State health insurance reforms have plateaued

While state health insurance reforms have been neither the panacea nor the ruination that some observers predicted they would be, they appear to have gone as far as they are going to, at least until after this fall’s presidential election.

"The states are exhausted with CHIP and Medicaid," says Len Nichols, a senior analyst with the Urban Institute’s health policy research group. "I don’t expect any more changes in small-group or individual insurance reform. To expand coverage any further, we’re going to have to spend some money. States are waiting for the presidential election to see who’s going to win and how much federal money will be available for reforms."

Mr. Nichols recently studied state efforts at individual insurance reform and distilled some of the lessons learned by states in the process. His report was published in the February 2000 issue of the Journal of Health Politics, Policy and Law. The first lesson, he tells State Health Watch, is that individual reform has been neither as good as people had hoped nor as bad as people had feared.

"What we found is that state insurance reforms are not going to move coverage a lot one way or the other, nor will they move premiums tremendously for most people. The experiences of the states do not support the argument that all insurance markets need is a little reform and then there will no longer be any reason to worry about the uninsured. Premiums did increase on average, as theory predicts, and coverage did decline somewhat on net. But the premium movements, while substantial in most cases, appeared to settle down over time and produced relatively small net coverage effects," he says.

Another lesson gained from states’ experiences is that there always are tradeoffs involved when reforms are attempted — some people are better off and some are worse off, says Mr. Nichols. The most common reforms enhance the welfare of those who are relatively sick and force the relatively healthy to pay higher premiums, he adds.

"That kind of tradeoff gives a lot of help to the few at the expense of the many," he says. "One’s judgment about the wisdom of this tradeoff depends both on one’s world view and on a detailed assessment of who gained and who lost. This tradeoff is politically tough and works only when it’s invisible to the many who are paying more, which comes from having a large base. We can see that small business insurance reforms created less of a problem because they had a bigger base."

Enrollment in the individual market has dropped in response to reforms that guaranteed issue of all products and pure community rating, says Mark A. Hall, professor of law and public health at the Wake Forest University School of Law in Winston-Salem, NC. However, the reforms "have not created an adverse selection death spiral, nor have they caused the collapse of the individual market. Instead, these reforms tend to create an individual market that resembles a large high-risk pool, one with widespread and substantial enrollment, but in which is more difficult for younger, healthier people to find affordable coverage.

"In the individual market, the stringency of rating restrictions has a dramatic effect on the willingness of insurers to remain in the market and on adverse selection effects against the market. Generally, states that have adopted pure community rating in the individual market have experienced significantly worse problems," he says.

In community rating, the expected claims of the entire covered group are estimated. An average premium is calculated dependent on what amount would be sufficient to pay the claims of the entire group.

Mr. Hall says that pure community rating in the individual market often leads insurers to adopt risk-avoidance techniques, such as trying not to have the most comprehensive benefits or the most attractive prices, much more aggressively. "This can create a perverse market dynamic in which insurers compete by trying to avoid attracting subscribers." To offset this insurer tendency, states with pure community rating in the individual market must set minimum benefit standards and require prior approval for significant rate increases, Mr. Hall suggests.

Mr. Nichols’ third recommendation for states considering insurance reforms — that they make sure there is a political consensus for the reforms being considered — is based on what he considers to be a disastrous experience in Kentucky.

"The simple fact is that insurance market reforms change almost every life in a state a little bit, and, thus, there must be a critical mass that shares the goals of social solidarity [considering health care a right and moving toward universal coverage] or there will be strong pressures for immediate repeal," Mr. Nichols says. Kentucky adopted a relatively comprehensive set of reforms while relatively few people involved understood the magnitude of what had been done. "Those who did understand were well-intentioned and thought that things could be worked out if everyone would just calm down," he says. "But they didn’t realize all the problems they would face."

Difficulties arose immediately because doctors were being paid less by Medicaid for reasons unrelated to insurance reform and the state moved to a system of gender-specific rating in which coverage for women cost more than for men. Both issues were extraneous to the cause of insurance reform, but they dominated the political landscape and created an impression in the minds of many that the whole reform package was very bad, he says. And with that, political support for the insurance reforms unraveled. With no political consensus to withstand the storm, the state repealed all of its reforms, Mr. Nichols says. "No politician is going to touch this again for about 10 years, and that’s a crime because a state like Kentucky has such a great need."

Asked about states that have had good results, Mr. Nichols points to Vermont and New Jersey. Reforms in Vermont appear to have worked, and New Jersey seems to have overcome some initial bumps in the road, he says. One sign of sufficient political consensus there was the states’ ability to require insurers who wanted to participate in the group market to also be in the individual market.

Contact Mr. Nichols at (202) 261-5697 and Mr. Hall at (336) 758-4476.