State Reforms of Small-Group Health Insurance Vivian Ho, Ph.D. Baker Institute Chair in Health Economics, Rice University Associate Professor, Baylor College of Medicine November 7, 2008

Outline  History of State Reforms  The Effect of Reforms  Why?  Implications for Three-Share Programs

History Source: CDC, NCHS, Health, United States 2007

History  In early 1990’s 45 U.S. states enacted new regs governing the sale of insurance to small-employer groups. – Guaranteed issue – Guaranteed renewal – Premium rating reform – Pre-existing conditions limitations – Portability provisions.

History  NY and NJ had strongest reforms.  NY – Prohibited insurers from denying coverage to any small group or individual. – Required premiums to be community rated  All subscribers charged same price, regardless of age, sex, or any other predictor of medical expenditures.

Effect of NY Reforms  40% of individuals saw premiums rise >=20% – Mostly for younger consumers.  18% of individuals saw premiums fall >=20% – Mostly for older consumers.

Effect of NY Reforms  Analysis comparing NY to PA (w/ no reforms) and to large firms in NY (not subject to reforms) finds no effect of NY’s reforms on health insurance coverage rates. (Buchmueller & DiNardo, American Economic Review 2002)  Age distribution of the insured became older, but this occurred in all states.  Studies using data from other states also found little/no effect of state reforms. → State reforms were ineffective

Why were State Reforms Ineffective?  In many states, the laws had little “bite.” – Most states allow rates to vary by age & sex. – Rate bands (e.g. 35% +/- plan’s standard rate) are still too wide.  Insurers could avoid the intent of new regs. – In many states, insurers required to sell only 1 or 2 products as guaranteed issue.  When new regs raised rates for lower-risk groups, they moved to less costly HI – In NY, HMO coverage rose 25% after state reforms.

Why were State Reforms Ineffective?  These studies suggest that demand-side (not supply-side) factors are the reason for falling insurance coverage.  “…near-universal coverage can be achieved only with a combination of public subsidies and some kind of requirement that people obtain health insurance. It is not reasonable to expect supply-side policies, like the state-level small- group reforms, to have had a major effect on coverage.” (Buchmueller, in Monheit & Cantor, State Health Insurance Market Reform, 2004)

Implications for Three-Share Programs  3-share programs are demand-side in nature and should be effective in raising coverage.  However, only one has been successful long-term. – Access Health in Muskegon, MI – Origins: planning grant from the Kellogg Foundation – Operating since 1999.

Access Health  ~1,100 covered for the past 3 years.  Medical costs ~ $155 pmpm  Admin costs ~ $17 pmpm  Adult premium: $46 contributed by both employer and employee.

Access Health  Funded by state’s Medicaid DSH funds.  Employers’ payments to Access Health treated as an “intergovernmental transfer” (IGT) to the state.  State certifies the IGT as a DSH payment to Muskegon’s 2 hospitals, which generates a federal match.  The federal match goes to the 2 hospitals, which turn funds over to Access Health.

Access Health  Average monthly premium for employer sponsored coverage in 2008 is ~$390.  How does Access Health keep costs so low?  HI coverage is interwoven into the local community support system. – Blended health insurance/social insurance

Access Health  If customer can’t afford copays, Access Health will help them apply for heating assistance, so funds can be used to pay for health care.  If breast or cervical exam indicates an abnormality, Access Health helps patient get into Medicaid BCCPT program.  Connection w/ Lions Club helps customers get glasses for $30/pair.  Pharmacy assistance programs sponsored by drug companies

Access Health  Focuses on employees earning $7-$9/hr and part-time workers (20-30 hrs/wk).  If try to cover workers earning $13-$14/hr, will crowd-out existing employer programs.

Additional Role for Government?  Government as a reinsurer.  Health care expenditures are highly skewed. – The top 1% of people account for 28% of total health care expenditures.  Gov’t could offer to pay 90% of costs for insurees w/ $50k costs in a year.  Reinsurance would dramatically lower risk, so HI premiums would fall.

Conclusions  Changing state regulations of the insurance market have not helped raise coverage.  3-share programs can be helpful, because they address demand-side problems in the market.  Successful 3-share programs require integration with a well-integrated community safety net.  Future reforms should consider government as a reinsurer.