1. 1 Fundamentals of Health Insurance Regulation Guenther Ruch Wisconsin Office of the Commissioner of Insurance

2. 2 Overview Risk Pooling Risk Pooling Adverse Selection Adverse Selection Health Insurance Markets Health Insurance Markets Rating Rules Rating Rules Licensure Licensure Solvency Solvency Consumer Protection Consumer Protection Market Conduct Regulation Market Conduct Regulation

3. 3 Risk Pooling Pooling spreads the cost of high cost individuals among a larger group of people, so that healthy individuals subsidize the cost of sicker individuals. Pooling spreads the cost of high cost individuals among a larger group of people, so that healthy individuals subsidize the cost of sicker individuals. Larger pools are more likely to have predictable incidence of health conditions, and thus more predictable risk. Larger pools are more likely to have predictable incidence of health conditions, and thus more predictable risk.

4. 4 Adverse Selection Groups and individuals make decisions to get the best deal for themselves based upon their knowledge of future health care needs. Groups and individuals make decisions to get the best deal for themselves based upon their knowledge of future health care needs. Pools with rules that benefit the healthy by limiting pooling or strict access rules will attract healthy individuals. Pools with rules that benefit the healthy by limiting pooling or strict access rules will attract healthy individuals. Pools with rules that benefit the sick by increasing pooling or lenient access rules will attract sick individuals. Pools with rules that benefit the sick by increasing pooling or lenient access rules will attract sick individuals.

5. 5 Adverse Selection “Death Spiral” Pool Becomes Less Healthy on Average PremiumsRise Healthy Risks Opt Out

6. 6 Health Insurance Markets Large Group Market: Businesses with more than 50 employees Large Group Market: Businesses with more than 50 employees Stable, predictable risk Stable, predictable risk Low risk of adverse selection Low risk of adverse selection Low administrative costs Low administrative costs Relatively light regulation Relatively light regulation Small Group Market: Small businesses, typically 2-50, though states vary Small Group Market: Small businesses, typically 2-50, though states vary Higher risk of adverse selection Higher risk of adverse selection More volatility of risk More volatility of risk Higher administrative costs Higher administrative costs Laws and regulations to improve pooling and access Laws and regulations to improve pooling and access Individual (Nongroup) Market: Individuals and dependants Individual (Nongroup) Market: Individuals and dependants Most often includes sole proprietors Most often includes sole proprietors Highest risk of adverse selection Highest risk of adverse selection Highly volatile risk Highly volatile risk Highest administrative costs Highest administrative costs Typically lightly regulated Typically lightly regulated

7. 7 Rate Regulation Large Group Market Large Group Market Competition among carriers self-regulates rates. Competition among carriers self-regulates rates. Small Group Market Small Group Market Rates regulated in nearly all states. Rates regulated in nearly all states. Individual (Nongroup) Market Individual (Nongroup) Market Rates regulated in 18 states. Rates regulated in 18 states.

8. 8 Understanding Rating Rules Community Rating Community Rating No adjustments for health or any other factors No adjustments for health or any other factors Adjusted Community Rating Adjusted Community Rating No health status variation No health status variation Typically allow variation for age and geography Typically allow variation for age and geography Rating Bands Rating Bands Limits total variation in rates or variation due to health, age, or other factors or combinations of factors Limits total variation in rates or variation due to health, age, or other factors or combinations of factors Actuarially Justified Rating Actuarially Justified Rating Insurers must justify use of rating factors Insurers must justify use of rating factors Common in nongroup market Common in nongroup market

9. 9 ME NY PA NH CT VT MA NJ VA NC SC GA FL WV KY TN AL MS MI WI MN IA HI AK KS NE ND SD MO IL IN TX MT ID NV UT WY CO NM AZ CA OR WA LA AR OK OH MD DE RI Community Rating 25.1:1 or greater Small Group Market Premium Variation DC Adjusted Community Rating Rating Band Variability: No Rating Structure19.1:1 – 25:1 13.1:1 – 19:1 13:1 or less *Note: Michigan HMOs and Blue Cross/Blue Shield are restricted to 3.12:1 maximum variation. All others may use 3.96 maximum variation

10. 10 ME NY PA NH CT VT MA NJ VA NC SC GA FL WV KY TN AL MS MI WI MN IA HI AK KS NE ND SD MO IL IN TX MT ID NV UT WY CO NM AZ CA OR WA LA AR OK OH MD DE RI Rating Bands Hybrid Michigan Blue Cross/Blue Shield must use community rating. There is no rating structure for other carriers. Individual Market Rating Rules DC Adjusted Community Rating Community Rating No Rating Structure

11. 11 Licensure Licensure is the key of all insurance regulation. Licensure is the key of all insurance regulation. All enforcement actions are based upon the company’s licensure. All enforcement actions are based upon the company’s licensure. Doing business as an insurer or a producer (broker or agent) without a license is a criminal offense. Doing business as an insurer or a producer (broker or agent) without a license is a criminal offense. Uniform Certificate of Authority Application Uniform Certificate of Authority Application Single application for licensing of insurers Single application for licensing of insurers 50 states and DC participate 50 states and DC participate Some require additional information Some require additional information New or redomesticating companies file Primary Application New or redomesticating companies file Primary Application Existing companies file Expansion Application Existing companies file Expansion Application

12. 12 Solvency Regulation Protects policyholders against the risk that insurers will not be able to meet their financial obligations (Pay Claims) Protects policyholders against the risk that insurers will not be able to meet their financial obligations (Pay Claims) Risk-Based Capital (RBC) requirements adjust minimum capital and surplus requirements to reflect a company’s risk exposure. Risk-Based Capital (RBC) requirements adjust minimum capital and surplus requirements to reflect a company’s risk exposure. Quarterly and annual financial statements Quarterly and annual financial statements Financial Analysis Financial Analysis Regular Examinations every 3-5 years Regular Examinations every 3-5 years Targeted Examinations Targeted Examinations

13. 13 Key Federal Protections Key Federal Protections HIPAA HIPAA COBRA COBRA Coverage Mandates Coverage Mandates Federal and State Federal and State State Protections State Protections Access to care Access to care Provider protections Provider protections Utilization review Utilization review Appeals Appeals Balance billing restrictions Balance billing restrictions Consumer complaints Consumer complaints Marketing review Marketing review Independent Review Independent Review Consumer Protections

14. 14 Market Conduct Detects and deters inappropriate behavior and ensures that business is conducted on a level playing field. Detects and deters inappropriate behavior and ensures that business is conducted on a level playing field. Market Analysis Market Analysis Review of data submitted to states and NAIC by carriers Review of data submitted to states and NAIC by carriers Market Conduct Initiatives Market Conduct Initiatives Investigations-Detailed inquiry into business practices Investigations-Detailed inquiry into business practices Interrogatories-Formal written questions about business practices Interrogatories-Formal written questions about business practices Examinations-Typically onsite comprehensive targeted reviews Examinations-Typically onsite comprehensive targeted reviews Complaints Complaints Assist consumers with their insurance problems Assist consumers with their insurance problems Detect inappropriate insurance company/agent behavior Detect inappropriate insurance company/agent behavior

15. 15 Summary The regulatory oversight of health insurance depends on the nature of the coverage The regulatory oversight of health insurance depends on the nature of the coverage There are some characteristics of health insurance that apply to all forms of the product There are some characteristics of health insurance that apply to all forms of the product Although health insurance is regulated by the individual states, there are certain regulatory standards for health insurance and health insurance companies that are uniform Although health insurance is regulated by the individual states, there are certain regulatory standards for health insurance and health insurance companies that are uniform The cost of health insurance is directly related to the cost of the services covered The cost of health insurance is directly related to the cost of the services covered