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

Nichols # 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

Nichols # 3 Relative Sizes of Group and Non- Group Insurance Markets MillionsPercent Offered employer coverage18075% Enrolled in employer coverage16268% Candidates for nongroup3414% Enrolled in nongroup8.64% Source: CTS Household Survey, 2001, cited in Nichols and Pauly, Health Affairs, 2002.

Nichols # 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.

Nichols # 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

Nichols # 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

Nichols # 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

Nichols # 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

Nichols # 9 Prevalence of Specific Regulations (pre-HIPAA) ReformSmall groupNon-group Guar. Issue369 Guar. Renewal4510 Limits on pre-ex4213 Premium restrictions4511 Source: Blue Cross Blue Shield Association

Nichols # 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

Nichols # 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

Nichols # 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

Nichols # 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)

Nichols # 14 Bottom Line: Offer Rates EmployersEmployees Total57.2%88.3% < %47.3% %71.5% %86.5% %96.6% 1, %99.4% <5044.5%63.5% %97.8% Source: MEPS-IC, data 2002.

Nichols # 15 Why Small Firms Dont Offer Labor market realities Lower wage workers Higher turnover Relative costs Administrative economies of scale Risk pooling economies

Nichols # 16 Worrisome Trends I Offer rates86.5%88.3% Eligibility rates81.3%77.1% Take-up rates85.5%81.0% Source: MEPS-IC, various years

Nichols # 17 Worrisome Trends II *ESI Coverage Overall66.3%65.0% Below poverty13.9%16.5% 1-2* poverty48.5%41.9% 2-4* poverty76.0%71.4% 4+ poverty85.7%85.6% Source: CPS data, cited in Nichols, * Employee-sponsored health insurance

Nichols # 18 Worrisome Trends III Ratio of family premium to wages th percentile wage33.2%47.1% Median wage22.4%32.6% Mean wage17.9%25.7% Source: National Compensation Surveys, BLS, cited in Nichols, 2005.

Nichols # 19 Worrisome Trends IV OccupationFamily premium/Median wage Physician 7.3% History professor15.8% Secretary 29.1% Carpenter24.2% Cook49.8% Source: BLS, cited in Nichols, 2005.

Nichols # 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

Nichols # 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