Reforms in the Small Group Health Insurance Market


Reforms in the Small-Group Insurance Market

Because employees in small firms are less likely to be offered health insurance through their employer, states have implemented a number of policy initiatives to affect this market. These can be considered in three broad categories: [1] bare-bones coverage laws, [2] premium limitations, and [3] underwriting provisions.

So-called bare-bones laws were introduced to try to minimize the deleterious impacts of some health insurance regulation enacted by state legislatures. All of the states have enacted laws that require health insurers to cover particular services [such as alcohol abuse treatment], particular providers [such as chiropractors], and particular categories of people [such as adopted children], if they sell health insurance in the state. Large firms can avoid these state health insurance regulations by being selfinsured under the terms of the federal ERISA [Employee Retirement Income Security Act] legislation. However, small firms find it much more difficult to self-insure.

Arguably, the health insurance coverage mandates require small firms to provide coverage they otherwise would not, thereby raising the costs of coverage and encouraging workers and their employers to forgo coverage altogether. However, as Morrisey and Jensen [1996] noted, the bare-bones legislation in many states also included provisions that made health insurance less attractive, such as covering fewer than 30 days of inpatient care.

Bare-bones laws were enacted by several states to exempt small firms of a certain size, often those with fewer than 25 employees, from having to provide the mandated coverages. In 1989, only one state had enacted a barebones exemption; by 1995, 43 states had done so [Jensen and Morrisey 1999b]. The argument was that this provision would make health insurance more affordable for small businesses and encourage them to begin or continue to offer coverage.

The second category of small-group reforms premium regulations either established rating bands or limited the use of certain underwriting provisions. Using manual rating, an insurer sets different premiums for different firms based on its underwriting standards. Rating bands establish legally allowed ranges by which high-risk premiums can exceed standard rates. High-risk rates, for example, may be allowed to be no more than 100 or 150% higher than standard rates.

The argument is that these limits will result in lower premiums for higher-risk small groups. However, insurers may drop out of the higher-risk market. States may also restrict the variables that an insurer uses to classify risks in the small-group market.

They may require that only community rating or rating based on age and sex be allowed. While these provisions may make coverage less expensive for higher-risk groups, they will likely increase premiums for lower-risk groups, who now find their risk pool expanded to include the higher-risk employer groups. Jensen and Morrisey [1999b] reported that only one state had enacted either of these rating restrictions in 1989, but 45 states had done so, in one form or another, by 1995.

Finally, small-group reform may have included provisions for guaranteed issue, guaranteed renewal, portability, and/or limits on the use of preexisting condition clauses. Guaranteed issue laws mean that if a small firm wishes to buy coverage at an insurer's established rates, the insurer cannot refuse to sell the coverage.

Guaranteed renewal means that a small group cannot be denied the renewal of an health insurance policy if it is willing to pay the established premium. Neither of these provisions limits the size of the premium the insurer may charge, however. By 1995, 38 and 43 states, respectively, had enacted guaranteed issue and guaranteed renewal provisions [Jensen and Morrisey 1999].

The rationale for these laws is that they allow firms to purchase or continue to maintain coverage if an insurer chooses to redline them. That is, these laws prevent an insurer from saying it will not provide coverage in a particular neighborhood or that it will not cover people in a particular profession, occupation, or industry.

They also prevent the insurer from dropping a small group that has experienced high claims. Portability allows an individual to move from one employer to another without having to again satisfy waiting periods or preexisting condition waiting periods with the new employer if equivalent waiting periods were satisfied with the old employer.

A waiting period is an initial time period, perhaps 6 or 9 months, before a new employee may submit a claim. Such contract provisions are implemented to limit adverse selection in which individuals take a job with coverage so that they or a family member may receive covered care for an already existing condition. Waiting periods for preexisting conditions serve the same purpose.

Three states had portability laws in 1989, and 11 had limitations on waiting periods; by 1995, 43 and 45 states, respectively, had such laws. For the most part, the portability and waiting period provisions were superseded by the federal Health Insurance Portability and Accountability Act of 1996 [HIPAA].

A series of studies investigated the effects of these reforms on the provision of health insurance by small employers. Zuckerman and Rajan [1999] used the U.S. Census Bureau's Current Population Survey from 1989 through 1995 to examine the effects of state health insurance reforms on coverage.

After controlling for demographic and market characteristics, they found: [1] that no package of small-group reforms had a statistically significant effect on the proportion of people without coverage and [2] that states that enacted guaranteed renewal and rating restrictions, but not guaranteed issue and portability reforms, saw declines in the proportion of people with private coverage [although this finding was not statistically significant at the conventional levels].

Jensen and Morrisey [1999b] used 1989 to 1995 small-employer survey data to examine the effect of small-group health insurance reforms on the probability that a firm with fewer than 50 workers offered coverage. The reforms included guaranteed issue and renewal, portability, waiting periods, preexisting condition limitations, and bare-bones exclusions.

Rating restrictions were highly correlated with other laws and could not be studied separately. Jensen and Morrisey found generally no statistically significant effects of the laws, either as a group or separately, on the probability that a small firm would offer health insurance coverage, but the presence of preexisting condition limitations did increase the likelihood that a small firm would offer coverage.

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This article was sent to us by: Jerry T. at 01222010

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