Consumer Protections in the Private Health Insurance Market

Ella Hushagen

Families USA

www.familiesusa.org

Updated November 9, 2009

Existing regulations

Federal law governs:o Large “self-funded” or “self-insured”

employers. Federal and state governments share:

o Large (over 50) & small (2-50) employers.o Transitions from group coverage.

State law governs:o Individual Health Insurance market.

Where are the gaps?

Individual health insurance:o Accessibility—In all but five states, insurers

can deny coverage.o Adequacy—Insurers exclude coverage for

pre-existing conditions; inadequate benefit packages.

o Affordability—Premiums are higher for people with pre-existing conditions; deductibles & cost-sharing unaffordable; inefficient use of premium $$.

Where are the gaps?

Small business health insurance:o Accessibility—Sole-proprietors/self-

employed do not have access to group coverage.

o Affordability—Premiums may vary by health status & age of employees; inefficient use of premium $$; higher costs shifted to employees.

o Adequacy—To reduce premiums, many states offer stripped-down benefit plans.

Goals of private market reform

Affordable—Premiums and cost-sharing are affordable.

Accessible—People can buy coverage regardless of health.

Accountable—Health insurance companies are accountable to consumers.

Adequate—Benefits are adequate for sick and healthy people.

Regulatory tools to:

Improve access to private market and spread cost of highest-risk individuals.

Restrict premium variation and limit out-of-pocket spending.

Ensure insurance company accountability and efficiency.

Provide adequate benefits.

ACCESS

1) Guaranteed issue

2) High-risk pool

3) Insurer of last resort

4) Strategies to increase group market access

1) Guaranteed issue

Five states require all insurers to accept all applicants, regardless of health.

Pros: Ease and choice for consumers. No medical underwriting reduces administrative overhead.

Cons: Comprehensive policies can get expensive because of adverse selection.

2) High risk pools

Designated nonprofit insurance program for people with pre-existing health conditions, turned down for individual market coverage (34 states).o Premiums are capped; income-based subsidies

available in some states. Pros: Spreads risk without disrupting market. With

adequate funding, can be affordable option. Cons: Often unaffordable for consumers.

Continual fight for adequate funding and benefits.

3) Insurer of last resort

Designated nonprofit insurer must sell to everyone, or every insurer must sell one standard policy to everyone.o Not always mandated by state law. o Rate protections typically inadequate.

Pros: Easy to establish, good use of nonprofit surplus.

Cons: Lack public oversight. Inadequate rate protections. Other insurers don’t share risk.

4) Group coverage access

Dependent coverage: Allow young adults (to age 21-30) to maintain coverage on family health plan (24 states).o Keeps young and healthy in risk pool.

Groups of one: Allowing sole-proprietors / self-employed to purchase small group market coverage as a ‘group of one’ (14 states). o Makes coverage available to sole-proprietors.

AFFORDABILITY

1) Pure and modified community rating

2) Rate bands

3) Restrictions on deductibles and out-of-pocket costs

1) Community rating

Pure community rating: Same premium prices to everyone, regardless of age and health (one state); or

Modified community rating: Same premium regardless of health, but allows limited variation for age, gender, and other factors (6 states).

Pros: Non-discriminatory; spreads risk among young and old, healthy and sick.

Cons: Raises price of insurance for young and healthy; may contribute to adverse selection.

2) Rate Bands

Limits how much premiums can vary based on health, age, gender, industry, etc. o For example, premiums may only vary up or

down by 25% for health status. Pros: Some limits are better than none;

incremental way to rein in variability. Cons: Incomplete risk-sharing; all factors

taken together may allow huge variance.

3) Restrictions on cost-sharing and deductibles

Few states regulate individual and small group market products to limit deductibles, impose out-of-pocket cost maximums, restrict maximum annual & lifetime benefit maximums.o Maine & Massachusetts through new programs.

Pros: Sets realistic limits on how much consumers can pay.

Cons: May cause adverse selection if not imposed on entire market.

ACCOUNTABILITY

1) Medical loss ratios

2) Prior approval of rates

1) Medical loss ratios

Require health insurance companies to spend a minimum percentage of premiums on medical care vs. administration and profit.o For example, 80% in the individual market (2

states) Pros: Easy to administer; controls profits. Cons: Doesn’t get at underlying medical

costs; companies hide profit.

2) Rate review/prior approval

Insurance department must review insurers proposed rates before they go into effect.o 25 states have prior approval of all products

in the individual market. Pros: Gives regulators authority to

disapprove outrageous premium increases. Cons: Requires vigilant regulators; will not

decrease or dramatically slow rate increases.

ADEQUACY

1. Pre-existing condition exclusions

2. Other adequacy tools

1) Pre-existing condition exclusions

Limit pre-existing condition exclusions:o Prohibit insurance companies from excluding

coverage of pre-existing conditions for any longer than 6 months (2 states);

o Limit look-back period to 6 months (15 states);o Define pre-existing conditions objectively (19 states).

Pros: Helps people with pre-ex get services; prevents insurers from alleging pre-ex based on unrelated symptoms.

Cons: Adverse selection; market churning.

2) Other adequacy tools

Appeals procedures and external review. Benefit mandates. Standardized benefit plans to allow easier

comparison shopping. Ombudsman or consumer assistance

programs. Consumer report cards.

Risky Ideas

1) Consumer-driven health care & HSAs

2) Deregulation

1) Consumer-driven health care

Idea: Require consumers to pay more for health care services; health consumers become savvy shoppers and bring down health care costs.

Reality: o In 2007, 48 million Americans reported having trouble

paying medical bills.o 18.7 million non-elderly Americans will spend more than

25 percent of their income on health care costs in 2009. o Medical crises contribute to half of home foreclosure

filings; 23 percent are attributable to medical bills.

1) Consumer-driven health care:Health Savings Accounts

Idea: Contribute tax-free dollars to a savings account for health care expenses; linked to high-deductible health plan.

Reality: o Impossible to shop for health care;o Creates tax shelter for rich;o Shifts costs to workers;o Undermines risk-sharing.

2) Deregulation

Idea: Allow consumers to buy insurance across state lines; choose best product.

Reality: Drastically weakens existing state consumer protections.

Federal help on the way?

Federal bills under consideration in Congress take many critical steps to enact or move towards the consumer-friendly reforms described in this presentation. Progress is expected on accessibility, affordability, and adequacy.

To learn more, visit http://www.familiesusa.org/health-reform-2009/

Stay tuned!

More information

www.familiesusa.org Private Market Publications; Resources for Consumers; Private Market Legal Rights Center

www.standupforhealthcare.org Contact us!

202-628-3030Cheryl Fish-Parcham, cparcham@familiesusa.orgClaire McAndrew, cmcandrew@familiesusa.orgKathleen Stoll, kstoll@familiesusa.org