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The winners will be those who currently cannot get coverage and those that currently have high premium rates. The losers will be those that currently have the lowest rates; the younger, healthier groups in industries with few occupational hazards.
Because being self-insured continues to be voluntary under this proposal, there will be adverse selection and selective disenrollment. Adverse selection refers to individuals making insurance decisions that are most financially beneficial to them. Under H.R. 3626, this means that the first new groups to select coverage will be those with the highest expected costs. These are the groups who cannot get coverage now. The entrance of these groups will increase average costs.
Unfortunately, adverse selection is not the only problem. H.R. 3626 will convert a carefully underwritten insurance market into a minimally underwritten one and changes rules for rate development. Very healthy groups are already getting the most affordable coverage possible under the current system because they are under it. With rating bands, their premiums will rise. Some of them will not be able to afford or will not be willing to afford the higher premiums. As a result, some of them will elect to either drop coverage or choose lower-cost alternatives such as individually underwritten products.
Although it is clear there will be adverse selection by high-cost groups and selective disenrollment by lower cost groups, the extent of each of these is highly uncertain. It is also uncertain how much the cost will rise because of the enhanced benefit package and rate restrictions. Thus, contrary to the intent of H.R. 3626, the number of workers insured by small employer products may not increase, and, in fact, could decrease.
Cost is now, and will remain, the major consideration for small groups and whether they choose to purchase insurance. Though the academy's Committee on Health is very concerned about the potential adverse cost consequences of H.R. 3626, the bill will increase the predictability of rate increases in the small group insurance market by eliminating certain rating practices that contribute to rate instability and are not required in order to have a viable private insurance market. As a result, for those who could afford Coverage under these new Federal standards, the bill will increase uncertainty concerning the continued availability and affordability of this coverage.
In closing, I would like to make one final point. The academy's Health Committee strongly believes that if Congress adopts this approach, it must do so in a way that minimizes the impact of the potential increases in cost. Sharp, erratic changes in premiums, both up and down, over a period of 2 or 3 years, will be difficult for employers to deal with. These erratic changes should and can be avoided through appropriate phasein provisions.
The academy's Committee on Health would welcome the opportunity to work with members of this subcommittee and their staff to help assure the best possible outcome for employees of small employers.
SUBCOMMITTEE ON HEALTH
INCLUDING H.R. 2121, H.R. 1565 AND H.R. 3626
March 12, 1992
The American Academy of Actuaries is a national organization formed in 1965
This testimony was prepared by the Academy's 18
member Committee on Health. The committee is made up of representatives from the entire range of health actuarial practice. The committee includes actuaries who work as consultants, are employed by insurance companies, are actuaries for government health programs and the National Association of Insurance Commissioners, and are employed by nonprofit health organizations.
Currently there are three problems in the small group health insurance market: (1) the high cost of coverage, (2) the availabiltiy of coverage and (3) the magnitude and predictability of rate increases from one year to the next. This testimony examines H.R. 3626 and H.R. 2121, two of the bills being considered by the subcommittee at this hearing, and discusses their potential effectiveness in addressing the major problems faced by small employers in obtaining health insurance.
KEY PROVISIONS OF H.R. 3626
H.R. 3626, introduced by Representative Rostenkowski, would establish minimum federal standards for health insurance products marketed to small employers. The bill defines small employers as those with 2 to 50 employees who normally work 17 1/2 hours or more a week. The bill would:
Require insurers that market small group insurance to offer their products to any small group that could meet the insurer's minimum participation requirements. Insurers would also have to guarantee renewability of such policies.
Eliminate premium differentials except those related to geographic area, age and gender and, for age and gender, limit the permissible variation.
Limit exclusions from coverage for preexisting conditions to six months. Workers with prior coverage could not be excluded if the break in coverage was less than three months.
Mandate a minimum standard benefit package for insurance products that includes all coverages included in Medicare Parts A and B plus a number of additional coverages, and establish cost sharing limits.
The provisions of H.R. 3626 would not apply to self-insured plans, except for the preexisting conditions limitations. To discourage small groups from self-insuring, H.R. 3626 would impose a tax of 25% on the expenditures of a small group health plan if the plan is not insured.
IMPACT OF H.R. 3626 ON CURRENT SMALL GROUP INSURANCE PRACTICES
Each of the major provisions of H.R. 3626 will have a substantial impact on current practices in the small group insurance market. However, different types of carriers will be affected differently as will small groups that insure with different types of carriers. The discussion below relates primarily to the practices of for-profit commercial insurance carriers. Practices of Blue Cross/Blue Shield plans vary widely from state to state because of state regulation. HMOs also vary widely in their rating and underwriting philosophies for small groups, and the rating practices of many HMOs are restricted by state and federal statutes.
Guaranteed Issue, Eligibility and Renewal Provisions: Currently all or nearly all small group business is underwritten. Medical underwriting is almost always used for groups of under 15 eligible employees and may be used for groups up to 50. Group underwriting techniques are also used. Minimum participation requirements and minimum employer contribution levels are two of the most commonly used group underwriting criteria. Other examples of group underwriting criteria are employer stability and employee turnover. Because of underwriting, those who are newly insured in the small group market are a better morbidity risk than thos who are not insured. Also, because of underwriting, some groups and some individuals cannot obtain coverage or can do so only at a very high cost.
Adverse selection is a term used by actuaries to describe the observed action of individuals and groups to make insurance decisions that are most financially beneficial to them. With guaranteed issue, the persons with the worst health status will be the first to seek coverage. However, because of the rating bands in the bill, insurers will not be able to charge those groups with the worst health status the full cost of the expected claims they will add to the insured pool. Thus, rates for healthier groups will have to be raised to subsidize the less healthy groups.
Since healthier groups will have to subsidize less healthy ones, there will also be selective disenrollment. This means that some of the groups with the low premiums currently will drop coverage or seek less expensive alternatives. Under H.R. 3626, healthy small groups could avoid subsidizing other groups by obtaining individual insurance where underwriting is not restricted. Healthy groups could also choose to self-insure and might do so if the insurance premium would clearly exceed the group's expected health expenditures plus 25% (the amount of the surtax on self-insured health care expenditures).
Rate Band Limitations: H.R. 3626 will permit full variation in premiums for cost differentials between geographic areas. However, the bill also states that no geographic area can be smaller than a Standard Metropolitan Statistical Area (SMSA). Currently, some insurers use smaller
H.R. 3626 also permits premiums to vary for differences in age and gender of groups. However, the variation is limited to plus or minus 25% of the insurer's index rate which is defined as 133 1/3 percent of the lowest premium that could be charged. All of a carrier's small group business is to be treated as a single block, except business marketed by direct mail, insurance marketed through associations formed for purposes other than providing insurance, and business purchased from another insurance carrier may be treated as separate blocks. A 20% rate differential is permitted between blocks of business.
The rate band limitations within a block of business will significantly restrict variations in rates relative to current practice. In addition to age and gender, many companies recognize industry, experience and duration, and health status. H.R. 3626 will eliminate variations from these other underwriting factors, which often lead to substantial differences in premiums or rejection. Moreover, the maximum variation permitted for age and gender is smaller than the range of actual differences in costs due to these characteristics.
Exhibits 1 and 2 provide an indication of how much demographic characteristics can affect expected health insurance claims costs. Exhibit 1 is a table of age/sex factors reflecting the actual experience of an HMO. Each factor in the table indicates the expected claims cost of an individual of a particular sex and age relative to the average claim cost for all individuals. As shown at the bottom of the exhibit, the expected claims cost for male workers age 60-64 is four times the expected claims cost for male workers age 20-29.
Exhibit 2 shows the relative age/gender factors for four hypothetical small employer groups. Employer Group A includes only males who are between the ages of 20 and 49. Employer Group D includes only young females and males between age 50 and 64. As shown at the bottom of the exhibit, the differences in the average cost factor because of age and sex are large. If these hypothetical groups were part of a block of business where the age/gender factors averaged 1.0 and only age and gender were used to determine the premium rate, then Employer Group A's premium would be only 69% of the average premium charged. Employer Group D would pay a premium 76% higher than the average one for the whole block of business.
The employer groups in Exhibit 2 are not intended to be typical. They merely illustrate how large differences in expected claims costs can be based only on the age/gender mix of a small group. In fact, when dependents are added and the size of the group (including dependents) exceeds 15 or 20 individuals, many of the groups would have expected claims near the average for all groups in the block of business.
As a result of limiting variations in premium rates, the current premium rates of many groups will be affected. Rates will increase for groups that currently have the lowest rates and will decrease for groups that have the highest rates.
Preexisting Conditions Limitations: The 6-month limitation on exclusions from coverage for preexisting conditions treated or diagnosed in the three months prior to coverage will exclude fewer claims than the conditions insurers currently use to deal with preexisting conditions. Under current practice, a more representative provision would be a limitation of 12 months on treatment of conditions diagnosed or treated in the 6 or 12 months preceding the effective date of coverage.
In addition to limiting exclusions to a maximum of six months, H.R. 3626 would require that insurers reduce the period of exclusion by one month for each month in prior coverage. Those who change insurance plans for any reason are to be considered in continuous coverage if the lapse in coverage is less than three months.
It is clear that fewer people will be excluded from coverage under the new limitations of H.R. 3626 and that this provision of the bill will add to the cost of the average premium for small groups. It is not known how many people in small employer groups are currently excluded from coverage because of preexisting conditions and for what conditions they are excluded. However, the cost of this provision should not be large. Based on a report on actuarial studies done in conjunction with small group reform in Ohio, this change might increase costs by around 2 percent.
Mandated Minimum Benefits Package: All services that are provided by Medicare are included in the core benefit package required by H.R. 3626. With the exception of coverage for prescription drugs, the services covered by Medicare are very comprehensive. Many employers currently have covered services that are less generous than those provided by Medicare, particularly in the area of mental health. However, a majority of employer-sponsored health benefit plans provide some coverage for prescription drugs.
The annual deductible and out-of-pocket amounts included in a plan may not exceed $250 and $2,500 individual, respectively. For a family the deductibles and out of pocket amounts are $500 and $3,000, respectively. No deductibles may apply to preventive services for children, nor to pregnancy related services.
These minimum benefits are more generous than the benefits currently provided by many small employers. Hence, some currently insured small groups will face increased premium costs to pay for the enhanced benefits they will need to provide. Moreover, since qualified HMOs are excluded from this part of the bill, many HMOs will be precluded from offering this type of benefit package and, therefore, may be unable to offer a competitively priced product.
The core benefit provisions apply to all health insurance products offered to small employers. Small employers that self-insure would not have to provide the core benefits if they do not choose to do so. However, those who self-insure would pay a tax equal to 25% of their expenditures for health care.
IMPACTS OF H.R. 3626 ON THE AVAILABILITY
The Academy's Committee on Health has three concerns with H.R. 3626. First, the bill will increase the average cost of employer-sponsored small group health insurance. Second, the bill will almost certainly lead to increased uncertainty and instability in the small group market during at least the first two to three years that it is in effect. Third, the bill could decrease, rather than increase, the percent of small groups with health insurance.
Nearly every provision in the bill will tend to increase the average cost of small group health insurance. This is true for the provisions on guaranteed issue, the restrictions on premium differentials, the enhanced coverage for those with preexisting conditions, and the generous required minimum benefit package. Adding these cost increases together could be substantial for particular small groups and for particular insurance settings where health policies are currently heavily underwritten. For small group insurance as a whole, however, it is difficult to predict what the likely overall increase in average cost will be without further detailed study.
The bill addresses the availability of coverage through guaranteed access and restrictions on the use of preexisting condition limitations. These provisions will make small group insurance available to groups and individuals that currently may not be able to obtain such coverage. Groups that currently have access to coverage will continue to have access. However, these provisions will also drive up the average cost of small group insurance.
Because of guaranteed issue, new entrants into the pool of insured small groups will be less healthy than those who are currently insured. To cover their higher claims costs, the insurers who take on these higher health risks will have to raise their premium rates.
It is not possible to estimate with a high degree of certainty how much costs will rise because of guaranteed issue. Analysis of the experience of high risk pools indicates the average claims costs for uninsurables are roughly 300% of those for healthy individuals. Moreover, according to a Society of Actuaries Research Report titled "Variation by Duration in Small Group Medical Insurance Claims," claims for those newly insured under a guaranteed issue product were 28 percent higher, on average, than the claims for an underwritten health insurance product. Because of new entrants, the morbidity of the insured population may be expected to deteriorate with the introduction of guaranteed issue.
Guaranteed issue could increase average costs for another reason. H.R. 3626 does not provide for a reinsurance mechanism. Thus, each insurer will have to bear the risk of the adverse selection that occurs because of guaranteed issue. Some insurers may not either be willing or financially able to take on this risk and will withdraw from the small group market. Other insurers will have to raise their average premiums somewhat more than would otherwise be required to protect themselves from the uncertainty associated with this new risk.