Health Insurance Portability: Reform Could Ensure Continued Coverage for Up to 25 Million Americans
Released: 1995-09-19T00:00:00

Letter

Background

Because most Americans receive their health insurance from their employers, changing jobs can disrupt their health care coverage. If a new employer does not offer health insurance, an individual must either depend on another source of health care coverage (such as a spouse’s plan or purchasing individual coverage) or become uninsured. Even if a new employer offers coverage, the new plan’s benefits may be more limited or more expensive than the previous plan’s.

Most private health plans have waiting periods for new enrollees and limit coverage for preexisting conditions. These limitations allow insurers to ensure that new enrollees have not purchased insurance just because they have become sick. However, the risk of losing health care coverage discourages workers from changing jobs, leading to a phenomenon known as “job lock.”

Employer benefits surveys have found that waiting periods and preexisting condition clauses are common, even among larger employers. KPMG Peat Marwick in 1994 reported that, among employers with at least 200 employees, 62 percent of health plans have time periods during which an employee must wait before getting coverage, typically lasting less than 3 months. The Peat Marwick survey also found that 59 percent of indemnity plans, 70 percent of preferred provider organization (PPO) plans, and 56 percent of point-of-service (POS) plans have preexisting condition exclusions. In contrast with the other plan types, health maintenance organizations (HMO) do not typically have preexisting condition clauses. As shown in figure 1, most of these preexisting condition exclusions last for 1 year or more.

Federal and State Laws Promote Health Insurance Portability

The Congress and the states have taken several initiatives to improve the portability of health care coverage. These include national standards that allow some people to temporarily continue group health care coverage despite losing their jobs and state laws providing portability to insurance policies sold to small firms. However, despite these steps, many Americans still are concerned that their health care coverage may be disrupted if they change jobs.

COBRA Coverage Continuation Requirements

The Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) required continued health care coverage for some individuals after losing their employment. The COBRA requirements generally allow individuals who leave a job to continue their health plan for up to 18 months by paying no more than 102 percent of the premium previously paid by the employer and employee, even if the employee starts a new job that offers health care coverage. A recent study found that 22 percent of eligible individuals continued health care coverage through the COBRA requirements. Another study estimated that the COBRA requirements increased mobility by 10 percent among those with health insurance.

State Initiatives

Recently, we reported that most states enacted small group health insurance reforms between 1990 and 1994. We found that 40 states have included portability provisions in their small employer health insurance legislation. These provisions require insurance carriers to waive preexisting condition limits or waiting periods if an individual has been continuously enrolled in a health plan. The states vary in the size of groups for which these provisions apply, the length of time allowed between health plans for coverage to be considered continuous, and how coverage between current and prior policies is linked for determining the effect of preexisting conditions.

We also reported that most state reforms have included, in addition to portability provisions, guaranteed issue, guaranteed renewal, and limits on preexisting condition exclusions. For guaranteed issue, states vary in whether insurers are required to actively offer a single plan to all small employers, offer two or more plans, or offer all of their plans with a guarantee that a plan would be issued. Every state we examined except Georgia requires insurers to guarantee renewal of a health policy regardless of health status or claims experience, with limited exceptions. We found that 41 states limit the use of preexisting conditions to deny coverage for specific illness, with about half limiting the term of preexisting conditions to no more than 1 year and ten states shortening the waiting period to 6 months or less. Finally, we found that, to varying degrees, most states impose rating restrictions on health insurers. For example, some states have limited the factors that insurers can use to estimate premiums, narrowed the range in rate differences among different groups, or adopted adjusted community rating.

State insurance reforms, however, cannot address the portability issue for every employee. Under ERISA, health plans that are self-funded by employers are not affected by state insurance regulation, including portability requirements. We estimate that about 44 million Americans are in self-funded health plans that states cannot regulate, even indirectly.States have also generally limited their reforms to insurance policies sold to small firms. Furthermore, no analysis exists on the number of individuals affected by these state reforms.

Current Federal Legislative Proposals

Several bills introduced in the 104th Congress, including S. 1028, H.R. 1604, and H.R. 1610, propose to reduce disruptions in health care coverage and job lock by increasing the portability of health insurance. In effect, these bills would limit the length of time that preexisting condition clauses can restrict health care coverage by providing credit for individuals who have been continuously enrolled by another group health plan. Thus, individuals with medical conditions who change health plans when they change jobs would not have to wait before receiving full coverage. In addition, S. 1028 would allow individuals who have exhausted their 18 to 36 months of COBRA continuation coverage, or who were ineligible for COBRA continuation because their prior firm employed fewer than 20 employees, to convert to individual coverage without having to meet eligibility requirements such as waiting periods or preexisting condition exclusions. This approach provides broader protections than existing state laws because it applies to all health plans, including self-funded plans and those offered by larger employers. See appendix I for a comparison of state laws and S. 1028.

Estimating the Number of Individuals Affected by National Health Insurance Standards

Overall, we estimate that as many as 21 to 25 million people per year could be affected by national portability standards, should they be enacted. Individuals who could be affected include those currently insured who change jobs and their dependents, individuals who lose their jobs and are no longer eligible for COBRA continuation coverage, and individuals who face job lock due to health insurance concerns. Table 1 shows each of these affected groups and our estimates of the number of individuals that the proposed legislation could affect.

Insurance regulation that ensures portability could benefit people in a variety of ways. Without portability standards, people with preexisting medical conditions who change health plans could be denied coverage for their conditions and may have to pay out of pocket for necessary medical services. Others may have to pay for COBRA continuation coverage in addition to paying for their new private health plan to ensure that their medical conditions are covered. Some people will remain in a job or turn down job offers because of health insurance concerns. A few people who exhaust their COBRA continuation coverage, or are ineligible for COBRA coverage after leaving a job, will be unable to purchase individual coverage at any price if they have a severe medical condition, such as acquired immune deficiency syndrome, severe diabetes, or heart disease.Finally, individuals who change employers may find that, even if the employer offers a choice of health plans, their choice is limited to health plans without preexisting condition exclusions.

Portability Standards Would Reduce Discontinuity in Health Care Coverage for People Changing Jobs

The largest group of people affected by the proposed legislation is those who change jobs. On the basis of our analysis of the CPS, over 20 million Americans changed jobs in 1993. Nearly 12 million of these people also maintained employer-based health care coverage. Additionally, nearly 7 million nonworking dependents received employer-based coverage through these job changers. Without portability standards, many of these individuals faced preexisting condition exclusions or waiting periods with their new health care coverage. Furthermore, individuals with preexisting conditions could face a period in which their new plan does not cover their condition. As an alternative, some could purchase COBRA continuation coverage if they want to be insured for a preexisting condition, though such coverage would be duplicative.

The proposed legislation would benefit such individuals to the extent that their coverage would not lapse while they are between health plans. Because about three-quarters of job changes are voluntary and therefore unlikely to mean a significant gap in employment, we estimate that S. 1028 would allow about 9 million individuals (with 5 million dependents) to change jobs without having any preexisting condition clause exclusions.Also under S. 1028, the remaining 3 million job changers (with 2 million dependents) would likely have reduced waiting periods, if any at all, before receiving full eligibility for coverage.

The proposed legislation would also allow individuals to purchase individual-based health care coverage without preexisting condition limits if they had maintained group health care coverage for at least 18 months and are no longer eligible for COBRA continuation coverage. In addition, individuals employed by firms with fewer than 20 employees who lose their employer-based coverage are not eligible for COBRA continuation coverage, but they could immediately qualify for individual coverage through the proposed portability standards. On the basis of COBRA continuation coverage election rates and turnover rates in small firms, we estimate that about 2 million individuals would be able to convert from employer-based coverage to individual coverage (although at a higher premium) without having to meet preexisting condition exclusions.

Portability Provisions Would Also Lessen Fear of Losing Coverage From Changing Jobs

The proposed legislation, however, would affect more individuals than those who change health plans because the standards would allow those workers who stay in their jobs out of concern over losing health care coverage to change jobs. Although studies of the extent of job lock have varying conclusions, we estimate that over time between 1 million and 4 million additional workers would change jobs if national portability standards were in effect.

Surveys have found that between 11 and 30 percent of individuals report that they or a family member have remained in a job at some time because they did not want to lose health care coverage. Extrapolating from a 1993 survey by the Employee Benefit Research Institute, we estimate that the proposed portability standards would relieve as many as 3 million or 4 million Americans of job lock. Twenty percent of individuals who reported job lock in their households cited preexisting conditions as the main reason for not changing jobs, according to this survey.

Other estimates of the extent of job lock among those with health insurance have varied. Although one study found little evidence of job lock, other studies we reviewed found that job mobility was reduced by at least 20 percent for individuals with health insurance and more for those who could have high medical expenses. For example, one study estimated that job mobility for workers with health care coverage was reduced by nearly one-third for married men, over one-third for workers with large families (a proxy for high medical expenses), and two-thirds for workers with a pregnant wife. Another study reported that employer-based health care coverage reduced job mobility by 23 percent for men and over 30 percent for women. On the basis of these results, the authors of the latter study conservatively estimated that approximately 1 million additional workers would have changed jobs but for job lock.

Issues in Designing National Portability Standards

In addition to improving the availability of health care coverage for many Americans, national portability standards could also affect the affordability of coverage. While the standards would guarantee that individuals could change health plans without having to meet preexisting condition exclusions, the standards’ effects on price and affordability of coverage are less clear, particularly for people with medical conditions.

Since the cost of health insurance coverage is often cited as the most critical determinant of whether firms or individuals purchase coverage, the expected effects on premiums are crucial in determining the net impact of state and federal insurance reforms on the level of coverage. High expected costs for an individual can mean a high premium, particularly for individual and small group policies. If government restrictions constrain premiums for individuals or a group, then insurers may be forced to raise premiums for all other workers.

Although empirical evidence is sparse, the possible price effects relate more directly to other health insurance reforms, such as guaranteed issue, than to portability. In fact, for the entire market, portability should little affect prices because the cost of these individuals would merely be shifted among health plans. Raised premiums could occur when a potentially high-cost individual transfers into a very small firm or the individual health insurance market. With no restrictions on ratings, the small firm’s or the individual’s premium could be significantly raised, which could lead to a decision to forego coverage.

For this reason, some insurers have opposed provisions in state and federal legislation to extend portability standards to individual-based health plans. They believe that high-cost individuals are the ones most likely to convert from a group health plan to an individual health plan, leading to increased premiums. Insurers disagree, however, about the extent to which national portability standards would cause higher premiums. Premium increases, if any, would depend upon the size of the covered group, rating restrictions imposed by state laws, and the extent to which the insurer uses medical underwriting to set premiums.

Federal and state legislators have tried to respond to these concerns to some extent. Several states, for example, explicitly recognize the greater uncertainties in the individual market by applying some reforms only to employers with at least two or three workers or only to self-employed individuals. In response to these concerns, S. 1028 as approved by the Senate Committee on Labor and Human Resources includes a provision that requires anyone converting to an individual health plan to have had continuous group health care coverage for the preceding 18 months for the portability standards to be effective. Furthermore, the bill would leave intact state laws that provide some price protection for individuals and small firms purchasing insurance in the private market.

Conclusions

Despite past state reforms and the COBRA continuation of coverage requirements, the lack of health insurance portability still concerns many Americans, particularly those with costly health conditions. Although many states have enacted portability standards for insurance carriers, ERISA preemption prevents states from applying the standards to self-funded employer-based health plans. We estimate that as many as 21 million to 25 million Americans a year could possibly benefit from proposed national portability standards. The extent to which insurers would respond to these reforms with increased premiums, however, is uncertain.

Please call me on (202) 512-7125 if you or your staff have any questions about this report. Michael Gutowski, Assistant Director, and John Dicken, Senior Evaluator, were major contributors to this report.

Comparison of Proposed National Health Insurance Regulations and Existing State Insurance Regulations

Most states have enacted health insurance reforms similar to those proposed by S. 1028; they are limited, however, to regulating insurance products sold to small employers. Thus, the national insurance reforms would apply to more health plans—including self-funded plans and those offered by larger employers—than existing state regulations. S. 1028 and most state regulations address four common areas: guaranteed issue, guaranteed renewal, portability, and limits of preexisting condition exclusions. The specifics of how these regulations would apply, however, vary. To the extent that state regulations are more restrictive than the proposed national standards, S. 1028 would allow the states to continue to enforce their regulations. Table I.1 summarizes current state regulations in these four areas.

Less than 50 All plans Less than 25 All plans (continued)

Related provisions exist under state Health Alliance Act.

Guaranteed Issue

S. 1028 would require guaranteed issue of all group insurance policies; that is, insurance carriers would be required to sell health insurance to all groups wishing to purchase it, and employers who offer health care coverage would be required to offer coverage to any qualifying employee. In our review of state small group health insurance reforms enacted between 1990 and 1994, we found that 36 states have guaranteed issue requirements that apply to small employers. However, only 11 states require that all insurance plans sold in that market have guaranteed issue; most states require that one or two plans be available as a guaranteed issue product.

Guaranteed Renewal

S. 1028 would also guarantee renewal of health insurance products by not allowing insurers to terminate or fail to renew a group policy. Between 1990 and 1994, 43 states enacted laws for guaranteed renewability of group insurance policies.

Portability

S. 1028 would provide credit for prior group health care coverage to reduce or eliminate preexisting condition limits when a person enrolls in a new group plan. The bill would reduce the preexisting condition exclusion by 1 month for each month that an individual was in a period of continuous coverage. Continuous coverage would be defined as coverage with a lapse of 30 days or less. However, a group health plan may impose a preexisting condition exclusion for services or benefits offered by the previous health plan.

We reported that 40 states have also enacted portability regulations for the small employer market. These laws vary in the period of time that they allow between enrollment in a new plan and whether they link the services provided in the former and current plans for enrollees to receive credit for a preexisting condition. In particular, 19 states allow for more than a 30-day lapse between enrollment in the two plans for coverage to be considered continuous. Furthermore, 14 states do not require a link between the services provided in the former and current plans for the preexisting condition limit to be reduced or eliminated.

Preexisting Condition Exclusion

S. 1028, which defines preexisting conditions as those for which care was recommended or received within the previous 6 months, would limit preexisting condition exclusions to no more than 12 months. We found that 41 states limit the duration of preexisting condition exclusions, with 10 states having shorter limits than proposed by S. 1028.

Rating Restrictions

We found that at least 44 states included premium rate restrictions as part of reforms passed between 1990 and 1994. However, the extent to which the states narrow the range of premiums that insurers may charge varies greatly. S. 1028 does not include rating restrictions but would allow states to impose rating restrictions on insurers.

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