Introduction to State Health Policy: A Seminar for New State Legislators

Slide Presentation by, Len M. Nichols Ph.D.

On April 1, 2005, Len M. Nichols made a presentation in a seminar entitled Introduction to State Health Policy.

This is the text version of Dr. Nichols' slide presentation. Select to access the PowerPoint® Slides (122 KB).

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 Program
New America Foundation

Slide 1

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.

Slide 2

Relative Sizes of Group and Non-Group Insurance Markets

• Offered employer coverage: 180 million, 75 percent.
• Enrolled in employer coverage: 162 million, 68 percent.
• Candidates for non-group: 34 million, 14 percent.
• Enrolled in non-group: 8.6 million, 4 percent.

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

Slide 3

History of Federal Insurance Market Regulation

• Constitution.
• U.S. versus 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.

Slide 4

State and Federal Roles in Insurance Regulation

• States
  • Solvency.
  • Consumer protection slash 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.

Slide 5

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.

Slide 6

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.

Slide 7

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.

Slide 8

Prevalence of Specific Regulations, pre-HIPAA

The table on this slide lists the number of States with regulations regarding four insurance reforms for policies offered to small groups and non-groups.

• Guaranteed issue: 36 small group, 9 non-group.
• Guaranteed renewal: 45 small group, 10 non-group.
• Limits on pre-existing conditions: 42 small group, 13 non-group.
• Premium restrictions: 45 small group, 11 non-group.

Source: Blue Cross Blue Shield Association

Slide 9

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."

Slide 10

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.

Slide 11

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.

Slide 12

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.

Slide 13

Bottom Line: Offer Rates

The slide has a chart with three columns describing offer rates of insurance by firm size. The first column is the size of the firm. The second column is the percentage of employers who offer insurance, and the third column is the percentage of employees who were offered insurance. For all firms, 57.2 percent employers offered insurance and 88.3 percent of employees were offered insurance.

• For firms with less than 10 employees: 36.8 percent of employers offered insurance, 47.3 percent of employees had an offer.
• 10 to 24: 67.8 percent of employers offered insurance, 71.5 percent of employees had an offer.
• 25 to 99: 82.4 percent of employers offered insurance, 86.5 percent of employees had an offer.
• 100 to 999: 95.4 percent of employers offered insurance, 96.6 percent of employees had an offer.
• 1,000 plus: 98.8 percent of employers offered insurance, 99.4 percent of employees had an offer.
• Less than 50: 44.5 percent of employers offered insurance, 63.5 percent of employees had an offer.
• 50 plus: 96.5 percent of employers offered insurance, 97.8 percent of employees had an offer.

Source: MEPS-IC, data 2002.

Slide 14

Why Small Firms Don't Offer

• Labor market realities
  • Lower wage workers.
  • Higher turnover.
• Relative costs
  • Administrative economies of scale.
  • Risk pooling economies.

Slide 15

Worrisome Trends I

The slide has a chart with three columns presenting the changes in offer rates, eligibility rates and take-up rates between 1996 and 2002 by percent of workers.

• Offer rates: 86.5 percent of employees were offered insurance in 1996, 88.3 percent in 2002.
• Eligibility rates: 81.3 percent of employees were eligible for insurance in 1996, 77.1 percent in 2002.
• Take-up rates: 85.5 percent of employees took up the offer in 1996, 81.0 percent in 2002.

Source: MEPS-IC, various years

Slide 16

Worrisome Trends II

This chart looks at insurance rates by income class.

Percentage of employees with employee-sponsored health insurance coverage for 1978 and 2002:

• Overall: 66.3 percent in 1987, 65.0 percent in 2002.
• Below poverty: 13.9 percent in 1987, 16.5 percent in 2002.
• 1 to 2 times poverty: 48.5 percent in 1987, 41.9 percent in 2002.
• 2 to 4 times poverty: 76.0 percent in 1987, 71.4 percent in 2002.
• 4 plus poverty: 85.7 percent in 1987, 85.6 percent in 2002.

Source: CPS data, cited in Nichols, 2005.

Slide 17

Worrisome Trends III

Ratio of family premiums to wages:

• 25th percentile wage: the family premium was 33.2 percent of wages in 1998 and 47.1 percent in 2003.
• Median wage: the family premium was 22.4 percent of wages in 1998, 32.6 percent in 2003.
• Mean wage: the family premium was 17.9 percent of wages in 1998, 25.7 percent in 2003.

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

Slide 18

Worrisome Trends IV

This chart presents the family premium as a percentage of the median wage by occupation.

• For a physician the family premium comprises 7.3 percent of the median wage.
• For a history professor the family premium comprises 15.8 percent of the median wage.
• For a secretary the family premium comprises 29.1 percent of the median wage.
• For a carpenter the family premium comprises 24.2 percent of the median wage.
• For a cook the family premium comprises 49.8 percent of the median wage.

Source: BLS, cited in Nichols, 2005.

Slide 19

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; HSA's, HRA's, MSA's.
  • Create better health care consumers.
  • But:
    • Expenditure distribution is highly skewed.
    • Comparative price and quality data not yet widespread.

Slide 20

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 system-wide "adult" conversations.

Current as of October 2005

Internet Citation:

Regulation of the Small Group and Individual Health Insurance Markets: Why, Why Not, and What Could Be Better? Text version of a slide presentation at Introduction to State Health Policy: A Seminar for New State Legislators. Agency for Healthcare Research and Quality, Rockville, MD. http://www.ahrq.gov/news/ulp/statepolicy/nicholstxt.htm

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