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The way to make insurance accessible and affordable is to community rate-to charge all insured persons the same premium, regardless of health risk. If communityrating is instituted absent access and cost-containment reforms, groups of young, healthy persons will see their premiums increase and escalate. If, on the other hand, insurance reforms are combined with other reforms, the effects on young, healthy groups are mitigated.

Cost-containment reforms, such as setting all-payer rates on the basis of a national health budget, can bring significant fiscal relief even to young, healthy groups. Such small groups are currently likely to be paying higher-than-average fees to providers because they do not have the bargaining power to negotiate lower rates with providers. Furthermore, as the above data illustrates, such groups can expect to see their premiums at least double by the end of the decade. Cost controls would reduce health inflation and offset the effects of community rating. With community rating, such groups would no longer have to fear the results of demographic changes in the composition of the workforce.

Mandating universal health insurance has a significant effect on insurance premiums, in addition to improving access to health care for the uninsured. First, it is only possible to establish true all-payer rates, if everyone is insured. Otherwise there is no payer for some care and the cost of that care is shifted to those who do have insurance. This drives up insurance premiums in an arbitrary and unpredictable manner.

Mandating insurance coverage also results in reduced insurance administrative costs. Marketing costs, which can amount to as much as eight percent of small group premium costs, are greatly reduced when all employers are required to provide health insurance. Other administrative savings can be achieved when everyone must be covered by a uniform, minimum benefit package at the same premium. Reduced marketing costs combined with these other administrative savings also make it possible to achieve community rating without imposing large premium increases on young, healthy groups. If mandated coverage is achieved through a "pay or play" approach, the young, healthy groups will also have the option of obtaining coverage through a public program in which risk is broadly spread and costs are therefore lower.


Insurance reforms cannot make health insurance accessible and affordable unless they are enacted as part of comprehensive reform that controls costs and guarantees coverage. The Senate reforms could unfortunately create a backlash against more comprehensive reform. This is because such reforms hurt many more people than they help, and because the reforms address only a small fraction of the problems consumers are experiencing in the insurance marketplace. The way to solve this nation's health care crisis is for Congress to roll up its sleeves and begin work on comprehensive reform legislation, rather than rush to enact insurance reforms that promise illusory benefits and will result in a political backlash.

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Chairman STARK. Sometime in the course of our inquiry you will be handed a series of graphs. I am not sure the Chair understands them as thoroughly as you would like, but we will probably ask you if you do and if they make any sense to you. But I will skip that for a moment and ask the panel—the administration in its testimony claimed that reductions in premiums for high-risk groups will exceed the increases of premiums for low-risk groups. I wonder if you all agree with this assertion.

Ms. NELSON. If I understand your question, you are asking us to comment on whether more groups will experience increases than decreases?

Chairman STARK. I presume their claim is that the reductions in premiums would be on an individual basis and not in the aggregate. So I think they are saying that the high-risk groups, reductions would be greater than the increase of premiums for low risk groups.

Ms. Nelson. I think if you looked on a specific group basis that could very well be true. But I think if you consider an overall effect, that the overall effect will be that some groups will drop coverage, and the groups that drop will be the ones of lower average costs. Their exit from the market will raise the average cost, so that to produce that, everyone's rate has to go up.

Chairman STARK. So that if you have this average line, going this way, if you cut the low numbers off, you just mathematically drive

Ms. NELSON. You bring the average up. Exactly,

Chairman STARK. As long as you don't make those lines curvy, I can understand them. All right.

Ms. WAXMAN. In our study, Congressman, I don't know if this answers your question either, but in our study what we found was that the majority of groups did see a smaller increase than the small number of groups that would have a larger decrease.

You would have to do that in order to balance out so you came out with the same amount of money. But the point was it was a very small number of groups actually saw a decrease and a very large number of groups got the increase.

Chairman STARK. So you have a large number of small increases and a few big decreases?

Ms. WAXMAN. Right. And some of those increases are not even that small, but yes.

Chairman STARK. Care to comment, Mr. Feezor, on that?

Mr. FEEZOR. The same, yes, in the couple of blocks that we looked at, or I looked at in the course of North Carolina's enactment, we were looking at three to four times the number of people would experience increases—although those increases would be, on the whole, much smaller—than the 10 to 20 percent of the people, or about one-fifth the number of people that would experience any decrease-though the decreases would be larger.

Chairman STARK. I want to ask you all to comment on a kind of a real world, and not in the technical sense I will tell you my prejudice at least in this; that I suspect that insurers can select, can manage selection, or select only the best risks through marketing practices without being grossly illegal or anything else; that

there have to be subtle ways in the marketplace and in the industry today so that can take place.

You may or may not agree with my supposition there, but, if I am correct, my question is: Is there a way to guard against that? Can we draft legislation as to preclude it?

Now, you may say it is not necessary, but you might want to comment on my assumption and, secondly, Commissioner, you might want to lead off on that. What can we do to prevent it?

Mr. FEEZOR. I will answer the first half of it. I concur in your suspicion. I think whether it is something as simple as where you place your producer network, that is, where you place your agents; the commission structure that you might associate with that, that is, where there is some incentive for commissions that maybe bring in good risk or experience lower loss ratios, there are a variety of ways that, even if you have a substantial rate modification, that you can still, I think, do some what I will call “surrogate risk selection."

The National Association of Insurance Commissioners, and one of the task forces I chair with them, are quite cognizant of that, and, in fact, have just begun to develop some, what we call "market conduct standards," that we hope will begin to address some of that. Certainly we will be happy to share that with the committee and staff as we go along. We already have some.

Ms. NELSON. I would agree that it would be possible to direct your marketing efforts to produce a healthier risk pool. For example, you could focus on certain industries that might be more favorable. But with guaranteed issue provisions, an insurer would be required to take any comer. It would put the onus on the employer group to purchase rather than be sold coverage.

Ms. WAXMAN. Yes, of course, it is true that insurers can target certain areas. We have seen it in medigap, for example, where insurers go to dances and market their products there and assume they will get the healthier risks. There are all sorts of ways that that can be done.

And certainly guaranteed issue would help, but I think also moving towards community rating, or even something that Mr. Moley talked about in terms of risk factor additions and substractions on all insurers makes the playing field level so that it doesn't matter which insurer gets what business, but they are all going to wind up paying about the same amount of rates to cover people. In other words, to spread the risk as broadly as possible. But, again, I caution you to do that without cost containment and other reforms could be a problem.

Chairman STARK. I am glad you mentioned that. It seems to me that all of these procedures fail if we don't have some kind of cost containment. We could, in fact, deal with some of the aggregate increases, but to just shuffle the problem around in the community, I mean, absent mandatory coverage and/or cost containment on the other end, we are just kind of shifting these problems about somewhat.

That is my problem with whether it is currently what I think the Senate will propose or what the administration is proposing; that it just is kind of a-it will change the direction of the curve for some groups for a while, but it really won't be a long-range solution.

Mr. Gradison would like to inquire. He might have a different approach to that.

Mr. GRADISON. Not really, Mr. Chairman. I would like to comment on what Ms. Waxman said and ask her comments on what I want to say.

I certainly agree with your point that there will be, under any of these plans, winners and losers, but that is true of any national plan, too. We learned that in catastrophic health insurance. There are winners and losers, and the notion that because there are more winners than losers that you can put the plan through, doesn't really-we got rolled over on that, Mr. Chairman.

So when I hear-
Chairman STARK. We?

Mr. GRADISON. Yes, we. So when I hear the comment that, well, you know, this is maybe something small and useful, but what we have to really do is something comprehensive, and I am listening to what you say carefully when you say that, and I respect that point, but I am saying to myself, it is the same problem.

We have something national, people are going to pay some taxes, and they are going to evaluate whether they are better off the way they are now or by paying these taxes. And I want to share with you, in that connection, some testimony we received on which perhaps you could comment, back before the full committee last fall by a representative of the UAW, which is a group pushing for national health insurance, as near as I can tell.

Mr. Hoffman said we cannot support any legislation which will require the majority of workers and retirees who already have health insurance coverage to shoulder a larger tax burden without receiving any additional benefits. I threw my hands up at that point. Reminds me of those old ads, what do you give the man who has everything.

Chairman STARK. You threw your hands up. It was a vote for me. Mr. GRADISON. I am trying to be responsive.

So long as there are winners and losers, and there is some evidence that a minority of that–a substantial minority, but, nonetheless, a minority-are losers and think they are losers, that we cannot do anything, how can we do something, whether it is a small group or comprehensive?

Ms. WAXMAN. I, of course, agree with you. I said there are always winners and losers, and there is also the greater good for all of us. Some of us would hope that sometimes, even if we personally lost, we would be happy about helping the greater good.

But beyond that, my objection to doing just the small group insurance market reform is that the positives are too meager to balance out for what are the possible losses.

If you do something comprehensive, really control health care costs, really give people the feeling that they will get some kind of coverage, regardless of their personal situation, then there is really a gain there. So that even if they suffer some personal loss, or small or temporary loss, you have at least given them something important.

There is not enough here in the small group insurance reform alone to make that balance work and that is my fear.

Mr. GRADISON. Thank you. I think that that is a responsive answer. I really appreciate the testimony of all on this panel. Thank you, Mr. Chairman, for inviting them.

Chairman STARK. Mr. Coyne.

Mr. COYNE. Thank you, Mr. Chairman. Do any of the panelists have any sense of the rate of return that insurers have as a result of the insurance business they provide?

Mr. FEEZOR. No specific figures, only to note it tends to be about a 3- to 5-year cyclical thing. If you asked me that question about 1986 or 1987, I would have said it is very much in the negative. Over the long haul, there does seem to be some aggregate data that it can be profitable, although pure health funds tend to be less profitable than many of the others.

Ms. NELSON. I think that is a true answer. Right now health insurers are anticipating a downturn in their results.

Mr. COYNE. OK. We often hear that premiums tend to rise for any small group over a period of time as the group that the knowledge of the particular group that is being insured is experienced. Do you have any evidence of the fact that after time, the group rates do increase?

Ms. Nelson. Claim costs of groups do deteriorate over time when underwriting is applied. A study has been done by the Society of Actuaries on the effects of duration that shows costs do increase over time.

Premium rates can be designed to effect part of this increase through adjustments in the first year and increases based on duration. Those practices are used. So it is real and can be considered in pricing practices. Pricing practices vary widely among the companies who sell health insurance.

Mr. COYNE. Thank you.
Ms. WAXMAN. Thank you.

Mr. COYNE (presiding]. Our next panel is the Blue Cross and Blue Shield Association, Mary Nell Lehnhard; and the Health Insurance Association; also the National Small Business United, Gary Kushner.



Ms. LEHNHARD. Members of the committee, we appreciate the opportunity to testify on health insurance reform. Our board of directors approved a strategy for small group insurance health reform in January 1991. The key elements are: no group should be denied private coverage; no group should be dropped because of health problems; and insurers should be required to set their rates on a fair and equitable basis. And we were asked specifically to comment on this last point today: Various proposals for reform of rate practices in the small group insurance market.

This congressional debate on reform of rating practices essentially centers on those who believe Federal guidelines should require insurance companies to use one single rate for all groupscommunity rating, and those supporting something closer to what the Na

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