Regulation of the Small Group and Individual Health Insurance Markets: Why, Why Not, and What Could Be Better?

1. Regulation of the Small Group and Individual Health Insurance Markets: Why, Why Not, and What Could Be Better? Len M. Nichols, Ph.D. Director, Health Policy ProgramNew America Foundation

2. Overview • 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

3. Relative Sizes of Group and Non-Group Insurance Markets Millions Percent Offered employer coverage 180 75% Enrolled in employer coverage 162 68% Candidates for nongroup 34 14% Enrolled in nongroup 8.6 4% Source: CTS Household Survey, 2001, cited in Nichols and Pauly, Health Affairs, 2002.

4. History of Federal Insurance Market 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.

5. State and Federal Roles in Insurance 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

6. Health 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

7. Why 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

8. Specific Types of Market Regulations • 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

9. Prevalence of Specific Regulations (pre-HIPAA) Reform Small group Non-group Guar. Issue 36 9 Guar. Renewal 45 10 Limits on pre-ex 42 13 Premium restrictions 45 11 Source: Blue Cross Blue Shield Association

10. Why 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”

11. HIPAA 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

12. HIPAA Individual Market Provisions • 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

13. Effects 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)

14. Bottom 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.

15. Why Small Firms Don’t Offer • Labor market realities • Lower wage workers • Higher turnover • Relative costs • Administrative economies of scale • Risk pooling economies

16. Worrisome 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

17. Worrisome 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

18. Worrisome 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.

19. Worrisome Trends IV Occupation 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.

20. 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

21. Conclusions • 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