they are allowed to do

Insurance industry historically preferred State regulation to Federal

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Specific Types of Market Specific Types of Market RegulationsRegulations

Limits on pre-existing condition exclusions

Portability (credit for prior coverage)

Guaranteed renewal

Guaranteed issue

Restrictions on the variance of premiums allowed for the same policy

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Prevalence of Specific Regulations Prevalence of Specific Regulations (pre-HIPAA)(pre-HIPAA)

Reform Small group Non-group

Guar. Issue 36 9

Guar. Renewal 45 10

Limits on pre-ex 42 13

Premium restrictions 45 11Source: Blue Cross Blue Shield Association

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Why HIPAA MattersWhy HIPAA Matters

Defined “Federal purpose” to be insurance market performance

Represents bipartisan agreement that small group and non-group markets need rules

Left existing State laws and enforcement mechanisms in place

Established a “Federal floor”

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HIPAA Group Market ProvisionsHIPAA Group Market Provisions

Limits on pre-existing condition exclusions 12/6 Credit for prior coverage Maximum 62-day gap

Guaranteed issue (all products) Guaranteed renewal No premium variance restrictions

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HIPAA Individual Market HIPAA Individual Market ProvisionsProvisions

Guaranteed renewal of all products

Guaranteed issue for eligible individuals

Eligible individual 18 months continuous coverage (62 day gap limit) Most recently employer group coverage Exhausted COBRA Not eligible for group or public coverage

No premium variance restrictions

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Effects of Insurance ReformsEffects of Insurance Reforms

Coverage Not much net effect in small group market Reduced coverage in non-group market

Risk pools Evidence is mixed

Market Competitors (reduced) Competition (increased)

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Bottom Line: Offer RatesBottom Line: Offer Rates

Employers Employees

Total 57.2% 88.3%< 10 36.8% 47.3%10-24 67.8% 71.5%25-99 82.4% 86.5%100-999 95.4% 96.6%1,000+ 98.8% 99.4%<50 44.5% 63.5%50+ 96.5% 97.8%

Source: MEPS-IC, data 2002.

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Why Small Firms Don’t OfferWhy Small Firms Don’t Offer

Labor market realities Lower wage workers Higher turnover

Relative costs Administrative economies of scale Risk pooling economies

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Worrisome Trends IWorrisome Trends I

1996 2002

Offer rates 86.5% 88.3%

Eligibility rates 81.3% 77.1%

Take-up rates 85.5% 81.0%

Source: MEPS-IC, various years

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Worrisome Trends IIWorrisome Trends II

*ESI Coverage 1987 2002

Overall 66.3% 65.0%

Below poverty 13.9% 16.5%1-2* poverty 48.5% 41.9%2-4* poverty 76.0% 71.4%4+ poverty 85.7% 85.6%

Source: CPS data, cited in Nichols, 2005.

*Employee-sponsored health insurance

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Worrisome Trends IIIWorrisome Trends III

Ratio of family premium to wages

1998 2003

25th percentile wage 33.2% 47.1%

Median wage 22.4% 32.6%

Mean wage 17.9% 25.7%

Source: National Compensation Surveys, BLS, cited in Nichols, 2005.

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Worrisome Trends IVWorrisome Trends IVOccupation Family premium/Median wage

Physician 7.3%

History professor 15.8%

Secretary 29.1%

Carpenter 24.2%

Cook 49.8%

Source: BLS, cited in Nichols, 2005.

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Search for Solutions Intensifies Search for Solutions Intensifies

Association health plans Exemption from State regulations Tradeoff gets back to risk pool preferences

Higher deductible health plans Account based adjuncts (HSAs, HRAs, MSAs) Create better health care consumers But:

• Expenditure distribution is highly skewed• Comparative price and quality data not yet widespread

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ConclusionsConclusions

Insurance market regulation is largely yours Tradeoffs are the nature of this policy game Increasing fraction of our workforce cannot

afford health insurance as we know it Pressure for solutions will increase We may be ready for systemwide “adult”

conversations