Health Insurance Reforms and Regulations

Transcription

1 Health Insurance Reforms The health insurance markets in many states have struggled to maintain affordable plan options for small businesses and individuals. Access to coverage in the individual markets of most states continues to be severely limited for people with preexisting conditions. In addition, the large year-over-year increases in health care spending drive premiums ever higher. The small group market remains unaffordable and unpredictable for many small business owners who struggle to continue to offer coverage as premiums increase. Without more regulation or incentives to facilitate greater enrollment across a wide range of individuals in the market, these problem will persist. A number of congressional proposals would directly influence health insurance oversight and market conditions. However, in the absence of federal action, it will again fall to the states to craft their own solutions to these vexing problems, which will be complicated by the political polarization spawned by the federal health reform debate and the severe budget difficulties most states are currently facing. States have been and will continue to be, with or without federal reform, at the forefront of innovation in health care, making them, in the words of Justice Louis Brandeis, the laboratories of democracy. Over the years, many states have forged ahead in enacting and implementing a wide variety of reform strategies. Indeed, much of the federal legislation enacted to improve health coverage in this country, like the Health Insurance Portability and Accountability Act of 1997, has been based upon successful state reforms. Overview of Current Regulation Health insurance regulation is essentially a mix of federal and state oversight. In general, the states regulate health insurance. However, the federal government has, over time, adopted laws and regulations that have overlaid federal autonomy. Today, approximately 36 percent of health coverage falls under the jurisdiction of state regulators. Federal oversight roles include the following: The Employee Retirement Income Security Act (ERISA) of 1974 established the federal government as the regulator of employer-provided benefits, including health insurance. Under ERISA, the federal government regulates the employer-employee relationship, but the authority of states to regulate private insurance purchased by the employer is preserved. If the employer does not purchase insurance, instead choosing to self-insure (bear the risk themselves), then state laws are preempted. Government plans are also exempt from state oversight. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 established minimum federal standards for the regulation of, primarily, small group coverage. If a state law does not meet the minimum standards, then that state law is preempted and the federal government regulates. 1

2 Beyond these federal preemptions, states oversee and regulate the individual and small group markets, and other aspects of private health insurance. The following section briefly describes the state regulatory framework, including market regulation, business and operations oversight, and consumer protections. Health Insurance Markets Individual Market. The individual (or non-group ) market is solely regulated by the states. In most states, this market is populated by those who are self-employed or do not have access to coverage through their employer. Small Group Market. The small group market, in most states, consists of employers with between 2 and 50 employees. Some states include groups of 1 (the self-employed) and can also include employers with up to 100 employees. Large Group Market. The large group market is composed of employers with too many employees to purchase in the small group market and are not self-insured, thus falling under state regulation. Licensure and Solvency All states require health insurance carriers to be licensed before they can sell health insurance in the state. During the licensure process, the state reviews the background of the owners and board as well as the business plan, finances, and other information to determine whether they meet minimum state requirements. States establish minimum solvency standards for health insurance carriers to ensure they have sufficient funds to meet their obligations. The National Association of Insurance Commissioners (NAIC) assists states in reviewing quarterly and annual financial statements to identify any potential problems in a timely manner. Access to Coverage Guaranteed Issue. HIPAA established a national standard that all small group plans must be guaranteed issue no small employer may be denied coverage. An individual who had creditable group coverage is guaranteed access to an individual plan designated for HIPAAeligibles by the state. All states have laws that meet this minimum standard, while a few states have extended guaranteed issue to the individual market. Preexisting Condition Exclusion Limitation. HIPAA established a national standard for group coverage that limits preexisting condition exclusions provisions in a policy that exclude coverage of care related to a particular disease, disability, ailment, etc. that was identified by the patient or their doctor during the look back period prior to the consumer purchasing the coverage. The HIPAA standard allows for a 6-month look back period and limits the exclusion period to 12 months. The exclusion period is reduced by a month for every month the person had creditable coverage without a significant gap prior to enrollment. States may create a more stringent, but not less stringent, approach to preexisting condition exclusions. 2

3 High-Risk Pools. Thirty-five states have created high-risk pools to provide health care coverage for uninsurable individuals and families. Typically, a consumer must have been denied coverage in the individual market before they can enroll in the high-risk pool and premiums are capped at percent of the average rate in the individual market. The pools are primarily funded by assessments on health insurance carriers. Dependent Coverage. Many state laws require insurance carriers to allow enrollees to purchase coverage for dependents over age 18, up to a certain age. This requirement is often limited to unmarried children or children in school. Forms and Rates Review of Policy Forms and Rates. Insurance carriers are required to submit policy forms (contracts) and premium rates to the Department of Insurance. Some states require prior approval before the forms and/or rates can be used; others require the forms and/or rates to be filed for review or informational purposes only. Carriers must certify that the policy forms meet the requirements of state law and that the premium rates comply with state rating rules. Rating Rules. There are four main types of rate regulation in place in the individual and small group markets today: Actuarial Justification: In markets with actuarially justified rating requirements, insurers must demonstrate a correlation between characteristics of the insured and increased medical claims costs. The NAIC has adopted safe harbors for case characteristics commonly used for setting premiums within which plans may generally vary rates without providing justification. Plans that vary rates in excess of these safe harbors may be required Individual Market Rating Rules to submit data for justification. This is the most common form of rate regulation in the individual and large group markets Rating Bands: Particularly in the small group market, many states have implemented rating bands that limit the variation in premiums attributable to health status and other characteristics. Rating bands are either expressed as a ratio of the highest rating factor to the lowest (e.g., 1.5:1) or as the allowable variation above and below an index rate (e.g., +/- 30 percent). Composite rating bands may be used to limit the combined effects of multiple case characteristics (e.g., a composite rating band that allows 4:1 variation based upon health status, age, gender, industry, and group size combined). HI CA OR WA NV AK ID AZ UT MT WY NM CO ND SD NE KS TX OK MN IA MO AR LA WI IL MS IN MI TN AL KY OH GA WV SC FL PA VA NC NY VT NH ME MA RI CT NJ DE MD DC No Rating Structure Community Rating Adjusted Comm unity Rating Rating Bands Hybrid M ichigan Blue Cross/Blue Shield must u se com munity r ating. There is no rating structure for other carriers. 3

4 Adjusted Community Rating: Adjusted (or modified) community rating laws prohibit the use of health status or claims experience in setting premiums. Other case characteristics, such as age and geography, may be used to vary premiums, though limits may be placed upon these factors as well. Small Group Premium Variation *Not e: Mich igan HM Os an d Blue Community Rating: Pure Cross/Blue Shie ld ar e rest ricted to 3.12: 1 No Rating Structure 19.1:1 25:1 maxim um va riatio n. All othe rs m ay use 3.96maxim um va riatio n community rating laws prohibit the use of any case characteristics besides geography to vary premiums. This form of rate regulation is rarely used. Key Patient Protections Mandated Benefits. States have adopted a variety of benefit mandates some more than others. These mandates require carriers to include in their policies coverage of certain services, e.g., chiropractic care, prenatal care, mental health services, etc. Access to Providers. States have adopted laws requiring insurers to reimburse certain classes of providers for services that are covered by the plan (e.g., psychologists who provide mental health care covered under the policy). States have also enacted laws ensuring access to emergency services, specialists, pediatricians as primary care providers for children, and others. Grievance and Appeals Rights. State laws ensure enrollees have timely access to internal and external appeals processes to resolve questions regarding coverage or medical necessity decisions and to grievance procedures. Oversight of Marketing Practices. States require that marketing materials be easily readable and not misleading or fraudulent. Insurance regulators have authority to review marketing information to ensure they comply with Unfair Trade Practices laws and other regulations. States also license and oversee the activities of insurance agents and brokers to protect consumers from false or misleading materials or claims. Review of Market Conduct. State regulators use market conduct exams, corrective action plans, and penalties to make sure carriers comply with state laws and regulations and conduct themselves in a way that is not detrimental to consumers. Prevention of Fraud. States identify fraudulent plans and work with other states and the federal government to shut them down and prosecute the organizers. Public education campaigns have been effective in making consumers aware of such plans. HI CA OR WA NV AK ID AZ UT MT WY NM CO ND SD NE KS TX OK MN IA MO AR LA WI IL MS Community Rating Adjusted Community Rating IN MI TN AL KY OH GA WV SC NC FL PA VA VT NY NH ME CT NJ DE MD DC MA Rating Band Variability: 13:1 or less 13.1:1 19:1 RI 25.1:1 or greater 4

5 Federal Insurance Reforms The Congress has offered a number of reforms that directly influence current state efforts in insurance regulation and oversight. These reforms may imminently become law, creating the need for immediate state action and longer term implementation efforts. The following is a review of the major components of that reform package, including any known flexibilities and deadlines. Immediate Reforms Temporary High Risk Pool Program. The legislation would provide $5 billion for the immediate creation of a federal program to subsidize coverage through high risk pools to uninsured individuals with preexisting conditions. There may also be other ways that states could access these funds to provide coverage. Medical Loss Ratios. Insurers would have been required to spend a specified percentage of premiums on health care or other services that improve health care quality and provide rebates to consumers for excess nonmedical expenditures. Rate Review. Perhaps in separate legislation, the Congress is considering authorizing the Secretary of HHS to work with states in eliminating unreasonable rate increases in insurance products. Through a rate review process in states or at the federal level, the legislation would allow for the denial or remediation of unreasonable increases in insurance rates or premiums. Preemption may be considered. Reforms to be Implemented by 2014 Guaranteed Issue. Beginning in 2014, insurers would have been required to accept all applicants for health insurance in the individual market. HIPAA already requires guaranteed issue in the small group market. Adjusted Community Rating. Insurers would have been prohibited from using any factors, including health status and gender, other than limited use of age, geography and tobacco use, in setting premiums. Health Insurance Exchanges. The reform package would allow for the creation of health insurance exchanges at the state level. These exchanges would offer individuals and small groups a forum for purchasing insurance. The components remain unclear, but funding would be available for states to conduct this implementation activity. Subsidies. Low and moderate income individuals below 400% of the federal poverty level would qualify for sliding-scale subsidies that cap the cost of health insurance premiums and costsharing at a percentage of their household income. Preexisting Condition Exclusions. Insurers would have been prohibited from imposing any preexisting condition exclusions. 5

6 Essential Benefits Standards. All insurance coverage would have been required to provide, at a minimum, coverage for specified categories of services and coverage of preventive services without cost-sharing. Limits on Cost-Sharing. Annual and lifetime limits would have been prohibited, and out-ofpocket costs would have been limited to approximately $5,000 per year for individuals and $10,000 for families. Individual Mandate. Most individuals would have been required to obtain health insurance coverage or pay a tax penalty. There would be penalties assessed for those not meeting the mandate. Penalties levels would be based on household income, with low income individuals being exempted. Employer Responsibilities. Most employers that fail to provide a specified level of coverage would have been required to pay monetary penalties if an employer's worker received subsidies through the health insurance exchange. Preemption of State Laws Like HIPAA, federal legislation would preserve any state laws that did not interfere with the application of new federal provisions, allowing states to enact and enforce requirements that are more stringent than the federal minimum standards. For a number of components, there may be a federal fallback option for states that choose not to conduct the activity. At this time, it remains unclear when states will need to decide whether participate or allow the federal fallback option to kick in. Funding for States States would have the opportunity to access federal funds to implement several provisions of the legislation. High Risk Pools. The interim high risk pool provision would allow the Secretary of HHS to implement the program out through contracts with states and nonprofit organizations. To be eligible for these funds, coverage provided through the program would have been required to meet a series of requirements regarding benefits, premiums and cost-sharing specified in the legislation. Federal funds would not be available under this program for individuals already enrolled in high risk pools. A total of $5 billion would be available for these purposes through the end of Exchanges. The legislation directed the Secretary of HHS to award grants to states for activities related to planning and establishment of health insurance exchanges. Grants would be renewable, as long as states made progress towards establishing an exchange, until 2015 when funds would no longer be available. Grant amounts would have been left to the discretion of the Secretary. 6

7 Rate Review. The bills would provide funds for states that meet minimum standards for review of requested premium increases. Timeline for Reforms The initial reforms would become effective for plan years beginning shortly after enactment. The bulk of the market reforms, the individual mandate, employer requirements, health insurance exchanges, and subsidies would become effective January, The final legislation may include the opportunity for early adoption of some aspects of the reforms, or for staging of implementation. State Innovations If federal reform does not occur, states may continue their efforts to lead in making innovative changes to health insurance marketplaces. Important lessons can be learned from other states and the recent federal debate. Below is a discussion of state options to address several challenges and guidance that can influence the ultimate success of efforts to: Encourage more people to buy insurance, particularly when they are healthy; Help keep insurance affordable; and Connect individuals with their insurance options through exchanges. Avoiding Adverse Selection Created by Market Reforms Throughout the debate over national reform there has been much discussion about the implementation of insurance changes in the individual and small group markets, including guarantee issue, no preexisting condition exclusions, rating reforms, and no lifetime or annual limits. However, there were concerns expressed that applying these reforms without significant subsidies would mean that young, healthy individuals would forego coverage until they need it, thus leading to an unhealthy pool and higher premiums. The following are ways to address this unwanted result or such reforms. Retain Preexisting Condition Exclusion. If a person chooses to go without insurance, grant the individual a guaranteed issue to coverage, but retain a 12-month preexisting condition exclusion, reduced by one month for every month of qualified coverage. An open enrollment period should also be included to limit when individuals may enter the market. This reform could be phased in over time, in three steps: 1) Begin with individuals who are moving from group to individual coverage. Currently, they only have access to a single plan or the high risk pool in most states. 2) Then, extend guarantee issue to persons moving from one individual market policy to another. The lack of guaranteed issue traps people in coverage in today s market. 3) Finally, extend guaranteed issue to all individuals. Add a Penalty for Late Enrollment. Set a specific age (say, 24 or 25), at which time, everyone is required to have qualified coverage. At that time, they would have guarantee issue, no preexisting condition, subsidies, and other protections. If a person chooses to wait to purchase coverage, then they are subject to preexisting condition exclusions and a penalty for late 7

8 enrollment (added premium). This would be similar to the way Medicare Part B and Part D work. Allow People to Purchase Less Coverage. Retain the individual mandate (with lower penalties) but allow people to purchase less coverage. Define minimum coverage the same way HIPAA defines qualified coverage, but add a maximum out-of-pocket expense of, say, $6,000 for individuals and $12,000 for families. This would ensure the coverage is major medical, plus it would have to meet state mandated benefits, but the market would set the benefit levels and costsharing within the limits. This, combined with lower subsidies, would allow more people to meet the individual mandate, while ensuring they enter the market. Importantly, everyone would have access to network providers, negotiated payment rates, and consumer protections, even if the coverage is very limited. If a person chooses to increase his or her coverage, adding a preexisting condition exclusion for benefits that were not covered by the previous plan would help stabilize the market. Implement an Individual Mandate and Government Subsidies. The most effective method for avoiding adverse selection is an effective, enforceable mandate for coverage, combined with subsidies to assist low-income persons. The intent of an individual mandate is to ensure, through an annual penalty, that the young and healthy are part of the pool and that coverage is affordable for everyone. However, a strong mandate with sufficient penalties has proven very difficult to pass at the federal and state levels, especially given the lack of resources to provide the necessary subsidies to make coverage affordable for lower-income persons, many of whom are young. Addressing Premium Shock Created by Rating Reforms The premium shock that is sure to be felt by low-risk policyholders when new rating and other reforms are applied particularly in states with few existing requirements must be addressed. Combining grandfathering of rating rules for the individual market, phasing in rating rules for the small group market, additional subsidies in the initial years, and an effective individual mandate can ameliorate the impact of the new reforms on those with existing coverage. In the small group market, small businesses that are currently at the lower end of the rate scale, based on average age, industry, health status, gender mix, or class of business, will face higher premiums as rating characteristics are eliminated or limited. Of course, rates will be reduced for those on the high end of the rate scale. For example, in a state with health status rating bands (1.66:1), maximum age rating (5:1), industry (1.5:1), and class of business (1.25:1), the maximum variation would be 15.5:1 based on these factors. If the state moves to modified adjusted community rating where health status, industry, and class of business rating is eliminated and age rating is limited to, say, 3:1, then the maximum variation would be 3:1 for these factors. To put it in terms of possible premiums, under current law the possible rates might range from $100 to $1550/month, but under the new rules the highest premium could not exceed the lowest premium by more than 300 percent. Therefore, the highest premium would need to come down and the lowest rate would need to 8

9 increase. The tighter rating rules bring the ends toward the weighted average rate to ensure the premiums meet liabilities. The issue is exacerbated in the non-group market, where the new rating rules will be far tighter than those currently found in most states. In all but a handful of states, actuarial justification is the only limitation on premium variation. Young and healthy enrollees who can currently purchase a good major medical policy for about $100 per month will see their rates rise significantly. This potential rise in rates for the young and for healthy businesses and individuals is being characterized by many as premium shock, and ameliorating the impact of the reforms for current policyholders will be the key to effective implementation. There are a variety of methods to help address potential premium shock to existing policyholders. Grandfathering. Allowing current policyholders to renew their non-group coverage under the current rating rules, provided there is no significant change in that policy, would allow the young and healthy to retain their lower rates. In addition, if states place the grandfathered non-group plans in a separate rating pool, the rates would remain stable until the individual becomes older and sicker, at which time the individual could move into a non-grandfathered plan and benefit from the new rating rules. Ironically, this could result in a rare health spiral, where the risk of the grandfathered pool continues to improve as the higher-risk persons leave the pool. To level the playing field a little, and reduce the obvious advantage to carriers who currently dominate the non-group market, a risk-adjustment mechanism should be applied to the grandfathered plans. Eventually, the grandfathered plans will be phased out as individuals move to group coverage, seek subsidies available to the non-grandfathered plans, or the premiums become more affordable in the non-grandfathered market as the individual s risk increases. Grandfathering the small group rating rules indefinitely is not recommended. If the lower rates for the younger, healthier businesses are maintained, then how can premiums for higher-risk businesses be decreased? Without an employer mandate that applies to micro-businesses and/or substantial subsidies, there will not be an influx of healthier small groups into the marketplace. Therefore, the new marketplace will be populated by the sicker groups that hope to find lower and more stable rates under the new rating rules. Unfortunately, the risk of the pool will prevent any significant reduction in rates or stability over time as grandfathered groups become high risk and move out of the old risk group. In the past, no state has grandfathered small groups when moving to adjusted community rating. Instead, states typically phase in the new rating rules for everyone over a three-to-four-year period, as suggested in the NAIC model. Subsidies. Both direct and indirect subsidies can lower premiums for everyone and could be particularly effective in the initial years as the new rating rules are implemented. Tax credits or other direct subsidies for individuals or small businesses can help offset the impact of the premium increase resulting from the rating reforms. Government reinsurance payment to carriers 9

10 to help pay for the medical costs of high-risk persons can help stabilize the market and reduce premiums, if there is strong oversight to ensure the savings are passed through to consumers. Individual Mandate. An effective individual mandate will ensure that the young and healthy participate in the marketplace. This is particularly important in the non-group market. If current policies are grandfathered as described above, the non-grandfathered pool will be primarily populated by those who will benefit under the new rules i.e., those who have higher risk factors. If a significant number of the low-risk uninsured are not strongly encouraged to participate in that new market, rates will remain unaffordable for many or subsidies will become unaffordable. And, things will become increasingly worse as those in grandfathered plans and those who remain uninsured choose to purchase coverage when they become sick. In effect, there would be a health spiral for the grandfathered plans and a death spiral for the non-grandfathered plans if the individual mandate is not effective. On the other hand, an effective individual mandate would create a stable pool in which premiums are far more affordable. Designing Health Insurance Exchanges Proponents of health insurance exchanges argue that they have the potential to provide purchasers with a greater variety of options in the marketplace and a means of making direct comparisons between policies. These factors would be particularly advantageous for individuals and micro-businesses with less than 10 employees. Others caution that exchanges on their own are unlikely to lead to substantial premium reductions and point to the potential for market segmentation and adverse selection if they are not constructed carefully. The issues and choices in setting up an exchange are discussed in a separate paper. In addition the functions of the exchange, states must carefully consider the design of the exchange to ensure that the participating plans are not at a competitive disadvantage to those sold in the outside market. For the long-term health of the exchange, carriers must not be allowed to shift risk to plans in the exchange. Applying regulations equally to plans in and out of the exchange; ensuring consumers are informed about all options in and out of the exchange; and requiring carriers to spread risk across all products, regardless of how they are sold, would help ensure sustainability of the exchange. Sales Outside the Exchange. Another question to consider is whether plans will be allowed to sell coverage outside of the exchange. If sales are allowed outside of the exchange, it is important that the same rules concerning access, rating, and consumer protections apply to coverage inside and outside the exchange to reduce the potential for adverse selection between the exchange and the outside market. Furthermore, the plans sold outside of the exchange must not be significantly different than those in the exchange and the marketing of outside plans must be closely monitored. An additional step that would be helpful to reduce the potential for adverse selection would be to require carriers to pool all of their business in a state, whether it is sold inside or outside of the exchange. Employee Choice Within the Exchange. Some exchange proposals have suggested giving individual employees of small businesses receiving coverage through the exchange their choice 10

11 of any plan offered in the exchange. While the portability of such coverage is extremely attractive, a number of technical difficulties make this a difficult task that must be approached carefully to avoid market distortions. If the group is rated as a whole, there is a potential for adverse selection as the individual employees select coverage from multiple insurers and become members of separate risk pools. Higher-risk employees would tend to gravitate toward more comprehensive coverage but would only carry with them a premium based upon the average risk of the group. Lower-risk employees, on the other hand, would tend toward less comprehensive coverage and would carry with them premiums that are higher than their individual risk would suggest. Furthermore, for an individual whose risk is average for a given group, the premium may not be sufficient to cover costs, even when selecting an identical plan from a different insurer if the risk pools of the two carriers are different. Some measures, like risk adjustment or restrictions on the scope of employee choice, may be necessary to prevent adverse selection. If premiums are set based upon individual characteristics rather than composite characteristics for the entire group, employees will lose some of the benefits of purchasing as a group. Other Issues to Consider in State-Based Insurance Reforms It is unclear what the final disposition of the federal reform legislation will be. However, whether federal legislation is signed into law or not, it will be up to states to implement reforms that will address the ever-growing problems of access to and affordability of health insurance and the high cost of health care. It is clear that the public perception is skewed at this time, due to the rancor of the national debate. Governors interested in implementing insurance reforms will need to consider a strong communications strategy regardless of what path they choose. In addition, states must consider their own challenges in finding the resources for these efforts, and for making sure their markets can bear the strains that may come and are prepared to take advantage of new opportunities. Resources It is no secret that resources are limited. Comprehensive health insurance reform can be very expensive to state governments taxing both monetary and personnel resources. It can also place pressure on employers and individuals because of higher taxes and/or higher premiums. Future budgets will face tremendous risk if new entitlements are created. Of course, there is also a significant cost to state budgets, the economy, and individual pocketbooks if nothing is done. The current situation is unaffordable. Cost Containment Any effort to increase access to insurance will not be successful over time unless the overriding issue of rapidly rising health care costs is also addressed. While the health care challenge in this country is generally expressed in terms of the number of Americans without health insurance coverage, the root of the problem lies in the high cost of providing health care services in this 11

12 country. According to National Health Expenditures data, health care spending reached $2.3 trillion in 2008; 16.2 percent of GDP; and $7,681 for every man, woman, and child in the United States. 1 This level is twice the average for other industrialized nations. Insurance is simply a tool to finance the underlying cost of health care, so unless spending is brought under control, all state and federal reforms will shift the financial burden from one group to another, but not solve the underlying problem. The challenge moving forward will be to overhaul the delivery system to promote prevention, quality, and results-based care; to encourage healthy lifestyles; and to eliminate waste and fraud in the system. Specifically, disease management, enhanced use of information technology, improved quality of care, wellness programs and prevention, and evidence-based medicine have shown promise in limiting the growth of health care spending. Whatever is done in insurance reform should be done in a manner that is consistent with sound cost control practices. Bending the cost curve must be a key goal, but it has proven very difficult to achieve through legislation or government programs. All stakeholders must be part of the solution and long-term vision and patience will be required. Conclusion If federal reform efforts fail, states will have the opportunity to demonstrate their ability to resolve the specific issues facing their residents in a way that recognizes the unique economic, demographic, geographic, and health care delivery characteristics of the state. Resources are strained and roadblocks exist, but states need to be the leaders on reforms, just as they have in the past. States continue to adopt a variety of reforms some comprehensive, some incremental and they can learn from each other. States need to share information on the impact of reforms and help each other build upon approaches that have proven successful. 1 Centers for Medicare & Medicaid Services, National Health Expenditures, (Baltimore, MD: Centers for Medicare & Medicaid Services, January 2010). 12