Statement of Steven B. Larsen, Maryland Insurance Commissioner, Baltimore, Maryland,
and Chair, Health Insurance and Managed Care (B) Committee,
National Association of Insurance Commissioners

Testimony Before the Subcommittee on Health
of the House Committee on Ways and Means

Hearing on the Nation's Insured

April 4, 2001

I. Introduction

Good morning, Mr. Chairman and Members of the Subcommittee. My name is Steve Larsen. I am the Insurance Commissioner for the state of Maryland. I would like to thank you for providing me with the opportunity to testify about the characteristics of group and nongroup health insurance markets, and how any federal legislation might impact those markets. Also, I am the chair of the National Association of Insurance Commissioners' (NAIC) Health Insurance and Managed Care (B) Committee. Although the NAIC ⁽¹⁾ does not have an official position on the variety of proposals being discussed to combat the problem of the uninsured and I am not testifying on behalf of NAIC, as chair of the NAIC's health committee I have been privy to numerous discussions on health policy issues affecting the insurance markets across the country. In 1999 I also served as Co-Chair of the Maryland Task Force to study the Non-Group Health Insurance Market.

One of the proposals Congress is considering is the use of tax credits to encourage the purchase of insurance in the nongroup (or individual) market. Without commenting on the adequacy of any particular tax credit to buy such a product, I think it is important that Congress understand the differences between and characteristics of group and nongroup markets before deciding on whether tax policy will be effective as a method of addressing our nation's uninsured problems.

II. Insurance Markets

The purpose of insurance is to spread risk among as large a group of people as possible ("pooling"). By creating larger pools, insurers reduce the uncertainty of the occurrence of insurable events and can more accurately predict the losses the group will suffer. Groups are better able to absorb increased claims costs of individuals within the group among the group as a whole. As such, insurance is the "law of large numbers."

Insurers manage risk through pricing policies and underwriting. Higher risks are priced at higher levels, and particular risks, individuals with particularly costly diseases, may be declined by insurers seeking to manage their risk.

Large groups, because of the law of large numbers, have never been a particular regulatory problem in group health insurance. However, in the late 1980s and early 1990s, small group reform was initiated in the states to combat the aggressive pricing and underwriting practices insurers were using. These techniques included long pre-existing condition limitations, large annual rate increases, and nonrenewal of policies due to claims experience, also called claims underwriting. State reforms included making small group policies guaranteed renewable, requiring insurers to issue policies to all small groups, limiting or doing away with any preexisting condition exclusion when a job is changed but coverage is seamless, and limits on preexisting condition exclusions, typically six or 12 months, or less. The Congress later adopted many of these concepts in the Health Insurance Portability and Accountability Act of 1996 (HIPAA).

One of the most important consumer protections the states have adopted to protect small groups is to limit the rates an insurer can charge to a small group. Today, 46 states have enacted some form of rating restrictions for small group insurers. The most typical arrangement is a limitation from the highest rate charged to the lowest rate charged based on an index rate. These types of limitations can still result in considerable variation from one small group to another, even up to 100% variation from the lowest to the highest rate. But it is a limit. A smaller number of states (approximately 17), Maryland included, have taken stronger steps to restrict rates in this market by enacting adjusted community rating provisions. These provisions generally prohibit the use of health status and claims experience in setting rates for particular small groups.

The individual market is subject to the same pressures as the small group market. In fact, many believe that "adverse selection" is more likely in the individual market because those who are willing to shop for and purchase a policy on their own are the individuals most likely to access benefits under the policy. Insurers use the same techniques in the individual market as they did in the small group market to manage risk.

The individual market, however, is far less subject to the types of consumer protections that have been applied to the small group market. Only 19 states have rating restrictions of any kind. That means insurers can determine rates based on health conditions when they issue the policies, with no upper limits on the initial rate or on rate increases upon renewal. Only 31 states have limitations on the use of preexisting condition exclusions. That means insurers can permanently exclude named conditions - the insured will never have coverage for those conditions. Only 12 states have some form of guaranteed issue. That means insurers can reject coverage entirely based on health status. And it is important to remember that HIPAA provides none of these protections. The only protection HIPAA provides for the individual market across the board is guaranteed renewability of policies. (HIPAA also provides guaranteed issue for persons coming off group health coverage of at least 18 months, but it provides no protection regarding how much individuals can be charged for the coverage).

Some statistics are enlightening. A survey done by the Maryland Insurance Administration showed that the Maryland BlueCross/Blueshield plan, CareFirst of Maryland, rejected 32% of the 18,000 people who applied for individual coverage in 1998. Those who were rejected, up until this year, had as an option to buy an open enrollment product, without medical underwriting, that had substantially fewer benefits than the underwritten product, even though the open enrollment product is subsidized by the state. This year, when benefits of the open enrollment product were increased, Carefirst sought an increase in some age bands of over 100%.

The Kansas Insurance Commissioner recently had occasion to compare premium rates in the small group and individual markets. The monthly premium rate for a small group plan ($1,000/$2,000 deductible; $1,000/$2,000 80%/20% coinsurance maximum) from one insurer was:

 A comparable individual plan offered by the same carrier had the following rates:

Only by increasing the deductible five-fold do the rates become comparable. An individual plan with a $5,000/$10,000 deductible lowers the premium range to:

While the small group market does contain rate fluctuations, there is an upper limit because of rating restrictions, and the fluctuation is not nearly as dramatic as that in the individual market. Importantly, generally people in small groups cannot be refused entrance into the market for medical reasons. Although the higher deductible policy premiums are much lower, it is difficult to imagine that the targeted market, the uninsured, could afford such a deductible or would find what is essentially catastrophic coverage, rather than comprehensive coverage, attractive.

Also, "shopping" for individual health coverage is quite complicated for consumers. While most insurance departments have consumer representatives, web sites and printed materials, the individual market varies so dramatically with a consumer's age, gender, health, and other factors that many people are very confused about what to buy and how to find the best buy.

These facts suggest that efforts to direct individuals to the individual market as a way to address all uninsured problems should be undertaken with caution. In addition, the individual market is a fragile one. One need only remember the crisis that befell Kentucky and Washington State when they attempted reforms of the individual market: they were left with virtually no companies as insurers left the market in droves. States have been understandably cautious ever since.

Larger groups provide buying clout in the market, spread the risk, and protect individuals against fluctuations of smaller pools. It is for this reason that many states have looked to strategies to pool groups together, using high-risk pools for adverse risks, expanding public programs such as SCHIP and Medicaid, and even opening public employee groups. By the same token I am not aware of any state that has looked to the individual market as the solution for uninsured citizens.

III. Beware of Association Health Plans

While Congress is considering how to reduce the number of uninsured persons, I want to strongly caution you against looking to Association Health Plans (AHPs) as a "magic bullet." As consistently expressed in the past by the National Governors' Association, the National Conference of State Legislatures and the NAIC, the creation of AHPs outside the state regulatory structure may very well result in hurting the very small business employees that you are trying to help. If exempted from state regulation, AHPs would "cherry pick" the healthiest people from state risk pools. Premiums for those remaining in the state-regulated market would rise as the coverage base declined. Those groups unable to join an AHP will be priced out of insurance. In addition insurers, who are under an obligation to "guarantee issue" all products to any small group, will be forced to cover groups that leave the AHP for more comprehensive coverage when a group member becomes ill. Insurers will then abandon the small group market as it loses its necessary proportion of healthy workers. Thus, AHPs will lead to the ultimate outcome of deregulation or collapse of the small group market. Such a result does not serve consumers very well. As the numbers show, there is no real evidence that an unregulated market (individual) is more cost-effective than a regulated market (small group), except for the healthiest risks.

States have enacted substantial reforms to the small group market in order to make insurance more accessible and affordable. In a report last year, the Congressional Budget Office (CBO) confirmed this analysis. CBO found that 80 percent of workers in small employers would see their health insurance premiums rise if AHPs were exempted from state regulation.

In addition, let us not forget the past and be destined to repeat it. In the 1980s, inadequate oversight of multiple employer welfare arrangements (MEWAs) resulted in rampant fraud and abuse, leaving consumers in nearly every state responsible for million of dollars in unpaid medical bills. Congress and the Department of Labor subsequently addressed this issue by clarifying that MEWAs fall under state regulatory authority. Current AHP proposals would again grant regulatory authority to federal regulators who lack the necessary experience and resources to oversee these plan, thus recreating the same circumstances that caused the 1980s MEWA nightmare.

It is important to remember that the states, not the federal government, have pioneered improvements in the health insurance market. Long before debate about a national Patients' Bill of Rights or access reforms began, states were developing innovative insurance market reforms to address consumer needs. Exempting AHPs from state regulation will deny states the opportunity to maintain the important consumer protections they created.

IV. Conclusion

While it is vitally important that we continue our efforts to increase access for those millions of American consumers who do not have health insurance, care should be taken to ensure that any solutions provide meaningful options to those we are trying to assist. Currently the individual market is characterized in many states by higher prices, more limited access and stricter underwriting than group markets. Thank you for the opportunity to testify.

1. The NAIC, founded in 1871, is the organization of the chief insurance regulators from the 50 states, the District of Columbia, and four of the U.S. territories. The NAIC's objective is to serve the public by assisting state insurance regulators in fulfilling their regulatory responsibilities. Protection of consumers is the fundamental purpose of insurance regulation.