Small Business Health Insurance & Prospects for Reform

Presentation to Joint Health Care Oversight CommitteeFebruary 27th, 2006

Agenda

Why focus on Small Business?

Small Group Health Insurance Market

Reform Strategies- Rate regulation- High risk pools- Public incentives- Group purchasing

Summary & Conclusions- Myths & Realities

Why Focus on Small Business?

Share of RI Employers by # of Employees

94%

6%1-4950-100+

Source: MEPS 2001 data, private sector employees, 1999 Survey of RI Employers used to adjust # employers with 100+ employees. In addition, MEPS does not break out the 1-2 market; however, from the 2000 market conduct study, we know that there are 15,000 employers in the 3-50 segment, so we can estimate the size of the 1-2 market. In order to estimate the number of employees in the 1-2 life segment, we assumed an average of 1.3 employees/employer

94% of all RI Employers are Small Businesses.

35% of RI Employees are in Small Business.

$420

$374

$150

$200

$250

$300

$350

$400

$450

2005

<50 Employees

50+ Employees

Why Focus on Small Business?Small businesses face higher premiums.

Average Single Coverage Commercial Monthly Premium

Source: 1999 data based on MEPS-IC – national survey, Rhode Island sample. 2005 data based on the Rhode

Island Employer Survey.

12% gap

Why Focus on Small Business?Small business is growing less likely to offer coverage.

Source: Rhode Island Employer Survey, JSI

68%

91%

98%

84%

98%

65%

50%

60%

70%

80%

90%

100%

3-9 Employees 10-49 Employees 50+ Employees

1999 2005

% of Employers Offering Coverage by Size

Why Focus on Small Business?

Employers Offering Coverage in 2005*

* Low wage employers are defined as those employers with average wages below $21,000Source: Rhode Island Employer Survey, JSI

45%

95% 100%88%

0%

20%

40%

60%

80%

100%

<50 Employees >50 EmployeesLow Wage

Non-Low Wage

Low wage small employers are even less likely to offer coverage.

Why Focus on Small Business?

• RI is a small business state

• Most uninsured are working

• Disproportionately, small businesses:

– Face higher premiums

– Less likely to offer coverage

– Especially if low wage

To Summarize: Small Businesses are the Bleeding Edge.

Small Group Health Insurance Market• Group size: 1-50 employees

• Two Insurers: UHP & BCBSRI (80% market share)

• Distribution: 2/3 sold via brokers & intermediaries

• Underwriting Rules (Health Reform 2000)– Adjusted community rating: age, sex, family size, limited health

status– Maximum 4:1 rate band – Guaranteed issue – no one is refused coverage

• Regulatory Controls– Rate factors– Product filings

– Market conduct

Small Group Market: Market Conduct Study Findings

• Too early to assess effectiveness

• DID NOT contribute to large rate increases

• Low cost plan designs were NOT available

• Significant variation in rules interpretation

2002 Study Results

The Small Employer Health Insurance Availability Act, 2000

• Overly complex product choices

• Employers choose rich plan designs

• Distribution costs appear high

• Minimal enrollment in state mandated plan designs

• Compliance issues mostly resolved

• Measures of Success? Increased parity between small and large groups

Small Group Market: Market Conduct Study Findings

Preliminary 2006 Findings (formal report in 1-2 months)

The Small Employer Health Insurance Availability Act, 2000

$239

$420

$374

$197

$150

$200

$250

$300

$350

$400

$450

1999 2005

<50 Employees

50+ Employees

Small Group Health Insurance Market Small Group Reforms Appear to Have Closed the Gap.

Average Single Coverage Commercial Monthly Premium

Source: 1999 data based on MEPS-IC – national survey, Rhode Island sample. 2005 data based on the Rhode

Island Employer Survey.

21% gap

12% gap

Small Group Market: RI Characteristics

Others appear specific to Rhode Island.

Some problems are consistentNationwide.

• Two player insurance market

• Relatively unmanaged, PPO dominant environment

• Relatively high costs of medical care

• Small group dominated marketplace

• Harder to retain healthy population in risk pool

• High administrative/distribution costs

• Disproportionate share of low income workers

Reform Strategies

• Rating Regulation

• High Risk Pools

• Public Incentives

• Group Purchasing

Problem: Even with regulation, the small group market is vulnerable to cost increases and becoming uninsured.

Lessons learned from other settings:

Reform Strategies: Rating Regulation

• Community rating

• Aggressive price regulation

• Guaranteed issue

• Issues: Healthy people may exit the pool

• Lack of insurer participation, benefit innovation

• Loose underwriting rules

• No guaranteed issue

• High risk pool

• Issues: High risk consumers may be priced out

• Insurer success is a function of risk identification, not cost reduction

Small Group reform must protect high risk consumers while keeping healthy people in risk pool

RI

More insurer competition

Less insurer competition

Lessons Learned: New Hampshire

More insurer competition

Less insurer competition

1994 SB711• Guaranteed issue• Restricted rating factors• 1-100 group size• Issue: affordability for

young, healthy population

2003 SB 110• Expanded rating factors• 1-50 group size • Issue: affordability for older,

sicker population

2005 SB 125• Scaled back rating factors• 3.5:1 rate band• Reinsurance mechanism• Issues: TBD

Reform Strategies: Rating Regulation

*See Report: Small Group Health Insurance Reform in New Hampshire

• State subsidized programs for:

– Medically uninsurable or higher risk individuals

– Those Eligible under HIPAA

– Medicare beneficiaries seeking supplemental coverage

• Commercial insurance paid by enrollee premium and state supplement

• 31 states now operate a high risk pools, covering more than 170,000 individuals

• Enrollment is a small fraction of the market – about 1.2% of each state’s individual insurance market

Reform Strategies: High Risk PoolsOverview and Description*

*See Report: State High Risk Pools for Health Insurance

• Initial, proposed 42% increase

• Changes in product offerings

• HIC Modified Approval– Less than 20% average rate

increase– 50% of all members - 11% increase

in total expenses for health insurance

– Consumer protections to aid subscribers in selecting new plans

– Premium Assistance Program

Recent Direct Pay DecisionDirect Pay Background

• Guaranteed Issue State

• No Risk Selection - Single Direct Pay Carrier

• Two risk pools: Basic & Preferred

• More subsidization will be needed as costs increase

• Average 10% annual medical cost inflation

Reform Strategies: High Risk PoolsDirect Pay and High Risk Pools

National Experience with High Risk Pools

• cover very few and are very expensive

• offer limited coverage, with high cost sharing

• generally require significant subsidization– In 2003, premiums covered only ~54% of total costs

• most commonly funded through an assessment on health insurer premiums

Reform Strategies: High Risk Pools

A high risk pool would have to be part of a broader public policy shift toward more competition/less regulation.

Direct Pay Market: Rhode Island Policy Options

• Continue private subsidization of high risk individuals– Key concern: unsustainable rate increases for preferred

subscribers

• Compel insurers to offer products that address underlying cost inflation

• Force more competition in Direct Pay Market– Key concern: shifting more costs for the sicker population

• Publicly subsidize the Direct Pay market

• Merge Direct Pay and Small Group risk poolsSome combination of the above options may offer a more prudent course than the creation of a state-run high risk pool

Reform Strategies: High Risk Pools

Lessons Learned: Public Incentives in New HampshireAggressive rate regulation coupled with reinsurance

• New Hampshire Reinsurance Program Goal - address carrier concerns

• How it works – insurers cede employees or groups to reinsurance program

• Source of funds - assessment on all carriers in the small group market

• Coverage differences vs. High Risk Pool– high risk individuals & groups see no difference in coverage – costs are spread across all carriers

• Impact: TBD

Reform Strategies: Public Incentives

Lessons Learned: Healthy New York

• Program Goal: more low wage small employers to offer health insurance

• Context: Community rated small group & individual market

• State sponsored reinsurance program

• Healthy New York premiums are substantially below market rates – estimates of up to 44 percent premium savings

• As of year end 2004, the program had enrolled 76,704 members (23% small employers, 19% sole proprietors, 58% individuals)

• As of December 2004, the projected amount to be expended was $25 Million

Implications for Rhode Island: Effective program model, but it is a narrow policy goal built on a subsidy with a Medicaid match

Reform Strategies: Public Incentives

Group Purchasing Models: Overview

• Voluntary purchasing of health insurance by small employer groups.

• Prevalence:– 33% of firms with fewer than 10 workers– 28% of firms with 10-49 workers

• In RI, most pooled purchasing arrangements were prohibited in 2000

• Theoretical benefits– Increased plan choice for employees– Administrative cost reductions

• Group responsibilities– Collecting, analyzing and publishing plan performance– Contracting with health plans– Enrolling employees– Collecting and distributing premiums

Reform Strategies: Group Purchasing*

*See Report: Group Purchasing Alliances for Small Employers

Implications for Rhode Island: Purchasing pools are unlikely to provide significant relief from the cost pressures faced by small employers

Practical ExperienceTheoretical Advantages

• Premiums are increasing

• Employers still decreasing coverage

• Can’t maintain large & stable population

• Price competition lacking

• Health plan participation lacking

• Opposition from agents, brokers

• Lack of marketing

• Only success: enhanced employee choice

• Cost reductions via economies of scale

• Benefits of clout enjoyed by large employers

• Increased choice

Reform Strategies: Group Purchasing

• Medical Costs High and Rising – RI premiums rank 8th in the nation*

• Hardest Hit - Small businesses, low wage & Direct Pay individuals

• No Simple Solution

Rate Regulation - delicate balance between coverage & participation

High Risk Pools – part of larger Small Group market strategy

Reinsurance – need targeted policy and willingness to subsidize

Purchasing Pools – true cost drivers and management realities minimize small potential benefits

Summary & Conclusions

Source: MEPS 2001 data.

Myth #1More insurer competition will solve Small Group insurance

problems

RealityWhen many insurers compete on price, the sick become

uninsured.Need insurers to compete on underlying product costs and

quality of services, not on underwriting or cost-shifting.

Summary & Conclusions: Myths & Realities

Myth #2Insurers are responsible for high premiums

RealityThere are some costs attributable to

administration and profit, but medical costs are 80-85% of premiums and are rising at 10% per year.

Summary & Conclusions: Myths & Realities

Myth #3Mandates are too costly and shortsighted

RealityMandates are estimated to be 5-10% of premiums.RI mandates provide coverage that has broad political

support (mental health).Some opportunities with infertility benefit. Rest contribute

minimally to cost.Rhode Islanders consistently opt for broad benefits, even if

they have to pay for it.

Summary & Conclusions: Myths & Realities

Myth #4Group purchasing will get us lower costs, more

choice and better service

RealityTrue cost drivers and management realities

outweigh theoretical benefits.Public intervention needed to deliver large group

advantages to small businesses.

Summary & Conclusions: Myths & Realities

Myth #5This problem is too big to overcome.

RealityHealth insurance is difficult in a voluntary market.We can move beyond mere cost-shifting. There

are major systemic costs we can remove if we focus on the underlying medical expenses.

Summary & Conclusions: Myths & Realities

Potential Strategies to Enhance Affordability

Summary & Conclusions

• A spectrum of product choices to meet customer need

• Products that address the underlying cost of health care by creating appropriate incentives for consumers, employers and providers, using these concepts:

Focus on primary care, prevention and wellness

Active management of chronically ill

Least cost, most appropriate setting

Evidence based, quality care

Potential Strategies to Enhance Affordability

Summary & Conclusions

• Provider payment strategies to promote the same concepts of appropriate services

• Simple administration processes for providers and consumers

• Cost information for consumers

On price

Trade offs