# Presentation: 682879

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

**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**

## 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

## 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.***

## 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.***

## 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

## 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

## 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

## 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

## 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

## 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”

## 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

## 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

## 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)

## 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.

## Why Small Firms Don’t Offer

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

## 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

## 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

## 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.

## 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.

## 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

## 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