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A simple example will demonstrate this. Assume
in poor health, aged 72 wishes to buy a $100,000 life
insurance policy. Further assume that he has a medical
condition which will cause him to die within the year.
Finally, a young woman in good health, aged 22, also
wants to buy a $100,000 life insurance policy.

We know we will need $100,000 soon, so, in a world where community rating is required, we will propose to charge each person $50,000. Premiums are equal.

Clearly, the young woman will refuse to pay this amount. The subsidy is unfair. She will not buy the insurance.

We still need $100,000, so we must now charge the elderly man $100,000, not $50,000.

Community rating thus will have the unintended consequence of driving out the young, healthy, low risk individuals we need in the system. The uninsured population will increase. Premiums for those left in will be much higher than before.

Areas Overlooked by Small Group Health Insurance Reform

1)

Portability. Despite the claim, small group health insurance reform really has no program to guarantee that those who fall out of the system can permanently keep quality, affordable health insurance.

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Golden Rule has proposed legislation which would clean
up the current patchwork system of COBRA, state contin-
uation, and conversion policies. It does so by guaran-
teeing that anyone who would otherwise lose his or her
insurance can keep the same benefits they had with
their employer at rates limited by law.

This reform is needed because it is so relatively easy to lose employer based coverage.

By linking this portability reform to coverage continuity reform, it is clear that no one should ever be forced out of the health insurance system. Portability protects (permanently if necessary, people in the

event of job loss or loss of dependent status. Coverage continuity (described earlier) protects their right to new health insurance as they, for example, re-enter the job market.

2)

Tax fairness. No amount of small group health insur ance reform will make health insurance affordable.

Tax equity will. Self employed people and individual buyers of insurance must have the same rights to tax deductibility of health insurance costs as those of us with employer-provided and employer-paid health insur

ance.

It has been clearly demonstrated that the ranks of the uninsured can be significantly reduced with this simple change.

Also, the portability reform outlined above can be made
effective and meaningful if people are given the means
(through tax equity) to continue paying their premiums
when they find themselves out of work.

3)

Medical Savings Accounts. Individual freedom and
personal responsibility are the ideals behind the
American way.

Government's role is to preserve these ideals, not to run our lives.

If we are to effectively bring health care spending under control, we can accomplish it most effectively by empowering 240 million Americans.

Golden Rule has proposed that people be permitted to
insure themselves against financial ruin by buying high
deductible insurance. To fund the day-to-day costs of
medical care, we propose that people should be permit-
ted to take the savings (generated by moving from low
deductible to high deductible insurance) and accumulate
that money tax-free in a medical savings account. Over
time, these savings can become substantial. They can
be used to maintain insurance through hard times, to
fund claim cost under the umbrella coverage, and ulti-
mately to pay for long term care (if needed).

Most important, we can break the mentality that insurance is "free" and that the goal is to maximize usage.

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New England
Journal of Medicine

Established in 1812 .. The NEW ENGLAND JOURNAL OF MEDICINE AND SURGERY

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Vol 326 No. 8

SOUNDING BOARD

565

11 Dullman RO Seagren SL, Proper K. ct al A randomized trial of induction

chemotherapy plus high-Joxe radiation versus radiation alune in Suage III

non small-cell lung cancer V Engl J Med Iw39-4012 Mattson K. Hoisti LR. Holst: P et al Inuperable na small cell lung cancer:

radiation with or without chemotherapy Eur J Cancer Clin Oncol 198824

SOUNDING BOARD

REFORMING THE HEALTH INSURANCE

MARKET FOR SMALL BUSINESSES

8-10

FALED with possible extinction, the private health insurance industn has emerged as a local advocate of retorming the soll it does business. Since January 19011 the Health Insurance Association of Imerica HL has proposed extensive regulation of the price ing, markeung, underwriting and design of policies sold 10 small business groups Similar proposals for rrtorm have been made by the Blue Cross and Blue Shield. Issociation and be the Vational Association of Insurance Commissioners NAIC. It is remarkable to see retorm proposal coming from the industry most likely to oppuse it luis also surprising that. with The rest of the debate over health care relorm in gridlock the basic structure of these measures has broad political support and is viewed by many as having a high likelihood of passive both in individual states and raris in the course of federal retorm President Bush and several congressional leaders from both par. airs have recentis endorsed some or all aspects of the indusin's proposed retorms. It is therefore imperauve to understand precisely what small-group-market re. form will und will not accomplish toward the twin godis universal access and cost containment.

plans have been forced to abandon this modified form of open enrollment and community rating for much more selective marketing practices. The root of these destructive market forces lies in the steeply rising cost of health care. Aggressive price shopping by healthier work forces has forced health insurers to gauge more accurately the actual risks of different groups and to screen out high-risk individuals and groups. Rather than repeat the specifics of widely publicized cases... I will describe the general market tendencies.

Underwriting (the process of assessing risk) for individual medical conditions becomes more cost etleclive as the size of the insured group decreases. This follows as a simple application of the statistical lan ot' large numbers. For larger groups. aggregate claims experience is highly predictive of future costs, whereas smaller groups are more likely to have extreme Huctuations from vear to vear. The consequence of this statistical logic is that insurers (responding to cmplover demands) have adopted several pracuices that make it dishcult or impossible for some small groups. or individuals within small groups, to obtain suifi. cient insurance. Insurers sometimes exclude high-risk people in small groups enurely or subject them to lengthy exclusion periods (as long as two years, for preexisting conditions or to permanent exclusions of their major health conditions. In extreme cases. entire small groups are refused coverage or are quoted extremely high prices, either at the outset of coverage or at renewal. More routinelv, emplovees who have lasted through lengthy preexisung-condition periods are afraid to change jobs, producing a phenomenon known as “job lock” that may affect 30 percent of Americans.

Frequently, large price increases and refusals to serve an entire small group are not based on any actual adverse history of claims. Some insurers engage in "tier rating," which classifies vanous groups on the basis of the insurer's experience that workers in cer. tain occupations and industries are likely to have higher claims. Even favorably rated groups are subjected to "durauonal rating,” which is the practice of offering a low premium to groups identified as low risks at the outset, but raising the premium steeply at each annual or semiannual renewal period, reflecting the tendency of the predicuve power of the initial risk assessment to wear off. Medical underwriting tends to wear ott be. cause of the statistical phenomenon known as regres. sion to the mean, according to which outliers (both low and high) tend over time to move closer to the norm. Prices also rise over time simply because the initial period during which preexisting conditions are excluded expires. At the most extreme, insurers may retuse altogether to renew the coverage of groups with initial low ratings, which constitutes the phenomenon known pejoratively as churning. TAKING THE REFORM PROPOSALS AT FACE VALUE

Various proposals to correct these destructive prac. tices share three essential components

guaranteed availability, price regulation, wnd prate reinsurancro

THE PURPOSE OF REFORMS IN THE SMALL-GROUP

MARKET Retorming the small group market is intended to arrest the disintegration of the health insurance mar. her for small businesses, which is currently in a death

pir.dl. In 1990 only 30 percent of firms with fewer than 5 emplovees otlered their workers health insurunce is compared with 87 to 99 percent of larger tirnis. Stared even more starkly among firms that do not offer coverage. 98 percent have fewer than 25 em. plonces.' These dramatic statistics result in part from

market dinamic that has torced insurers to treat small businesses more like purchasers of individual policies than like group purchasers. but without the revululon protections that apply to the individual inarker

In previous decades. Blue Cross, health-maintenance organizations HMOsi, and even many commercial health insurers tended to charge one rate for all small groups in a given community, usually adjustingoni lor age and sex. In recent ears, however. commercial insurers and mans H.MOs and Blue Cross

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566

THE NEW ENGLAND JOURNAL OF MEDICINE

Feb. 20, 1992

although they vary considerably in their details. I will use the HIAA's state legislative model as the basis for descripcion, nouing important variations. These reforms are aimed at the small-group market defined as emplovers with 3 to 25 full-time workers. Other dehnitons go as high as 50 or 100.) Making 3 the cutoft point is intended to create some demarcation in the regulation of individual as compared with group policies, and setting a cap is intended to prevent he regulatory burden from further increasing the incentive of larger groups to sell-insure.

The essence of guaranteed availability is the requirement that insurers cover anvone who applies. No group mas he denied at least a basic, minimal-benefits health plan, regardless of health status. This require. menu is coupled with a "whole group concepe," which prohibits the exclusion ihr either the insurer or the imploser of any individual within 3 group. More. over, insurers would be prohibited from retusing to renew any group's insurance except for fraud. nonparment, or similar malleasance.

I second aspece of guaranteed availabilits is to ensure the continuity and portabilits of courrage hv reg. uluring the use of exclusion clauses. Insurers would be prohibited enurels from excluding specinc health conditions. The would be allowed only to place an initial 12-month preexisting condition exclusion on coverage for any condition inanitested within a months betore The date of coverage Other proposals applido und 3-inonth limit: Toddress the problem of "ob lock, Subscribers would be able to transier to new insurer. rither bu changing jobs or changing insurers within The same workplace without undergoing a new exclu100 period Guaranteed bulabilirliminates ine worst ettects

medical underwriting retusal al Coverage and hurning - bus tanding alone it would wegravate huge price ranauons und Huctuations by forcing insurers to make in the most extreme risks. There. lore, the second component of the reforms is to estab. lish modified form of community raung for small groups hi imposing various price regulations. These compier restrictions van greatly in their details, but their basic thrust is to dampen durational rating for individual groups over ume and to suppress tier-raiing practices across the marker as a whole at a moment in time

Both the HI.1.4 and VAIC models limit vear-tosear increases in any given group's premiums to 15 percent above the insurer's "irend.“ denned us the increase in the least expensive new business: vthers propose 1) to i percent limits. The concept is to allow market-wide cost increases but limit those that reflect group-specific health risks.

Second, the HI 14 model would present and insur. res from varving lis prices more than 35 percent above cop heton iis midpoint for groups with imilar benetes and rase sharacteristics. The Vicinodel llons sulit) percent pread 5 percent home or below he indpointind bulsponsored kontori tulee RANO na Bentro D.I.

i Wiper

cent spreads, respectively. 12,13 The case characteristics that may be used to set different pricing bands include geographic, demographic (age and sex), and industry factors, but the HIAA model allows only a 15 percent variation (a 30 percent spread) on the basis of indusIrv. For instance, if an insurer's average price is $2,000 for a group whose average age is 40 to 30 vears. the HIAA pricing band restricts the variation among similar groups to $1,300 to $2,700, with an additional 5600 spread according to industry and occupation. However, because this loose form of community raiing is age-adjusted, there is no limit on the extent in which pricing bands for groups of different ages mas varv from one another. By contrast, other proposals. such as bills sponsored by Senators Rockefeller DW.Va.) and Mitchell (D-Mc.) and Representatives Rostenkowski (D-III.) and Stark (D-Calif.), move verr close to pure community rating.

Proposals that allow separate blocks of business add vet another laver of complexity. Some insurers man. age separately products that are marketed through distinct sales forces, acquired from another company or designed according to fundamentally different prin. ciples (such as capitation or indemnity), In keeping with this tradition. most proposals (but not the HILA's, follow the NAIC model by appiving their rating limits separately to a limited number of blocks defined in this manner. In order to prevent circumven. uon of the rating limits. they also limit the pricing varation between block midpoints to a spread of 2010 +0 percent. Within each block, however, there is no limit on the degree of price variation according to the allowable age, sex, and location factors.

The third, and from the commercial insurers' per. spective the most fundamental, component of small. group reform is a mechanism of private reinsurance that allows individual carriers to reinsure any risks that they expect will generate costs exceeding the prices they mav charge. Reinsurance encourages in. surers to accept all applicants and thus suppresses the incenuve to engage in indirect and surrepuitious risk selection The reinsurance mechanism for small

groups

would differ in two fundamental wavs from state high-risk pools that cover uninsurable individuals. First, smallgroup reinsurance is invisible to the public. The insurer that issues the policy merely cedes the risk to the reinsurer (except for a deductible and possibly a copavment by the ceding carrier). The reinsurer's only role is to indemnify the ceding carrier for its claims expenses: the ceding carrier remains responsible for the administration of the plan. Second, in order to avoid burdening government budgets. the HIAA proposes small-group reinsurance as a primarils private mechanism: it would be run by a nonprofit entity. Tunded primarily by the insurance industry, and gove erned by a quasigovernmental board.

The principal funding for the reinsurance entity would come from the reinsurance premium paid hu the (eding carrier. Carriers could prospectieli reiure either whole groups or high-risk individuals with

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