Reading the Tea Leaves of Health Reform

ObamaCare was in part modeled after some states' own health reform measures. What happened there provides striking insight into what the country is in for over the next few years. States like New York, Massachusetts, and Colorado share common reform measures with the new national health reform law and hold keys to understanding what lies ahead.

Health insurance reforms have most often been based on a pair of mandates targeting the individual and small group markets. The first is an underwriting method known as "community rating." The second is "guarantee issue." Under these new rules, insurance carriers are forbidden to rate health plans by using actual group demographic and claim experience, known as "experience rating," and are required to take all applicants, regardless of existing health conditions, gender, occupation, or age. The intent is to expand access to insurance by forcing carriers to accept all applicants. The thinking is that by community rating with guarantee issue, costs will be stabilized over a larger group of policyholders because insurers would be prohibited from cherry-picking preferred-risk individuals and groups. Thus, access is expanded and costs are stabilized and ultimately reduced.

A review of history does not sustain this assertion.

As of April 1, 1993, the state of New York required insurers to adopt community rating and guarantee issue for individuals and small groups. According to Mark A. Hall's 2000 study of New York's health reform ("An Evaluation of New York's Reform Law," Journal of Health Politics, Policy and Law, 25 February 2000, p. 71-98), what was intended did not come to pass. With respect to enrollment, the percentage of the non-elderly population without insurance in New York worsened from 16.5% in 1992, below the national average, to 18.3% in 1994, which was above the national average. Hall further concluded that enrollment in both the individual and small group markets also declined after the reform. Individual enrollments continued to decline until 1997, four years after the new regulations.

Hall also reviewed the impact to pricing. He found that indemnity rates for individual policies increased by nearly 40% per year for the first two years following reform. Small group rates increased between 10% and 14% during the same period. Hall also found that about 20% of small group and 25% of individual subscribers received rate increases of 40% or more following reform. Wellpoint's California DOI-approved increase that set Secretary of Health and Human Services Kathleen Sebelius off a few months ago was -- wait for it -- 39%. 

In Colorado, the state passed House Bill 1355 in 2007, which also mandated small group community rating. Phased in over two years, HB 1355 removed discounts of up to 25% for healthy small groups and prohibited rating up small groups due to health status. The 2008 renewals were adversely impacted because the unhealthy small groups who were rated up could no longer be discriminated against because of their adverse health status. In 2009, groups that had a discount previously lost it at renewal. This, combined with the 2008 impact, caused yet another artificial rate increase. One group last year had a 23% increase. When one factors in the loss of their 17% discount, the implied actual increase was around 6%.

Another example is a small group of about 35 employees my team services. Last year, their renewal called for a 35% increase. To reduce the impact, the group cut benefits and increased employee premium cost-sharing. This year, the proposed increase is 55%! Forget about the projected cost reductions -- where's the stability of rates we were promised?

The fact of the matter is that community rating is a bill of goods that increases health care insurance costs. Hall notes, "Community rating increases cost for healthier subscribers, thereby at the margin driving some from the market, and guarantee issue attracts higher risks into the market."

Hall also commented on the impact of reform on market structure. He concluded that there was a large reduction in the number of indemnity insurers in the individual policy market. In total, nine insurers immediately left the market following New York's insurance reform. Two more withdrew over the next year. The result: fewer insurers, who raised deductibles to catastrophic levels. The Wall Street Journal reported just last week that New York has some of the highest individual insurance premiums in the country.

Take a look at what is happening in Massachusetts today. The Boston Globe reports that the Massachusetts Department of Insurance denied nearly all rate increase requests and is now being sued by non-profit insurance carriers. In essence, the DOI is placing price caps on health insurance premiums and ignoring the actual cost of providing health care. They too have a community rating system introduced in their reform legislation. Read the linked article and pay close attention to what the insurers are saying about their ability to remain solvent after sustaining significant losses last year.

As of January 1, 2014, community rating will be the law of the land in every state. The entire nation will be subject to these reform measures. Anybody care to read some tea leaves?
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