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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 10 coverage and demographic characteristics.

To illustrate if the market average is $2.000 for a group whose average age is +0 to 50 vears, an insurer whose own average is the same could collect a maximum of $2.700 per member from the emplover, as noied 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 presliced to be higher than these prices, the reinsurance enuts will necessarily suffer losses, which will be pread over the insurance market through a tax on small-group premiums. The HI.4.1 calls for a limit of + percent on this cax: thereafter. funding sources would be sought from large group insurance, including sell-insured emplosers, or from general tax rev


for all sectors of the indusen support this reinsurunce model. Because some HMOs lack a claims-based Istem of reimbursement, they would not rasily fit. ind because Blue Cross plans that use community rating are more accustomed to bearing a wider range al risks. thes would tend to use reinsurance less and so would rather not have to pay the indusin-wide assessmenis. Legislative enactment of reinsurance is therefore likely to allow some insurers to opt out. This is the current compromise in several federal bills and in one of the NHC drait reinsurance models. THE POLITICAL ECONOMICS OF THE REFORM

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

Insurers very much favor state-by-state enactment of these reforms because of their familiarity with the {"xisting scheme of state regulation and the precedent that federal intenvennon would set. However, the attraction of small group retorm is so great that lederal lawmakers may find it irresistible. The federal debate is currently dominated be talk of public-private part. nerships and incremental retorms.'*." The most compelling step on the private side is in the small-group market. Of the more than 30 million uninsured penple

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. 17 Criti cally, then, these reforms respond directly to the portion of the uninsured or underinsured population that has political ciout. Just as important, the resorms can be implemented without raising taxes, an essential 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 situng duck, and it's all free." 18

Remarkablv, in contrast with virtually every other piece of the intractable puzzle of health care reform. the broad principles of reform in the small-group mar. ket 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. '9.20 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. *1.** Small 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 immediately 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 decav 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 emanaung from the impending presidential election. Democrats are making fundamental reform of health care financing a ceniral campaign issue. The Democratic bills that require private emplovers to purchase insurance (instead of adopting a Canadian-style, all-government system) have smail. group reform as an essential component. Democratic leaders are also sponsoring more incre. mental 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 it during the 1992 campaign. Several Republicans, including the entire leadership of the Senate, have attempted to preempi this tack with bills that include small-group reform along with other, more incremental measures.:31.5! Reform of the insurance market has also received glowing praise from Secretary of Health and Human Services Louis Sullivan.53.15 and is a major plank in President Bush's recently announced health care plat.

23-28 Kev




Feb. 20. 1992

form. Industry-initiated, budget-neutral, incentive. based reforms precisely 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. Must have cnacted only some version of the rating restrictions, but a handful (Connecticut. Vorth Carolina. Oregon, and Vermont have enacted guaranteed availability and private reinsurance as well, and the HII.A has targeted an additional 15 large states for lull implementation in 1992. The Vauonal Governors' Association also strongly endorses state-bv-state enactment The complex political forces at plav in the states are much more difficult to encapsulate, but it is possible to outline proto vpical patterns under which small-group reforms have alreadı arisen.

State politics are shaped by two factors absent at the tideral level. The list is the presence of an established regulatory agency, heavily influenced bs ans VAIC model legislation, particularly if the local insurance commissioner was active in the association's delibera. tions. This explains the rapid adoption ot the NAIC's raung und renewability model bill in many states 10.4.. .Irkansas. Florida. Towa. Worth Dakota. and South Carolina. The second unique lactor is the vari.ble structure of the local insurance market, particu. laris the respectise sizes of Blue Cross and domestic localls headquartered commercial insurers. Connecticur, home to many commercial insurers, was the first to enact a full set of retorms based on the HI.. mudel, but domestic insurers cannot always be counird on to support the industry proposals. In a few states eu. Texas and Wisconsini, the majority of the commercial insurers have resisted the retorms The effect * Blue Cross on small group reform varies according 10 whether the local plan still engages in open enrollinent and communiti rating to a substanual extent. If so. Blue Cross will tend to lavor guaranteed issue of insurance and strict rating relorms, to torce its compeutors to plas buihe same rules.

Given the considerable legislauve activity already under was in the states, and given the traditional abstention of the federal government from insurance regulanon. It is likely that lederal involvement in small-group reform will be limited to selling minimal standards for the states to enact and entorce, under guidance from the SAIC. This model is already in place for Medigap insurance and is being considered for long-term care

THE LIKELY EFFECTS OF THE REFORMS There are many health policy objectives that these relorms will not accomplish, even for their intended target - uninsured workers and their families. First. in the industris own words. These retorms are aimed ..( “uvailabilin. nor atlordability," meaning that they are designed in in eller insurance to ans willing purchaser at a price that does not tar exceed the mar. kesibrage, 1101 to solve the problem ut cost contain: mennt rutrighi finn hen is 10K (struit ihese

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 engineers in North Carolina might pav only $1.865 a vear. whereas a group of three sickly, 58-year-old male phy. sicians in Boston might pav $30,555. (This estimate is based on the following variables: A 350 percent differ. ential is typical for age and sex factors. This would result in a rate adjustment of I at the low end and 3.5 at the high end. The geographic factor is estimated 10 account for a 30 percent spread, although chis is speculative. HIAA rating reforms allow a 30 percent 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 1.35 at the low and high ends, respective. lv. 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 rating 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 observers have argued, they have the potential to decrease the prevalence of private insurance.

given the extreme 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 emplos. ees earning less than $10.000 a vear as do firms with insurance (33 percent vs. 12 percenu). Emplovers also tend not to offer insurance for jobs with high turnover. The turnover rate for uninsured firms is three times the rate for insured forms (39 percent vs. 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


and over half cited low profits as very important reasons for not offering in

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Insurers respond to these financial barriers by calling for tax incentives 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 by incurring the wrath of the consumer and provider groups that lobbied for their enactmene. Even more croubling, recent evidence suggests that the effects of lowering prices would have to be extraordinarily large in order to work well. The Robert Wood Johnson Foundation has sunded approximately 10 demonstration projects on marketing

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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 car. get markers, even with prices of one quarter to one half market value. One third of the businesses with out insurance that were surveved in Denver and one tourth of those in Alabama said they would not contribute an amount toward the cost of their emplovres health insurance.

The price sensitivilt oluninsured businesses is ag. gravated by the inevitable etfect of the small-group relorms on average market prices. These reforms will increase prices because thes make insurance most attractive to the groups at highest risk by holding prices below 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 i to 25 percent in per capita claims."

in sum, the working uninsured are composed primanis of two groups: high-risk people who cannot Tord insurance and low-risk people who cannot aflord insurance. Small-group reforms will help the for. mer and hinder the latter. It is 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 insurance. although those who do will tend to have sicker and thus more needy emplovees. When small-group reforms tail to reduce substantially the number of uninsured people, a sense of frustration may set in that will lead to more radical measures. Flat community raung or nanional health insurance is always possible. But it is more likely that is the worst effects of risk selection are removed from the private insurance marker and broader access is still not achieved, an emplover mandare will become irresistible. Whether it can be imposed will depend on whether cost-control meas. ures can be found to solve the underlying problem of utfordability

The Pepper Commission. Bipartisan Commission on Comprehensive Health
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Private health insurance options for reform. Heanngs before the House
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15 Session September 20. 1990 WashingtonDC Government Printing

Othce Committee Print 101-35, 10 Suatement of the Amencan Academy of Actuanes Presented at the sing

cost of private health insurance Heanng before the House Committee un Energy and Commerce. Subcommittee on Commerce Consumer Prosec lion and Compeutiveness. 102nd Congress. Ist Session. Apni .

Washington DC. Government Printing Orhce 11 Eckholm D. Health benents found in dever switching New York Times

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Long-term strategies for health care Heanngs before the House Cumminee on Ways and Means 102nd Congress. iu Session. Apni 10.12....

1991 Washington DC Goverment Prnung Office 15. Blumenthal D. The timing and course of health care retorm Engl J Meu

1991.J25.198-200 16. Suatement of John D Movnahan. Metropolitan Life Insurance Compan

Presented at Long-term strategies for health care Heanno before the House
Committee on Ways and Means 102nd Congress. Ise Session Apni S

1991. Washington DC Government Printing Othce 17 Foley ID Uninsured in the United States, the noneiderly population without

health insurance analysis of the 1990 CUTETI population survey washing

ton. DC. Employee Benefit Research lasutute. 1991 18 KosterticaUnnsky business Navonal Journal. April 1991 19, Todd JS, Sections SV. Knchbaum JA, Harvey LK Health Access Amenca

- screngthening the US health care system JAMA 1901.205 503-4 20. Statement of C Thomas Smith. Amencan Hospiual Associaton Presented

a Long-term strategies for health care Heanings before the House Commit tee on Ways and Means 102nd Congress. Ist Session, Apni 23991

Washington, DC. Government Printing Office. 21. Suatement of James S Todd. Amencan Medkal Association Presented a

Long-term scrategies for health care Heanngs before the House Committee on Ways and Means 102nd Congress is Session. Apri 25. 1991 Wash

ington DC Government Printing Ofhce 22 Himmelstein DU, Wwthandler S Who cares for the care given Lkk of

health insurance among health and insurance personnet JAMA 1991.250

399-401 23 Rich S. Business proupa unite to lobby on health insurance Washington

Post October 16. 1991 A4 24 Statement of Lane Kistland. AFL-CIO Presented a long-term strategies

for health care. Heanngs before the House Committee on Ways and Means 102nd Congress. Ist Session. Apni 24. 1991 Washington, DC Gurem.

ment Prinong Office 29. S. 1227 (Mitchell. et al.) 26 S 1177 (Rockefeller 27. HR J205 (Rostenkowski 23. HR 3335 (Waman), 102nd Congress. Ist Session 29 HR 3826 (Rosienkowu. 30. HR 2121 (Start). 102nd Congress. Is Session 31. S. 700 (Durenberger 32. HR. 1565 (N. Johnson), 102nd Congress. Ist Session 33 Testimony before the House Committee on Wuys and Means. October 10

1991. Washington. D.C. Government Printing Othee. M Text of remartus by Louis W Sullivan a Rice University Houston Telas

March 26. 1991 35. Rich S. Seeting to plug health insurance fup. Washington Pou. March?..

1991 A21 %. Pas R. Insurers plan to fighe congress on small-business health coverage

New Yort Time September 24, 1991 A26. 37. NGA Task Force on Health Care. A healthy Amenca: the challenge for

states. Washington, DC. Naponal Coveror' Associadon 1991 38 McCall N. Ria T. Hall A The effect of state regulations on the qualors and

sale of insurance policies to Medicare benencianes Health Point Policy

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and HR 1916. 102nd Congress. Ist Session
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resource book Washington DC. Government Printing Othce. 1991

Lyle TA The false promx of small-group reform Emphasis 199111) 42. Suatement of Mart V Nadel. Government Accounting Orhce presented at

Standards for privase health insurance. Heanings before the Subcommittee
on Health of the House Comminee on Ways and Means 10.nd Congress
1st Session, May 21, 1991 Washington. D.C.. Goverment Printing
Sucement of Karen Davis. Johns Hopkins Department of Health Polk and
Management Presented at Health insurance options tormol pnvale
health insurance Heanngs betore the Subcommittee on Health of the Hive
Committee on Ways and Means 102nd Congress 14 Session. Mas !
1991 Washington DC Government Printing Othce

Ancona State Universary

College of Law Tempe. N 13207

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


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Schramm Health care financing for all Amencans. JAMA 1991-265: 1996-9 Reinhard LE Breaking Amencan health policy andlock Health AR (MilWood) 19911012)103 Sullivan CB. Rice T. The health insurance picture in 1990 Health All Mullwood) 1991.102). 104 1S. Lippen C. Wicu E Cnocal disainctions how firms that offer health bene. his differ from those that do not Washington, DC.. Health Insurance Association of Amenca. 1991 Anderson K. Small Arms are getting squeezed out. C'SA Today June 1). 1491 Coron P Perushing conditions hold Amencans hostage to emplovers and insurance. JAMA 1991.26551) Freuuenheim M Health insurers to reduce losses, blacklist dozens of occu. pations New Yort Times Februar 1990 AI

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Suatement of Harry Sunon. Amencas Academy of Actuanes. Practed
# Stanlards for private nesith insurance Meanings before the Subcomment-
leen Health of the House Committee on Ways and Means. 102nd Cun.

la Sewwon. Mar. 1991 Washington DC Government Printing
Statement Bernard T Tresnis, Blue Cross and Blue Shield Assoc-
ition Presented at Health insurance and the small proup marke. Heaning
behave the Subcumminer on Health of the House Committee on Ways and
Means 101 Cungress. ind session. April ). 1990. Washington DC

nimeni Pnoting the Sulement uran L Barrand, Senior Program Office, Robert Wood JuheA nation, and David Helms. President. Alpha Center Presented # Health insurance uptrons reform of private health insurance Heannes hire the Subcommince on Health of the House Committee on Ways and Mesna 10.nu Cungress. 1s Session May 9). 1991 Washington, DC Cinement Printing Office Huux ut Representatives. Committee on Ways and Means. Subcommittee un Mesich private health insurance options for reform. Washington DC Guremment Printing Oince. September 20. 1990 Comuninee Print 101.

Relcrencing remarts of Judith Glarner Colondos and Hugh Davis Alabama da minar cattled "Health insurance for the uninsured: soru ries and DOI CY options for a public prve partnership Washington, DC., Mas!! * Statement of Howard) Bolnict. Ceine Life Insurance Company Presented # Health insurance uprions reform of private health insurance Heanngs relore the subcommittee on health of the House Committee on Win and Means U nd Congress. Is Session. May J. 1991 Washington DC Concm meni Printing Office




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

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, our 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 or 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

delivered in 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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