Title: Small Business Health Insurance
1Small Business Health Insurance Prospects for
Reform Presentation to Joint Health Care
Oversight Committee February 27th, 2006
2Agenda
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
3Why Focus on Small Business?
94 of all RI Employers are Small Businesses.
35 of RI Employees are in Small Business.
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
4Why Focus on Small Business?
Small businesses face higher premiums.
12 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.
5Why Focus on Small Business?
Small business is growing less likely to offer
coverage.
of Employers Offering Coverage by Size
Source Rhode Island Employer Survey, JSI
6Why Focus on Small Business?
Low wage small employers are even less likely to
offer coverage.
Employers Offering Coverage in 2005
Low wage employers are defined as those
employers with average wages below
21,000 Source Rhode Island Employer Survey, JSI
7Why Focus on Small Business?
To Summarize Small Businesses are the Bleeding
Edge.
- 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
8Small 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 41 rate band
- Guaranteed issue no one is refused coverage
- Regulatory Controls
- Rate factors
- Product filings
- Market conduct
9Small Group Market Market Conduct Study Findings
The Small Employer Health Insurance Availability
Act, 2000
2002 Study Results
- Too early to assess effectiveness
- DID NOT contribute to large rate increases
- Low cost plan designs were NOT available
- Significant variation in rules interpretation
10Small Group Market Market Conduct Study Findings
The Small Employer Health Insurance Availability
Act, 2000
Preliminary 2006 Findings (formal report in 1-2
months)
- 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
11Small Group Health Insurance Market
Small Group Reforms Appear to Have Closed the Gap.
12 gap
21 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.
12Small Group Market RI Characteristics
Some problems are consistent Nationwide.
Others appear specific to Rhode Island.
- Harder to retain healthy population in risk pool
- High administrative/distribution costs
- Disproportionate share of low income workers
- Two player insurance market
- Relatively unmanaged, PPO dominant environment
- Relatively high costs of medical care
- Small group dominated marketplace
13Reform Strategies
Problem Even with regulation, the small group
market is vulnerable to cost increases and
becoming uninsured.
Lessons learned from other settings
- Rating Regulation
- High Risk Pools
- Public Incentives
- Group Purchasing
14Reform Strategies Rating Regulation
Less insurer competition
More insurer competition
- 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
RI
Small Group reform must protect high risk
consumers while keeping healthy people in risk
pool
15Reform Strategies Rating Regulation
Less insurer competition
More insurer competition
Lessons Learned New Hampshire
- 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
- 3.51 rate band
- Reinsurance mechanism
- Issues TBD
See Report Small Group Health Insurance Reform
in New Hampshire
16Reform Strategies High Risk Pools
Overview and Description
- 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 states individual insurance
market
See Report State High Risk Pools for Health
Insurance
17Reform Strategies High Risk Pools
Direct Pay and High Risk Pools
Recent Direct Pay Decision
Direct Pay Background
- 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
- 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
18Reform Strategies 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
A high risk pool would have to be part of a
broader public policy shift toward more
competition/less regulation.
19Reform Strategies High Risk Pools
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 pools
Some combination of the above options may offer a
more prudent course than the creation of a
state-run high risk pool
20Reform Strategies Public Incentives
Lessons Learned Public Incentives in New
Hampshire Aggressive 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
21Reform 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
22Reform Strategies Group Purchasing
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
See Report Group Purchasing Alliances for Small
Employers
23Reform Strategies Group Purchasing
Theoretical Advantages
Practical Experience
- Premiums are increasing
- Employers still decreasing coverage
- Cant 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
Implications for Rhode Island Purchasing pools
are unlikely to provide significant relief from
the cost pressures faced by small employers
24Summary Conclusions
- 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
Source MEPS 2001 data.
25Summary Conclusions Myths Realities
- Myth 1
- More insurer competition will solve Small Group
insurance problems - Reality
- When 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.
26Summary Conclusions Myths Realities
- Myth 2
- Insurers are responsible for high premiums
- Reality
- There are some costs attributable to
administration and profit, but medical costs are
80-85 of premiums and are rising at 10 per year.
27Summary Conclusions Myths Realities
- Myth 3
- Mandates are too costly and shortsighted
- Reality
- Mandates 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.
28Summary Conclusions Myths Realities
- Myth 4
- Group purchasing will get us lower costs, more
choice and better service - Reality
- True cost drivers and management realities
outweigh theoretical benefits. - Public intervention needed to deliver large group
advantages to small businesses.
29Summary Conclusions Myths Realities
- Myth 5
- This problem is too big to overcome.
- Reality
- Health 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.
30Summary Conclusions
- Potential Strategies to Enhance Affordability
- 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
31Summary Conclusions
- Potential Strategies to Enhance Affordability
- 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