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a pre-paid managed care policy, through which individuals can
protect themselves from the variables of cost; and

a policy offering a benefit payment schedule, through which the
cost of insurance can be more manageably pre-determined and
individuals can choose to take on a nore active role in
controlling their costs by involving themselves in price

negotiations with providers, where possible.
In addition, we believe that the deduction allowed employers for the cost
of health insurance premiums should be limited. For example, the limit
might be set at 133 to 150 percent of the cost of the minimum benefits
package in a geographic area. In a health care system of limited
resources, fairness dictates this limitation. It is not right that the
tax system provides subsidies for insurance coverage giving nearly
first-dollar coverage to individuals who, to a reasonable extent, can
afford to take some responsibility for the cost of health care. This
policy has created an incentive to consume services beyond need while far
too many Americans go without any health coverage and only about 40% of
those under the federal poverty level qualify for health coverage under
By requiring insurance to be offered in this way, competition in the
insurance market can be greatly increased. Both the cost of health care
and the choices available to help control that cost will be more directly
placed before employers and employees. The AMA is also calling on all
health care providers and insurance entities to be required to make
information on fees and prices readily available to consumers for
frequently provided services before they are provided.
Through these measures, individuals will have a stake in their health
care decisions, which will push away much of the insulation now keeping
them from making cost-conscious decisions in the current system of
limited choices. As a result, providers -- including physicians -- could
be forced more directly into containing the cost of their services.
Additionally, the AMA would like to se

see the establishment of reinsurance pools that all insurance entities, including self-insureds, would be required to underwrite. The pools would provide reinsurance for the cost of the minimum benefits package beyond a certain amount (for example, $25,000) for each insured individual. This would help make required employer coverage more affordable, particularly for small business. Conclusion Although there is not yet agreement on a specific way this nation will achieve comprehensive health care reform, it is encouraging that the reform debate has reached the point where specific reform measures that are widely agreed upon can be considered under a very real opportunity for passage into law. If the Subcommittee takes advantage of this opportunity, and measures are made into law that guarantee that insurance will spread health risk, a substantial number of Americans now forced out of the health insurance market will begin to be able to find coverage. We also urge the Subcommittee to consider our call to ensure, through health insurance reform, that employers and individuals are given meaningful choices in the way health care is delivered.

We not only believe that choice is what Americans want, with necessary information and properly structured incentives to make choices, it is the only way that both universal access and cost containment can be achieved. Without the competition that choice provides, there can be no guarantee that all Americans have the access to affordable quality care that they want and deserve.

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In enacting effective health insurance reforms, especially for small employers, the Subcommittee has a unique opportunity to take the first consequential step toward comprehensive health reform. The AMA urges the Subcommittee to take that step.


The American Society of Internal Medicine (ASIM), representing over 25,000 physicians nationwide who are subspecialists in adult medical care, appreciates the opportunity to submit written comments for the record of the March 12 hearing on Private Health Insurance Retorm Legislation. ASIM commends the Committee for considering legislation to reform the private health insurance industry and couldn't agree more that the private health insurance market is in critical need of national reform. Specifically, ASIM supports the immediate enactment of H.R. 2121, introduced by Rep. Pete Stark, to reform the private health insurance market. Given the overwhelming consensus on the need for and approach to reform, this Committee has a unique opportunity to make a significant improvement in the affordability and availability of private health insurance, particularly for small businesses and self-employed individuals. These two populations have been increasingly squeezed out of the insurance market as health care costs have escalated and as the industry has become more and more competitive and increased their practices of "cherry picking and "experience rating*.

ASIM strongly supports legislation calling for: 1) limitations on pre-existing condition exclusions; 2) community rating policies; 3) the elimination of abusive renewal policies; 4) guaranteed acceptance; 5) full disclosure of rating and renewal practices; and 6) the creation of state reinsurance mechanisms. ASIM views any proposal to reform the insurance market as a part of our larger policy agenda to provide access to health insurance to all Americans. Although the insurance market reforms being debated by this Committee will go a long way toward addressing many of the inequities in the insurance system, comprehensive reform that requires employers to provide health insurance coverage and significantly expands the public program is necessary. The incremental retorms being considered by this committee should not be used to delay fundamental retorm. ASIM does believe, however, that the increasing number of uninsured Americans and perhaps even more so the rapidly rising number of underinsured Americans is directly related to the collapse of the private health insurance market. The collapsed private insurance market must be re-built as quickly as possible. Unnecessary delays in federal action to correct the problems and abuses in the private insurance market will likely result in increasing numbers of un-and-underinsured Americans over the next few years.

The Collapse of the Private Health Insurance Market

The exorbitant cost of health insurance is the single most frequently stated reason that businesses

especially small firms -- do not provide coverage. Additionally, many businesses, individuals and families report that insurance is not available at any price. Others report that even when coverage is available, insurers are unwilling to provide coverage for pre-existing health care illnesses or injuries. There are several specific insurance practices that have caused widespread lack of health care coverage or underinsurance. These practices include pre-existing condition exclusions, 'low-balling initial premiums, experience rating and other abusive rating and renewal standards.

Many of the undesirable and problematic insurance practices that have left so many Americans uninsured have evolved as competition has escalated in the industry and health care costs have skyrocketed. And, untortunately, the problem is likely to get worse. At one time, insurers offered coverage to their insureds at about the same price to all purchasers. This rating practice is commonly known as 'community rating". In the 1940's, however, as competition heightened in the market and large companies began to assert that it was unfair that they had to subsidize the health care premiums of smaller companies, insurers began to offer individual group's their own rates based on the group's use of health care services (i.e. 'experience rating"). Today, insurers are unwilling to provide coverage to those firms they view as poor risks. Insurers offer lower-thanaverage premiums to capture businesses, industries and individuals with low risks (commonly referred to as "cherry-picking") and refuse to cover those businesses, industries and individuals perceived to be high risks. Insurers can very easily offer deep discounts to businesses, large and small, through medical underwriting--a process by which insurers can assess how healthy the group is before they accept it for coverage. Unfortunately, this rating method often leads to very steep rate increases (sometimes as high as 200 percent) at time of renewal, unless the group can re-quality with a different carrier for another select (discounted) rate. The Society believes these practices are simply no longer acceptable.

Another insurance market practice that has made it particularly difficult for employers to acquire affordable insurance is experience rating--meaning that, based on projected utilization, each employer is assigned to a rating tier. The premiums for employers in each tier are a percentage of the average premiums for groups with similar demographic characteristics in the entire small group pricing pool. Thus, rather than having healthy subscribers helping to subsidize unhealthy subscribers--by spreading risks across all subscribers--unhealthy subscribers must carry their own weight. For employers with workers who have health conditions that incur high medical costs, this often leads to cost-prohibitive insurance premiums or cancellation of coverage entirely.

These abusive insurance practices are particularly detrimental to the ability of small businesses (eg, fewer than 50 employees) to find and purchase affordable health insurance for their employees. As can be expected the consequences of experience rating and low-balling are magnified for small businesses if an employee or his or her dependent becomes ill because they have fewer employees to spread the costs of care than larger firms. While ASIM believes that the entire health insurance market should be reformed, the Society believes that reform of the small group insurance market should be given priority, it necessary.

The Office of Technology Assessment estimates that 20 percent of all Americans who apply for health insurance face pre-existing condition limitations resulting in either increased premiums or exclusions from coverage entirely. Prohibiting exclusions for pre-existing conditions would help reduce the numbers of uninsured and go a long way toward eliminating the problems of underinsurance--thereby closing a major gap in the present insurance system.

ASIM's Recommendations for Reforming the Private Insurance Market

To correct these abusive insurance practices and to make coverage more affordable and available to all businesses, Congress should enact legislation to:

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Insurers should not be able to deny coverage for a specific pre-existing illness to any individual trying to obtain health insurance. This practice has left many individuals without adequate coverage and should be discontinued. Additionally, the elimination of pre-existing condition exclusions will make it easier for individuals to change jobs if they desire to do so without fear of losing coverage for a specific illness. Since prohibiting pre-existing conditions could result in individuals declining to obtain health care coverage until they are ill, once the employer mandate and the expansion of the public program are fully implemented, all individuals should be required to document that they have obtained coverage.


Prohibit insurers from establishing premiums based on the claims experience of an employer (i.e. ban experience rating). Instead, insurers should set rates based on the characteristics of an individual carrier's insureds--meaning that all employers with an insurance carrier would be charged the same rate or two rates based solely on family status. As an interim measure, at a minimum legislation should be enacted to establish standards limiting annual renewal increases for small businesses, etc.

The advantages of community rating are clear in that no one group must bear the entire cost of its own health care which can be cost prohibitive for many small employers. For example, under community rating, it a small employer has an employee that has a very ill child, the cost of the child's health care would not be borne entirely by the individual employer but instead it would be spread over all employers in the community (i.e. the community of employers insured by the insurance company). Additionally, community rating can reduce some of the administrative costs of insurance because insurance carriers would not have the added costs of medical underwriting for each individual business.

Community rating is opposed by some insurers and large businesses because it is likely to increase premiums to the healthiest groups. This occurs because insurers would no longer be able to otter initial deep premium discounts to new healthy groups. ASIM believes, however, that initial premiums for healthy groups are more likely to reflect actual, average claims experience over the years under this approach. Additionally, under community rating healthier subscribers would share in the costs of providing care to unhealthy subscribers which may increase premiums. For this reason, community rating is strongly opposed by several very powerful constituencies which may cause a delay in the enactment of comprehensive insurance reform legislation. While ASIM believes that community rating should be mandated, ASIM could support as an interim measure the enactment of legislation modeled after the recommendations of the National Association of Insurance Commissioners.

The National Association of Insurance Commissioners (NAIC) has developed recommendations for retorming the small group insurance market. The first and most significant of the reforms is the enactment of "rate bands to assure that rates do not vary excessively within a class of business or among classes of business. Under this proposal, insurers would be restricted in their ability to deeply discount initial premiums. And, insurers would be restricted from increasing premium rates too high at time of renewal. Additionally, the NAIC proposal permits insurers to utilize medical underwriting although the practice is restricted significantly. Those groups that present risks beyond what one insurer can absorb would be reinsured. The NAIC proposal is politically practical and appropriate and should be pursued as an interim step toward community rating.

Specifically, legislation should be enacted to: 1) establish standards limiting annual renewal rate increases for small groups: 2) prevent insurers from ottering 'deep discounts or select rates in an effort to attract new business by establishing standards on the amount initial rates can vary from average premium rates; and 3) establish standards on the amount that average premium rates can vary among different classes of business.


Develop a basic benefit package and pre-empt state insurance mandates.

By substituting a federally determined basic benefit package, employers would be protected from state mandated benefits that drive up the costs of premiums. State mandated benefits can add as much as 20 percent to the cost of coverage in some states.

Require all Insurers to 'guarantee acceptance of all small employers wishing to
purchase Insurance and renewabllity of coverage.

All employers, specifically small firms, should be guaranteed the availability of private health insurance coverage regardless of health status, occupation or geographic location of the firm. Additionally, no insurer should be able to cancel or fail to renew coverage of a firm because of high claim costs.


Reguire insurers to disclose their rating and renewal practices specifically to small employers and consumers.

Insurers should be required to disclose to small employers and consumers their insurance rating and renewal practices so that they can thoroughly understand how their rates are being determined so as to make informed decisions when purchasing coverage. Additionally, insurers should be required to disclose: 1) the provisions concerning the carrier's right to change premium rates, 2) a description of the class of business the group will fall under and 3) the provisions relating to renewability of coverage. Insurers should be required to maintain records pertaining to rating practices and renewal underwriting practices including actuarial assumptions. Insurers should be required to file a report with the Insurance Commissioner to ensure that their actuarial practices are consistent with these standards. Additionally, insurers should be required to inform small employers of the process they have for recourse should the carrier be in violation of the state or federal standards.


Reguire states to develop a reinsurance mechanism to provide coverage to those Individuals or groups that are 'high risks'. States should be given sufficient flexibility to develop a reinsurance mechanism that meets a state's Individual needs.

Reinsurance mechanisms are necessary to spread the costs of high-risk groups among all insurers. Generally, there are several kinds of reinsurance mechanisms that are being pursued at the state level. The "Prospective Reinsurance Option would require all carriers to accept all small employers for coverage, regardless of health status, and would establish a voluntary prospective reinsurance mechanism to help carriers spread the risk of accepting all employers. Under this approach carriers would use medical underwriting to identity potential high-risk cases and reinsure these cases. Carriers could opt out of the reinsurance mechanism provided they agreed to assume the full risk of all small groups applying for coverage. The "Retrospective Reinsurance Option would also require all carriers to accept all small employers for coverage, regardless of health status, and would establish a voluntary prospective reinsurance mechanism to help carriers spread the risk of accepting all employers. Carriers would not pay reins rance premiums at the time of enrollment of the group or individual. Rather, under the “retrospective stop-loss approach," carriers would assume the full risk of the individual or group up to a limit after which the high-risk group or individual would be reinsured. The remaining risks would be spread across all insurers. Under the "Allocation Option" high-risk uninsurables are allocated among all carriers. Carriers would be required to accept and manage the full risk of the small groups allocated to them. Under the 'Pooled Employee Option", employees in small businesses and their dependents would be pooled into one or more small employer health benefits programs and treated as a single, large employer. This approach is intended to give small groups increased purchasing power. Carriers electing to insure the pooled group would not be permitted to exclude any employer in the pool from insurance coverage for health reasons. The "Designated Carrier Option' would mandate that carriers participate in the reinsurance mechanism and would establish designated carriers. Those high-risk groups who are unable to get insurance through the market would be directed to a designated carrier. Designated carriers are required to offer employers a basic or standard benefit option at a rate of no more than 150 percent of average market premiums. All small employer insurance carriers would share the losses of the reinsurance program. Finally. the "Mandatory Prospective Reinsurance Option is similar to the first mechanism, however,

carriers would be required to participate in the reinsurance pool. All carriers would be required to accept all small employers regardless of the health conditions of their employees.

States should be encouraged to experiment with any of the six reinsurance mechanisms to determine the ettectiveness of spreading the risks of unhealthy groups and individuals across all insurers. Individual states have varying needs in their attempts to address the uninsured and underinsured problems of the high-risk groups. States should be given sufficient flexibility to develop a reinsurance mechanism that addresses the state's individual needs.


Although it is a positive sign that health care reform has been identified as a major issue in the 1992 Presidential campaign, the heightened attention given to the issue by Republicans and Democrats has also resulted in a heightened level of discord, politicization and polarization not uncommon during an election year making it difficult for a compromise to be reached. ASIM believes, however, that Congress should set aside partisan ditterences and enact comprehensive health care retorm that builds on and improves the existing health insurance system despite the obvious political obstacles. Within this broader context, reforming the private health insurance market should be given the highest priority to assure private health insurance coverage on a continuing basis for small employers and to ensure coverage for high risk individuals. The Society stands ready to assist the Committee in its effort to enact meaningful reforms in the private health insurance industry as a step toward our goal to enact a comprehensive health retorm package that will provide all Americans with basic medical coverage.



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