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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, [email protected] McAndrew, [email protected] Stoll, [email protected]
