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Vol. 326 No. 8



in groups. To reinsure high-risk groups, the HIAA reforms call for a premium that is 150 percent of the market-wide average: to reinsure high-risk individuals. The price would be 500 percent of the average market value for individuals within groups. These market averages would be determined by the quasigovernmental board and would be adjusted according to coverage und demographic characteristics.

To illustrate. if the market average is $2.000 for a group whose average age is +0 to 30 vears, an insurer whose own average is the same could collect a maximum of $2.700 per member from the emplover, as nored above. but would pay $3.000 per member to reinsure the group, or $10.000 to reinsure a particular member of the group. Since insurers will reinsure only the groups and individuals whose expenses are predicted to be higher than these prices, the reinsurance inuts will necessarily suffer losses, which will be

pread over the insurance market through a tax on small-group premiums. The HI.A calls for a limit of + percent on this tax: therealier. funding sources *ould be sought from large-group insurance, including sell-insured emplovers, or from general tax rev

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Sot all sectors of the industri support this reinsurunce model. Because some HMOs lack a claims-based sistem of reimbursement. they would not rasily fit. und berause Blue Cross plans that use community riting are more accustomed to bearing a wider range

risks, they would tend to use reinsurance less and so would rather not have to pay the indusin-wide assessmenis. l.gislaule enactment of reinsurance is theretore likely to allow some insurers to opi out. This is the current compromise in several federal bills and in one of the VNC's dratt reinsurance models. THE POLITICAL ECONOMICS OF THE REFORM

PROPOSALS There are strong economic reasons for accepting wme s prsion of the indusini's proposals for reforming The small-vroup market. The reforms are designed to accomplish iwo important objectives. First, they induce insurers to behave in a manner more consistent with the fundamental premises of group insurance bv minimizing the degree of individual medical underwriting without imposing laborious regulators over. sight. Second, the reforms reorient the industry from competition based on risk selection to competition based on risk management, thereby harnessing mar. ker torces in a manner much more likely to benefit the community

Insurers very much favor state-bv-state enactment of these relorms because of their familiarity with the existing scheme of state regulation and the precedent that federal intervention would set. However, the attraction of small-group reform is so great that federal lawmakers may find it irresistible. The federal debate is currently dominated by talk of public-private partnerships and incremental reforms.''.'". The most compelling step on the private side is in the small-group market. Of the more than 30 million uninsured people

in the United States, more than half are full-time workers or their dependents, and half the uninsured workers are in the small-business work force. Critically, then, these reforms respond directly to the portion of the uninsured or underinsured population that has political clour. Just as important, the reforms can be implemented without raising taxes, an essenual ingredient in the present political climate. In the words of Senator Rockefeller, the small-group market is the easiest target Congress has, it's a wonderful, glorious. multicolored, brilliant, magnificent sitting duck, and it's all free. "18

Remarkablv, in contrast with virtually every other piece of the intractable puzzle of healın care reform. the broad principles of reform in the small-group market are supported by nearly all the major participants. Providers have always staked their fortunes on a private financing mechanism, so they have much to gain by endorsing these reforms."9.-0 This is particularly true for physicians, given that a large number of them practice in small businesses and given that they are considered by the insurance industry to be in one of the "blacklisted." high-cost professions." businesses are obviously the principal beneficiaries. and large businesses are either neutral or supportive as long as thev are not required to pav a substantial share of the reinsurance assessments. The insurance industry – the interest group most immediatel disadvantaged – is championing the reforms in order to stabilize the market and adopt an active stance in the national policy debate. The only sounds of discontent come from those who would prefer an entirely govern. mental system of financing and who therefore oppose any piecemeal solutions that may slow the decay of the private insurance marker. But even organized labor groups, traditionally the largest supporters of socialized insurance, have signaled that they are amenable to private-sector compromises

The speed and likelihood of federal adoption of small-group reforms are strongly influenced by the volatile political forces emanating from the impending presidential election. Democrats are making fundamental reform of health care financing a central campaign issue. The Democratic bills that require private emplovers to purchase insurance (instead of adopting a Canadian-style, all-government system, have small. group reform as an essential component. Democratic leaders are also sponsoring more incremental proposals that pursue insurance reform as a necessary first step.

The Democrats' sweetest dream come true would be to pass one of their comprehensive reform packages and force President Bush to veto ic during the 1992 campaign. Several Republicans, including the enure leadership of the Senate, have attempted to preempi this tack with bills that include small-group reform along with other, more incremental measures.'!$1.)? Reform of the insurance market has also received glowing praise from Secretary of Health and Human Services Louis Sullivan.".15 and is a major plank in President Bush's recently announced health care plat.

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form. Industrv-initiated. budget-neutral. incentive. based reforms preciselv fit conservative political ideology and pragmatic objectives.

Meanwhile, reform efforts are proceeding rapidly at the state level. Twenty-two states have passed one or more of the basic components of small-group reform. Most have chacied onlv some version of the rating restrictions, but a handful (Connecticut. Vorth Carolina. Oregon, und Vermonu have enacted guaranteed availability and private reinsurance as well, and the HI.1.1 has targeted an udditional 15 large states for full implementation in 1992." The Vational Governors' Associanon also strongly endorses state-bv-state mnacement." The complex political forces at plav in The states are much more dishcult to encapsulate, but It is possible to outline proton pical patterns under which small group relorms have already risen.

Suate politics are shaped by two factors absent at the Irderal level. The first is the presence of an established regulatory agency, heavils Intluenced hi ans NAIC model legislaton. parucularls of the local insurance commissioner was active in the association s delibera. cons. This explains the rapid adoption of the VAIC's rating and renewabilis model buil in many states 10.4. Irkansas. Florida. low. North Dakota. and South Carolina. The second unique lactor is the variable structure of the local insurance market particu. iuris the respecule sizes of Blue Cross and domestic

localls headquartered commercial insurers. Connecticut home to mans commercial insurers was the first to enactulull set of retorms based on the HI.1.4 mudel, but domestic insurers cannot always be countidon to support the industri proposals. In a lew states

e Texas and Wisconsin), the majority of the com. mercial insurers have resisted the retorms. The elect ** Blue Cross on small group reform varies according to whether the local plan still engages in open enrollinent and community rating to a substantial extent. If 30. Blue Cross will iend to lavor guaranteed issue of insurance and strict rating retorms. to force its competitors to play on the same rules.

Given the considerable legislative activits already under was in the states, and given the traditional abstention of the federal government from insurance regulation. It is likely that federal involvement in small group reform will be limited to selling minimal standards for the states to enact and entorce. under yuidance from the VAIC. This model is already in plair for Medigap insurance and is being considered for long-term are

THE LIKELY EFFECTS OF THE REFORMS There are many health policy objectives that these relorms will not uccomplish. rien for their intended targer - uninsured workers and their families. First. in the industnoun words, these retorms are aimed 1 variability, not allordabilis," meaning that they .ire designed in to the insurance in un' willing purchaser at a price that does notlar record the mar. het liberage 101 to be the problem lost contain: Tentutright in then. 1104 Aried 'hese

reforms will not enhance availability to the extent the industry would like. Because the pricing limits in the HIAA and NAIC models are adjusted according to geographic and demographic characteristics, the reforms could still allow a 16-fold difference in the rates charged groups at the extreme ends of the possible combinations of allowable risk factors. For instance, for a plan with an average annual rate of $1.500 per enrollee for single coverage, a group of three healthy, 28-year-old male computer-software engincers in North Carolina might pav only $1.865 a vear. whereas a group of three sickly, 58-vear-old male phr. sicians in Boston might pay $30,555. (This estimate is based on the following variables: A 350 percent disserential is typical for age and sex factors. This would result in a rate adjustment of l at the low end and 3.5 at the high end. The geographic factor is estimated to account for a 50 percent spread, although this is speculauve. HIAA rating reforms allow a 30 per. cent spread for occupation and a 70 percent spread for health status. These three factors would result in rating adjustments of 0.85 and 1.15. 0.75 and 1.25. and 0.65 and 135 at the low and high ends, respective Iv. The compounded rating adjustments are thus 0.414 and 6.79.)

Avoiding these anomalies is a relatively simple but controversial matter of moving closer to strict community raung by restricting adjustments according to age and other factors. Even as modified. hon. ever, these reform proposals may still fail to increase access to health care; indeed, as several obsen ers have argued, they have the potential to decrease the prevalence of private insurance. given the ex. treme price sensitivity of purchasers in the smallgroup market." The HIAA provides some insight into purchasing proclivities through its 1990 nationwide survey of 3000 emplovers.' Firms without health insurance have nearly three times as many emplova ees earning less than $10.000 a vear as do firms with insurance (33 percent vs. 12 percenu. Employers also tend not to offer insurance for jobs with high turnover. The turnover rate for uninsured firms is three times the rate for insured firms (39 percent is. 13 percent), When these firms were asked their reasons for not purchasing insurance, only 30 percent cited the lack of an acceptable plan as very important, whereas three quarters cited expense and over half cited low profits as very important reasons for not offering insurance.

Insurers respond to these financial barriers by calling for tax inccnuves designed to encourage voluntary purchase and by offering to sell bare-bones coverage. but budget cutters have a strong aversion to new tax subsidies, and eliminating laws that mandate certain benefits creates political havoc bv incurring the wrath of the consumer and provider groups that lobbied for their enactment. Even more troubling, recent evidence suggests that the effects of lowering prices would have to be extraordinarily large in order to work well. The Robert Wood Johnson Foundauon has sunded approximately 10 demonstration projects in markeunu

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health insurance to previously uninsured small businesses. After one to three vears. most projects had achieved less than 10 percent penetration of their carget markets, even with prices of one quarter to one hail market value. One third of the businesses with. out insurance that were surveved in Denver and one fourth of those in labama said they would not contribute ant amount toward the cost of their employ. res' health insurance.'

The price sensitivity of uninsured businesses is ag. gravated by the inevitable etfect of the small-group reforms on average market prices. These reforms will increase prices because they make insurance most at. tractive to the groups at highest risk by holding prices helon the plan's actuarial value. The excess is assessed against the premiums paid by all small-group purchasers, which will inevitably drive an undeter mined number of low-risk purchasers out of the marker. thus raising the market average even more. Actu. urial simulations performed for the HI.LA and Blue Cross estimate an average increase of 5 to 25 percent in per capita claims.

In sum. the working uninsured are composed primanly of two groups: high-risk people who cannot utford insurance and low-risk people who cannot af. tord insurance. Small-group reforms will help the former and hinder the latter. Ius impossible to predict how these counteracting effects at the margin will net out over time, but it is quite possible that fewer emplovers than before will voluntarily purchase insurunce. although those who do will send to have sicker and thus more needy emplovees. When small-group retorms fail to reduce substantially the number of uninsured people, a sense of frustration may see in that will lead to more radical measures. Flat community rating or national health insurance is always possible. But it is more likely that if the worst effects of risk selection are removed from the private insurance marker and broader access is still not achieved, an emplover mandate will become irresistible. Whether it can be imposed will depend on whether cost-control measures can be found to solve the underlying problem of utfordability.

Antona State Univery

College of Law Tempe, AZ 8527

MARK A. Hall, J.D. I am indebted to Henry Greely, Stanford Law School for helpful discussions.



Schramm Health care financing for all Amencans JAMA 1991.265

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This statement is submitted on behalf of the National Association of Rehabilitation Facilities (NARF). NARF

the national voluntary association of community based facilities. Our membership includes over 800 medical, vocational, and residential facilities. Our medical membership includes freestanding rehabilitation hospitals, rehabilitation units in general hospitals, and comprehensive outpatient rehabilitation facilities. A majority of these facilities are Medicare providers. The hospitals and units are exempt from the Medicare prospective payment system (PPS).


NARF is interested in and concerned about the current health care reform debate. Recently, Board of Directors approved the Statement of Principles against which to Measure Health Care Reform and Characteristics of a Reformed Payment System as they relate to rehabilitation ( See attachment).

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Rehabilitation is an integral not peripheral- part of the current health care delivery system. It prevents numerous complications as well as preventing reinstitutionalization and extended institutionalization. Over 80% of people receiving rehabilitation services return to their homes, work, schools, or an active retirement.


Rehabilitation services are individualized, goal-oriented medical services designed to maximize functional ability and promote quality of life and independence for people, who through accident

illness, have acquired a temporary or permanent disability. These services are provided by qualified health care professionals including physiatrists, occupational therapists, physical therapists, speech-language pathologists, audiologists, rehabilitation nurses, respiratory therapists, and others. Rehabilitation services are delivered in a variety of settings, depending on diagnostic and therapeutic requirements, including hospitals, nursing facilities, comprehensive outpatient rehabilitation facilities, rehabilitation agencies, and clinics.

Millions of people receive rehabilitation services annually people who have had a heart attack or stroke, have arthritis, cancer or a neurological disorder, have had joint replacements or have experienced a traumatic accident or debilitating illness, as well as children with congenital or acquired physical impairments.

Peter Drucker, a well known management consultant, has said, "The health area in which we have made the greatest progress in recent decades has been rehabilitation; to restore badly injured people to functioning. Of all health care dollars, they are the best spent." Rehabilitation is a cost effective alternative to extended acute care. A survey conducted by the Health Insurance Association of America found a savings of $11 for every $1 invested in rehabilitation services and a savings per claimant of between $1,500 and $250,000. Similar results have been shown in studies conducted by several insurance and case management companies. Northwestern National Life Insurance Company finds that rehabilitating workers can save companies $30 for every $1 spent. We believe premium costs, if any, associated with coverage of medical rehabilitation services are modest when contrasted with potential savings due to prevention of complications, institutionalization and extended institutionalization. For example, according to 1990 figures from Blue Cross/Blue Shield of Massachusetts, the cost of full coverage in inpatient and outpatient settings of occupational, physical, and


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