Consumer Protections in the Private Health Insurance Market Ella Hushagen Families USA Updated November 9, 2009

Existing regulations Federal law governs: oLarge self-funded or self-insured employers. Federal and state governments share: oLarge (over 50) & small (2-50) employers. oTransitions from group coverage. State law governs: oIndividual Health Insurance market.

Where are the gaps? Individual health insurance: oAccessibilityIn all but five states, insurers can deny coverage. oAdequacyInsurers exclude coverage for pre-existing conditions; inadequate benefit packages. oAffordabilityPremiums are higher for people with pre-existing conditions; deductibles & cost-sharing unaffordable; inefficient use of premium $$.

Where are the gaps? Small business health insurance: oAccessibilitySole-proprietors/self- employed do not have access to group coverage. oAffordabilityPremiums may vary by health status & age of employees; inefficient use of premium $$; higher costs shifted to employees. oAdequacyTo reduce premiums, many states offer stripped-down benefit plans.

Goals of private market reform AffordablePremiums and cost-sharing are affordable. AccessiblePeople can buy coverage regardless of health. AccountableHealth insurance companies are accountable to consumers. AdequateBenefits are adequate for sick and healthy people.

Regulatory tools to: Improve access to private market and spread cost of highest-risk individuals. Restrict premium variation and limit out- of-pocket spending. Ensure insurance company accountability and efficiency. Provide adequate benefits.

ACCESS 1) Guaranteed issue 2) High-risk pool 3) Insurer of last resort 4) Strategies to increase group market access

1) Guaranteed issue Five states require all insurers to accept all applicants, regardless of health. Pros: Ease and choice for consumers. No medical underwriting reduces administrative overhead. Cons: Comprehensive policies can get expensive because of adverse selection.

2) High risk pools Designated nonprofit insurance program for people with pre-existing health conditions, turned down for individual market coverage ( 34 states). oPremiums are capped; income-based subsidies available in some states. Pros: Spreads risk without disrupting market. With adequate funding, can be affordable option. Cons: Often unaffordable for consumers. Continual fight for adequate funding and benefits.

3) Insurer of last resort Designated nonprofit insurer must sell to everyone, or every insurer must sell one standard policy to everyone. oNot always mandated by state law. oRate protections typically inadequate. Pros: Easy to establish, good use of nonprofit surplus. Cons: Lack public oversight. Inadequate rate protections. Other insurers dont share risk.

4) Group coverage access Dependent coverage: Allow young adults (to age 21-30) to maintain coverage on family health plan (24 states). oKeeps young and healthy in risk pool. Groups of one: Allowing sole-proprietors / self-employed to purchase small group market coverage as a group of one (14 states). oMakes coverage available to sole-proprietors.

AFFORDABILITY 1) Pure and modified community rating 2) Rate bands 3) Restrictions on deductibles and out-of-pocket costs

1) Community rating Pure community rating: Same premium prices to everyone, regardless of age and health (one state); or Modified community rating: Same premium regardless of health, but allows limited variation for age, gender, and other factors (6 states). Pros: Non-discriminatory; spreads risk among young and old, healthy and sick. Cons: Raises price of insurance for young and healthy; may contribute to adverse selection.

2) Rate Bands Limits how much premiums can vary based on health, age, gender, industry, etc. oFor example, premiums may only vary up or down by 25% for health status. Pros: Some limits are better than none; incremental way to rein in variability. Cons: Incomplete risk-sharing; all factors taken together may allow huge variance.

3) Restrictions on cost-sharing and deductibles Few states regulate individual and small group market products to limit deductibles, impose out-of-pocket cost maximums, restrict maximum annual & lifetime benefit maximums. oMaine & Massachusetts through new programs. Pros: Sets realistic limits on how much consumers can pay. Cons: May cause adverse selection if not imposed on entire market.

ACCOUNTABILITY 1) Medical loss ratios 2) Prior approval of rates

1) Medical loss ratios Require health insurance companies to spend a minimum percentage of premiums on medical care vs. administration and profit. oFor example, 80% in the individual market (2 states) Pros: Easy to administer; controls profits. Cons: Doesnt get at underlying medical costs; companies hide profit.

2) Rate review/prior approval Insurance department must review insurers proposed rates before they go into effect. o25 states have prior approval of all products in the individual market. Pros: Gives regulators authority to disapprove outrageous premium increases. Cons: Requires vigilant regulators; will not decrease or dramatically slow rate increases.

ADEQUACY 1. Pre-existing condition exclusions 2. Other adequacy tools

1) Pre-existing condition exclusions Limit pre-existing condition exclusions: oProhibit insurance companies from excluding coverage of pre-existing conditions for any longer than 6 months (2 states); oLimit look-back period to 6 months (15 states); oDefine pre-existing conditions objectively (19 states). Pros: Helps people with pre-ex get services; prevents insurers from alleging pre-ex based on unrelated symptoms. Cons: Adverse selection; market churning.

2) Other adequacy tools Appeals procedures and external review. Benefit mandates. Standardized benefit plans to allow easier comparison shopping. Ombudsman or consumer assistance programs. Consumer report cards.

Risky Ideas 1) Consumer-driven health care & HSAs 2) Deregulation

1) Consumer-driven health care Idea: Require consumers to pay more for health care services; health consumers become savvy shoppers and bring down health care costs. Reality: oIn 2007, 48 million Americans reported having trouble paying medical bills. o18.7 million non-elderly Americans will spend more than 25 percent of their income on health care costs in oMedical crises contribute to half of home foreclosure filings; 23 percent are attributable to medical bills.

1) Consumer-driven health care: Health Savings Accounts Idea: Contribute tax-free dollars to a savings account for health care expenses; linked to high- deductible health plan. Reality: oImpossible to shop for health care; oCreates tax shelter for rich; oShifts costs to workers; oUndermines risk-sharing.

2) Deregulation Idea: Allow consumers to buy insurance across state lines; choose best product. Reality: Drastically weakens existing state consumer protections.

Federal help on the way? Federal bills under consideration in Congress take many critical steps to enact or move towards the consumer-friendly reforms described in this presentation. Progress is expected on accessibility, affordability, and adequacy. To learn more, visit Stay tuned!

More information Private Market Publications; Resources for Consumers; Private Market Legal Rights Center Contact us! Cheryl Fish-Parcham, Claire McAndrew, Kathleen Stoll,