Insurance Reform Goes Crazy

While the National Association of Insurance Commissioners (NAIC) was rolling out a set of model laws for the states to consider in reforming their small group insurance laws, a handful of states decided to go much, much, further.

While the National Association of Insurance Commissioners (NAIC) was rolling out a set of model laws for the states to consider in reforming their small group insurance laws, a handful of states decided to go much, much, further.

The NAIC models were focused on keeping the market working while ensuring access to coverage and preventing excessive rating variations between groups. It also proposed two alternative forms of risk sharing between carriers so no one insurance company would be hit too hard by a surge of high-risk enrollees. Almost all of the states adopted some variation of the rating restrictions but none adopted the risk-sharing provisions. A few years later the federal government adopted its own version of these requirements by enacting the Health Insurance Portability and Accountability Act of 1996 (HIPAA). These laws would go on to severely damage the market for small group coverage throughout the United States. We’ll come back to that in a future post.

Meanwhile, a few states went well beyond these requirements and decided to apply even more onerous restrictions to both the individual (non-group) and small employer markets. New Jersey, New York, Maine, Massachusetts, Vermont, Connecticut, Washington, and Oregon all applied “community rating” to one or both market segments, along with “guaranteed issue” of some form.

Community rating means that all enrollees are charged the same premium regardless of their risk factors, and guaranteed issue means that all applicants must be accepted for coverage whenever they apply. In some cases the states also adopted a limited number of allowable standardized benefit plans.

Economists of every political persuasion warned these states that such restrictions cannot work in a voluntary market. At a minimum they will discourage the young and healthy from enrolling until they know they will need services, which will spur a “death spiral” of decreasing enrollment and ever-higher premiums. Liberal economists concluded that enrollment should therefore be mandatory, while conservative economists concluded that the restrictions should not be adopted at all. But both sides agreed that combining voluntary enrollment with these restrictions would doom the market.

But most of the politicians and “consumer advocates” in these states had no interest in listening. They were in such a fever to “do something” that reason was thrown out the window. It may also be possible that some of them did understand the consequences and knowingly adopted the restrictions anyway, thinking that the sooner the private market was destroyed, the sooner they would realize their real dream of a government-run health care system.

The late Conrad Meier of the Heartland Institute did a nice job of summarizing the experience of all eight states in a 2005 publication, “Destroying Insurance Markets.” This publication describes the precise experience of each state. He quotes the Council for Affordable Health Insurance (CAHI) from 1993 as warning against this approach to insurance regulation:

Most of today’s uninsured are young and do not have much money. Community rating forces them to subsidize the cost of the middle-aged, who are at their peak earning power. Forcing the young to pay more will drive them out of the insurance market, raising costs for everyone.

Meier went on to look at what had happened ten years later and found that:

• Between1994 and 2003, the share of the population in these eight guaranteed issue states covered by individual health insurance plans fell dramatically.
• The eight states have seen a massive exodus of private insurance companies that had been selling individual health insurance policies.
• Premiums for individual insurance have soared.
• By contrast, states that did not adopt guaranteed issue and/or community rating have seen much smaller premium increases.

Meier took a closer look at each state, but we will confine our examination here to New Jersey, the poster child of these changes. He focused on three issues: raising premiums, declining coverage, and abandonment of the state by carriers.

Ten years after the reforms went into effect the rising cost of coverage was jaw dropping. For instance, Aetna’s Plan “D” family premium went from $769/mo. in 1992 to $6,025/mo. in 2005. The increase for the New Jersey Blues was similar. These are neither the worst nor the best examples. Plan “D” is a fairly rich benefit design, but not outrageously so, with a $500 deductible and 80/20 coinsurance. Meier reported that in 2005 the lowest monthly premium for single coverage for each of the five plan designs was:

Source: “Destroying Insurance Markets”

It is worth noting here that in states without community rating a 24-year old male would likely be charged under $100/mo. for coverage like this.

The number of people covered by individual coverage in New Jersey dropped dramatically, though the count varies considerably depending on who is doing the counting/ Meier reports that the U.S. Census Bureau counted 998,000 people with non-group coverage in 1994 and 623,000 in 2003. The Employee Benefits Research Institute put it at 500,000 in 1992 and 300,000 between 2001 and 2003, while the state on New Jersey said coverage fell from 156,565 in 1993 to 78,298 in 2003. In all three cases enrollment fell substantially after the reforms were enacted.

In an article in Health Affairs in 2004, Alan Monheit and colleaguesconfirm these assessments, writing that, “despite positive early evaluations, the IHCP (New Jersey’s individual market) appears to be heading for collapse.”

The “positive early evaluation” Monheit refers to is an article by Katherine Swartz and Deborah Garnick written in 1999 that was gushing in its praise for the program, calling it an “unprecedented achievement.” To be generous, perhaps Swartz looked at it too early, before the perverse effects had really kicked in. But for years later the “policy community” kept citing the Swartz paper as proof that New Jersey was working just fine and those of us who predicted otherwise were delusional.

But Swartz was wrong. Monheit writes:

The IHCP’s current situation points to a market that is heading for collapse. Enrollment has declined from a peak of 186,130 lives at the end of 1995 to 84,968 at the end of 2001. In addition, premiums have increased two- to threefold above their early levels. These changes have raised concerns as to whether a comprehensive regulatory effort such as the IHCP can yield a sustainable health insurance market.

The reasons are obvious to anyone not blinded by a political agenda:

Since pure community rating imposes the same premium on low- and high-risk people, the premiums of low risks exceed their actuarially fair level, while those of high risks are lower than their fair level. A sustainable market equilibrium may be tenuous under such a requirement.

Monheit also points out that the small group market was relatively healthy during this period, in part because New Jersey was enjoying economic growth (and job creation) and because the Small Employer Health Benefits Program, which was implemented about the same time, allowed for greater rate variation based on age and location. Indeed, while premiums in the individual market more than doubled from 1996 to 2000, small employer insurance grew only 30%. So enrollment in this segment grew from 694,312 in 2004 to 937,784 by the third quarter of 1999, before dropping again to 884,104 in the third quarter of 2001.

In the past few years New Jersey dropped its pure community rating requirement in the individual market, but one is left to wonder how many families were financially destroyed in the meantime by this misguided social experiment. How many people found they could no longer afford coverage and were thrown into the mercies of the charitable system? How many people continued to pay politically inflated premiums and were forced to curtail other important services?

No one ever bothers to count the people damaged by liberal social engineering. So people like Katherine Swartz continue to sleep well at night, heedless of the damage she has caused.