1. Small Business Health Insurance & Prospects for Reform Presentation to Joint Health Care Oversight Committee February 27 th, 2006

2. Agenda Why focus on Small Business? Small Group Health Insurance Market Reform Strategies - Rate regulation - High risk pools - Public incentives - Group purchasing Summary & Conclusions - Myths & Realities

3. Why Focus on Small Business? Source: MEPS 2001 data, private sector employees, 1999 Survey of RI Employers used to adjust # employers with 100+ employees. In addition, MEPS does not break out the 1-2 market; however, from the 2000 market conduct study, we know that there are 15,000 employers in the 3-50 segment, so we can estimate the size of the 1-2 market. In order to estimate the number of employees in the 1-2 life segment, we assumed an average of 1.3 employees/employer 94% of all RI Employers are Small Businesses. 35% of RI Employees are in Small Business.

4. Why Focus on Small Business? Small businesses face higher premiums. Average Single Coverage Commercial Monthly Premium Source: 1999 data based on MEPS-IC – national survey, Rhode Island sample. 2005 data based on the Rhode Island Employer Survey. 12% gap

5. Why Focus on Small Business? Small business is growing less likely to offer coverage. Source: Rhode Island Employer Survey, JSI % of Employers Offering Coverage by Size

6. Why Focus on Small Business? Employers Offering Coverage in 2005* * Low wage employers are defined as those employers with average wages below $21,000 Source: Rhode Island Employer Survey, JSI Low wage small employers are even less likely to offer coverage.

7. Why Focus on Small Business? RI is a small business state Most uninsured are working Disproportionately, small businesses: –Face higher premiums –Less likely to offer coverage –Especially if low wage To Summarize: Small Businesses are the Bleeding Edge.

8. Small Group Health Insurance Market Group size:1-50 employees Two Insurers: UHP & BCBSRI (80% market share) Distribution: 2/3 sold via brokers & intermediaries Underwriting Rules (Health Reform 2000) –Adjusted community rating: age, sex, family size, limited health status –Maximum 4:1 rate band –Guaranteed issue – no one is refused coverage Regulatory Controls –Rate factors –Product filings –Market conduct

9. Small Group Market: Market Conduct Study Findings Too early to assess effectiveness DID NOT contribute to large rate increases Low cost plan designs were NOT available Significant variation in rules interpretation 2002 Study Results The Small Employer Health Insurance Availability Act, 2000

10. Overly complex product choices Employers choose rich plan designs Distribution costs appear high Minimal enrollment in state mandated plan designs Compliance issues mostly resolved Measures of Success? Increased parity between small and large groups Small Group Market: Market Conduct Study Findings Preliminary 2006 Findings (formal report in 1-2 months) The Small Employer Health Insurance Availability Act, 2000

11. Small Group Health Insurance Market Small Group Reforms Appear to Have Closed the Gap. Average Single Coverage Commercial Monthly Premium Source: 1999 data based on MEPS-IC – national survey, Rhode Island sample. 2005 data based on the Rhode Island Employer Survey. 21% gap 12% gap

12. Small Group Market: RI Characteristics Others appear specific to Rhode Island. Some problems are consistent Nationwide. Two player insurance market Relatively unmanaged, PPO dominant environment Relatively high costs of medical care Small group dominated marketplace Harder to retain healthy population in risk pool High administrative/distribution costs Disproportionate share of low income workers

13. Reform Strategies Rating Regulation High Risk Pools Public Incentives Group Purchasing Problem: Even with regulation, the small group market is vulnerable to cost increases and becoming uninsured. Lessons learned from other settings:

14. Reform Strategies : Rating Regulation Community rating Aggressive price regulation Guaranteed issue Issues: Healthy people may exit the pool Lack of insurer participation, benefit innovation Loose underwriting rules No guaranteed issue High risk pool Issues: High risk consumers may be priced out Insurer success is a function of risk identification, not cost reduction Small Group reform must protect high risk consumers while keeping healthy people in risk pool RI More insurer competition Less insurer competition

15. Lessons Learned: New Hampshire More insurer competition Less insurer competition 1994SB711 Guaranteed issue Restricted rating factors 1-100 group size Issue: affordability for young, healthy population 2003SB 110 Expanded rating factors 1-50 group size Issue: affordability for older, sicker population 2005SB 125 Scaled back rating factors 3.5:1 rate band Reinsurance mechanism Issues: TBD Reform Strategies : Rating Regulation *See Report: Small Group Health Insurance Reform in New Hampshire

16. State subsidized programs for: – Medically uninsurable or higher risk individuals – Those Eligible under HIPAA – Medicare beneficiaries seeking supplemental coverage Commercial insurance paid by enrollee premium and state supplement 31 states now operate a high risk pools, covering more than 170,000 individuals Enrollment is a small fraction of the market – about 1.2% of each state’s individual insurance market Reform Strategies : High Risk Pools Overview and Description* *See Report: State High Risk Pools for Health Insurance

17. Initial, proposed 42% increase Changes in product offerings HIC Modified Approval –Less than 20% average rate increase –50% of all members - 11% increase in total expenses for health insurance –Consumer protections to aid subscribers in selecting new plans –Premium Assistance Program Recent Direct Pay DecisionDirect Pay Background Guaranteed Issue State No Risk Selection - Single Direct Pay Carrier Two risk pools: Basic & Preferred More subsidization will be needed as costs increase Average 10% annual medical cost inflation Reform Strategies : High Risk Pools Direct Pay and High Risk Pools

18. National Experience with High Risk Pools cover very few and are very expensive offer limited coverage, with high cost sharing generally require significant subsidization – In 2003, premiums covered only ~54% of total costs most commonly funded through an assessment on health insurer premiums Reform Strategies : High Risk Pools A high risk pool would have to be part of a broader public policy shift toward more competition/less regulation.

19. Direct Pay Market: Rhode Island Policy Options Continue private subsidization of high risk individuals –Key concern: unsustainable rate increases for preferred subscribers Compel insurers to offer products that address underlying cost inflation Force more competition in Direct Pay Market –Key concern: shifting more costs for the sicker population Publicly subsidize the Direct Pay market Merge Direct Pay and Small Group risk pools Some combination of the above options may offer a more prudent course than the creation of a state-run high risk pool Reform Strategies : High Risk Pools

20. Lessons Learned: Public Incentives in New Hampshire Aggressive rate regulation coupled with reinsurance New Hampshire Reinsurance Program Goal - address carrier concerns How it works – insurers cede employees or groups to reinsurance program Source of funds - assessment on all carriers in the small group market Coverage differences vs. High Risk Pool – high risk individuals & groups see no difference in coverage – costs are spread across all carriers Impact: TBD Reform Strategies : Public Incentives

21. Lessons Learned: Healthy New York Program Goal: more low wage small employers to offer health insurance Context: Community rated small group & individual market State sponsored reinsurance program Healthy New York premiums are substantially below market rates – estimates of up to 44 percent premium savings As of year end 2004, the program had enrolled 76,704 members (23% small employers, 19% sole proprietors, 58% individuals) As of December 2004, the projected amount to be expended was $25 Million Implications for Rhode Island: Effective program model, but it is a narrow policy goal built on a subsidy with a Medicaid match Reform Strategies : Public Incentives

22. Group Purchasing Models: Overview Voluntary purchasing of health insurance by small employer groups. Prevalence: – 33% of firms with fewer than 10 workers – 28% of firms with 10-49 workers In RI, most pooled purchasing arrangements were prohibited in 2000 Theoretical benefits – Increased plan choice for employees – Administrative cost reductions Group responsibilities – Collecting, analyzing and publishing plan performance – Contracting with health plans – Enrolling employees – Collecting and distributing premiums Reform Strategies : Group Purchasing* *See Report: Group Purchasing Alliances for Small Employers

23. Implications for Rhode Island: Purchasing pools are unlikely to provide significant relief from the cost pressures faced by small employers Practical Experience Theoretical Advantages Premiums are increasing Employers still decreasing coverage Can’t maintain large & stable population Price competition lacking Health plan participation lacking Opposition from agents, brokers Lack of marketing Only success: enhanced employee choice Cost reductions via economies of scale Benefits of clout enjoyed by large employers Increased choice Reform Strategies : Group Purchasing

24. Medical Costs High and Rising – RI premiums rank 8 th in the nation* Hardest Hit - Small businesses, low wage & Direct Pay individuals No Simple Solution ­Rate Regulation - delicate balance between coverage & participation ­High Risk Pools – part of larger Small Group market strategy ­Reinsurance – need targeted policy and willingness to subsidize ­Purchasing Pools – true cost drivers and management realities minimize small potential benefits Summary & Conclusions Source: MEPS 2001 data.

25. Myth #1 More insurer competition will solve Small Group insurance problems Reality When many insurers compete on price, the sick become uninsured. Need insurers to compete on underlying product costs and quality of services, not on underwriting or cost-shifting. Summary & Conclusions: Myths & Realities

26. Myth #2 Insurers are responsible for high premiums Reality There are some costs attributable to administration and profit, but medical costs are 80-85% of premiums and are rising at 10% per year. Summary & Conclusions: Myths & Realities

27. Myth #3 Mandates are too costly and shortsighted Reality Mandates are estimated to be 5-10% of premiums. RI mandates provide coverage that has broad political support (mental health). Some opportunities with infertility benefit. Rest contribute minimally to cost. Rhode Islanders consistently opt for broad benefits, even if they have to pay for it. Summary & Conclusions: Myths & Realities

28. Myth #4 Group purchasing will get us lower costs, more choice and better service Reality True cost drivers and management realities outweigh theoretical benefits. Public intervention needed to deliver large group advantages to small businesses. Summary & Conclusions: Myths & Realities

29. Myth #5 This problem is too big to overcome. Reality Health insurance is difficult in a voluntary market. We can move beyond mere cost-shifting. There are major systemic costs we can remove if we focus on the underlying medical expenses. Summary & Conclusions: Myths & Realities

30. Potential Strategies to Enhance Affordability Summary & Conclusions A spectrum of product choices to meet customer need Products that address the underlying cost of health care by creating appropriate incentives for consumers, employers and providers, using these concepts: ­ Focus on primary care, prevention and wellness ­ Active management of chronically ill ­ Least cost, most appropriate setting ­ Evidence based, quality care

31. Potential Strategies to Enhance Affordability Summary & Conclusions Provider payment strategies to promote the same concepts of appropriate services Simple administration processes for providers and consumers Cost information for consumers ­ On price ­ Trade offs