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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 and demographic characteristics.

To illustrate, if the market average is $2.000 for a group whose average age is 40 to 50 years, an insurer whose own average is the same could collect a maximum of $2.700 per member from the emplover, as noted 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 entity will necessarily suffer losses. which will be spread over the insurance market through a tax on small-group premiums. The HIAA calls for a limit of + percent on this tax: thereafter. funding sources would be sought from large-group insurance, including self-insured employers. or from general tax rev

enues.

Not all sectors of the industry support this reinsurance model. Because some HMOs lack a claims-based system of reimbursement, they would not easily fit and because Blue Cross plans that use community rating are more accustomed to bearing a wider range of risks, they would tend to use reinsurance less and so would rather not have to pay the industry-wide assessments. Legislative enactment of reinsurance is theretore likely to allow some insurers to opt out. This is the current compromise in several federal bills and in one of the NAIC's draft reinsurance models.

THE POLITICAL Economics of THE REFORM
PROPOSALS

There are strong economic reasons for accepting some version of the industry's proposals for reforming the small-group market. The reforms are designed to accomplish two important objectives. First. they 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 oversight. Second, the reforms reorient the industry from competition based on risk selection to competition based on risk management, thereby harnessing market forces 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 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 clout. Just as important, the reforms 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 sitting duck, and it's all free."18

Small

Remarkably, in contrast with virtually every other piece of the intractable puzzle of health care reform. the broad principles of reform in the smail-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.19.20 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. businesses are obviously the principal beneficiaries. and large businesses are either neutral or supportive as long as they are not required to pay 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 governmental system of financing and who therefore oppose any piecemeal solutions that may slow the decay of the private insurance market. 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 employers to purchase insurance (instead of adopting a Canadian-style, all-government system) have smallgroup reform as an essential component." 25-28 Kev Democratic leaders are also sponsoring more incremental proposals that pursue insurance reform as a necessary first step.

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form. Industry-initiated. budget-neutral. incentivebased 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. Most have enacted only some version of the rating restrictions, but a handful (Connecticut. North Carolina, Oregon, and Vermont) have enacted guaranteed availability and private reinsurance as well, and the HIAA has targeted an additional 15 large states for full implementation in 1992. The National Governors Association also strongly endorses state-by-state enactment. "The complex political forces at play in the states are much more difficult to encapsulate, but it is possible to outline prototypical patterns under which small-group reforms have already arisen.

State politics are shaped by two factors absent at the federal level. The first is the presence of an established regulatory agency, heavily influenced by any NAIC model legislation, particularly if the local insurance commissioner was active in the association's deliberations. This explains the rapid adoption of the NAIC's rating and renewability model bill in many states e.g.. Arkansas. Florida. Iowa. North Dakota, and South Carolina. The second unique factor is the variable structure of the local insurance market, particularly the respective sizes of Blue Cross and domestic locally headquartered) commercial insurers. Connecticut. home to many commercial insurers, was the first to enact a full set of reforms based on the HIAA model. but domestic insurers cannot always be counted on to support the industry proposals. In a few states e... Texas and Wisconsin), the majority of the commercial insurers have resisted the reforms. The effect of Blue Cross on small-group reform varies according to whether the local plan still engages in open enrollment and community rating to a substantial extent. If 10. Blue Cross will tend to favor guaranteed issue of insurance and strict rating reforms. to force its competitors to play by the same rules.

Given the considerable legislative activity already under way 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 setting minimal standards for the states to enact and enforce. under guidance from the NAIC. 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 reforms will not accomplish. even for their intended target uninsured workers and their families. First, in the industry s own words, these reforms are aimed at "availability, not affordability." meaning that they are designed only to offer insurance to any willing purchaser at a price that does not far exceed the mar ket average, not to solve the problem of cost containment outright Even then as now constructed these

Feb. 20, 1992

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 engi neers in North Carolina might pay only $1.865 a year. whereas a group of three sickly, 58-year-old male physicians in Boston might pav $30,555. (This estimate is based on the following variables: A 350 percent differential is typical for age and sex factors. This would result in a rate adjustment of 1 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 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. respectively. The compounded rating adjustments are thus 0.414 and 6.79.)

41-44

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. however, 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 employees earning less than $10.000 a year as do firms. with insurance (33 percent vs. 12 percent). 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 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 expense and over half cited low profits as very important reasons for not offering in

surance.

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 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 Foundation has funded approximately 10 demonstration projects on marketing

health insurance to previously uninsured small businesses. After one to three years. most projects had achieved less than 10 percent penetration of their target markets, even with prices of one quarter to one half market value." One third of the businesses withOut insurance that were surveved in Denver and one tourth of those in Alabama said they would not contribute any amount toward the cost of their employees health insurance."

The price sensitivity of uninsured businesses is aggravated by the inevitable effect of the small-group reforms on average market prices. These reforms will increase prices because they 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 undetermined number of low-risk purchasers out of the market, thus raising the market average even more. Actuarial simulations performed for the HIAA 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 alford insurance and low-risk people who cannot af ford insurance. Small-group reforms will help the former 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 employees. When small-group reforms fail to reduce substantially the number of uninsured people, a sense of frustration may set 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 market and broader access is still not achieved, an employer 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 atfordability.

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S. 1872, 102nd Congress. 1st Session.

14

15.

16.

17

19

Long-term strategies for health care Hearings before the House Committee on Ways and Means. 102nd Congress. Ist Session. Apni 16 17.23.24 25 1991 Washington, DC Government Printing Office.

Blumenthal D. The timing and course of health care reform Engi Meu 1991 325 198-200

Statement of John D Moynahan. Metropolitan Life Insurance Company Presented at Long-term strategies for health care. Heanings before the House Committee on Ways and Means 102nd Congress. 1st Session. Apni 25 1991 Washington. DC Government Printing Office

Foley JD Uninsured in the United States the noneiderly population without health insurance analysis of the 1990 current population survey washing. ton. DC. Employee Benefit Research Insutute. 1991

18.

Kostertitz J. Unnsky business. National Journal. Apni 6. 1991 796 Todd JS. Seekins SV. Knchbaum JA. Harvey LK. Health Access Amenca -strengthening the US health care system JAMA 1991 2652503-6

20. Statement of C. Thomas Smith. Amencan Hospital Association Presented at Long-term strategies for health care. Hearings before the House Commit tee on Ways and Means 102nd Congress. 1st Session. Apni 25 Washington, DC Government Printing Office.

21

22.

23.

24

25.

:991

Statement of James S Todd. Amencan Medical Association Presented at Long-term strategies for health care Hearings before the House Committee on Ways and Means. 102nd Congress. 1st Session. Apni 25. 1991 Washington. D.C Government Printing Office

Himmelstein DU. Wuoihandler S. Who cares for the care givers' Lack of health insurance among health and insurance personnel JAMA 1991.266 399-401

Rich S. Business groups unite to lobby on health insurance Washington Post. October 16, 1991 A4.

Statement of Lane Kirkland. AFL-CIO. Presented at Long-term strategies for health care. Hearings before the House Committee on Ways and Means 102nd Congress. Ist Session. Apml 24. 1991 Washington, DC Guvern. ment Printing Office.

S. 1227 (Mitchell, et al.)

26. S. 1177 (Rockefeller)

27. H.R. 3205 (Rostenkowski).

28. H.R. 2535 (Waxman. 102nd Congress. 1st Session. 29. H.R. 3626 (Rostenkowski).

30. H.R. 2121 (Stark). 102nd Congress. 1st Session 31. S. 700 (Durenberger).

32. H.R. 1565 (N. Johnson). 102nd Congress. 1st Session.

33. Testimony before the House Commitee on Ways and Means. October 10 1991 Washington. D.C. Government Printing Office.

34. Text of remarks by Louis W Sullivan at Rice University Houston Texas. March 26, 1991.

35. Rich S. Seeking to plug health insurance gap. Washington Post. March 27. 1991 A21.

36. Pear R. Insurers plan to fight congress on small-business health coverage New York Times. September 24, 1991:A26.

37. NGA Task Force on Health Care. A healthy Amenca the challenge for states. Washington, DC.. National Governors Association. 1991

38. McCall N. Rice T. Hall A. The effect of state regulations on the quality and sale of insurance policies to Medicare benencianes. J Health Polit Policy Law 1987:12:53-76

The Long-Term Care Insurance Consumer Protection Act of 1991. S 846 and H.R. 1916. 102nd Congress. 1st Session.

House of Representatives Committee on Ways and Means Health care resource book. Washington, DC. Government Printing Office. 1991 Lyle TA. The false promise of small-group reform Emphasis 1991(1924 Statement of Mark V Nadel. Goverment Accounting Office Presented at Standards for private health insurance. Hearings before the Subcommittee on Health of the House Committee on Ways and Means 102nd Congress. 1st Session, May 21, 1991 Washington. D.C. Government Printing Office

Statement of Karen Davis. Johns Hopkins Department of Health Policy and reform of private Management Presented at Health insurance options health insurance Heanngs before the Subcommittee on Health of the House Committee on Ways and Means 102nd Congress. 1st Session. Mas 1991 Washington DC.. Government Printing Office