Fundamentals of Health Insurance Regulation

1
Fundamentals of Health Insurance Regulation

• Guenther Ruch
• Wisconsin Office of the Commissioner of Insurance

2
Overview

• Risk Pooling
• Adverse Selection
• Health Insurance Markets
• Rating Rules
• Licensure
• Solvency
• Consumer Protection
• Market Conduct Regulation

3
Risk Pooling

• Pooling spreads the cost of high cost individuals
  among a larger group of people, so that healthy
  individuals subsidize the cost of sicker
  individuals.
• Larger pools are more likely to have predictable
  incidence of health conditions, and thus more
  predictable risk.

4
Adverse Selection

• Groups and individuals make decisions to get the
  best deal for themselves based upon their
  knowledge of future health care needs.
• Pools with rules that benefit the healthy by
  limiting pooling or strict access rules will
  attract healthy individuals.
• Pools with rules that benefit the sick by
  increasing pooling or lenient access rules will
  attract sick individuals.

5
Adverse Selection Death Spiral
6
Health Insurance Markets

• Large Group Market Businesses with more than 50
  employees
• Stable, predictable risk
• Low risk of adverse selection
• Low administrative costs
• Relatively light regulation
• Small Group Market Small businesses, typically
  2-50, though states vary
• Higher risk of adverse selection
• More volatility of risk
• Higher administrative costs
• Laws and regulations to improve pooling and
  access
• Individual (Nongroup) Market Individuals and
  dependants
• Most often includes sole proprietors
• Highest risk of adverse selection
• Highly volatile risk
• Highest administrative costs
• Typically lightly regulated

7
Rate Regulation

• Large Group Market
• Competition among carriers self-regulates rates.
• Small Group Market
• Rates regulated in nearly all states.
• Individual (Nongroup) Market
• Rates regulated in 18 states.

8
Understanding Rating Rules

• Community Rating
• No adjustments for health or any other factors
• Adjusted Community Rating
• No health status variation
• Typically allow variation for age and geography
• Rating Bands
• Limits total variation in rates or variation due
  to health, age, or other factors or combinations
  of factors
• Actuarially Justified Rating
• Insurers must justify use of rating factors
• Common in nongroup market

9
Small Group Market Premium Variation
NH
VT
WA
MT
ND
MA
NY
OR
RI
SD
ID
MI
CT
WY
NJ
DE
IN
IL
NV
UT
CO
CA
DC
NC
OK
AZ
NM
AL
HI
TX
FL
AK
Rating Band Variability
Community Rating
131 or less
Adjusted Community Rating
13.11 191
No Rating Structure
19.11 251
Note Michigan HMOs and Blue Cross/Blue Shield
are restricted to 3.121 maximum variation. All
others may use 3.96 maximum variation
25.11 or greater
10
Individual Market Rating Rules
WA
MT
ND
MA
OR
ID
SD
RI
CT
WY
NJ
DE
NV
UT
CO
CA
DC
OK
AZ
NM
HI
TX
AK
No Rating Structure
Community Rating
Adjusted Community Rating
Rating Bands
Hybrid Michigan Blue Cross/Blue Shield must use
community rating. There is no rating structure
for other carriers.
11
Licensure

• Licensure is the key of all insurance regulation.
  
• All enforcement actions are based upon the
  companys licensure.
• Doing business as an insurer or a producer
  (broker or agent) without a license is a criminal
  offense.
• Uniform Certificate of Authority Application
• Single application for licensing of insurers
• 50 states and DC participate
• Some require additional information
• New or redomesticating companies file Primary
  Application
• Existing companies file Expansion Application

12
Solvency Regulation

• Protects policyholders against the risk that
  insurers will not be able to meet their financial
  obligations (Pay Claims)
• Risk-Based Capital (RBC) requirements adjust
  minimum capital and surplus requirements to
  reflect a companys risk exposure.
• Quarterly and annual financial statements
• Financial Analysis
• Regular Examinations every 3-5 years
• Targeted Examinations

13
Consumer Protections

• Key Federal Protections
• HIPAA
• COBRA
• Coverage Mandates
• Federal and State
• State Protections
• Access to care
• Provider protections
• Utilization review
• Appeals
• Balance billing restrictions
• Consumer complaints
• Marketing review
• Independent Review

14
Market Conduct

• Detects and deters inappropriate behavior and
  ensures that business is conducted on a level
  playing field.
• Market Analysis
• Review of data submitted to states and NAIC by
  carriers
• Market Conduct Initiatives
• Investigations-Detailed inquiry into business
  practices
• Interrogatories-Formal written questions about
  business practices
• Examinations-Typically onsite comprehensive
  targeted reviews
• Complaints
• Assist consumers with their insurance problems
• Detect inappropriate insurance company/agent
  behavior

15
Summary

• The regulatory oversight of health insurance
  depends on the nature of the coverage
• There are some characteristics of health
  insurance that apply to all forms of the product
• Although health insurance is regulated by the
  individual states, there are certain regulatory
  standards for health insurance and health
  insurance companies that are uniform
• The cost of health insurance is directly related
  to the cost of the services covered