Insurance reforms succeed without rocking markets, says analysis of initiatives in 7 states

State health insurance reforms have not brought soaring prices and upheaval to the marketplace, except for some notable exceptions in the individual market.

That is the general conclusion of an exhaustive review of insurance market reforms in Colorado, Florida, Iowa, New York, North Carolina, Ohio, and Vermont. A Wake Forest University study of insurance availability, prices, and enrollment found that guaranteed issue, community rating, and similar reforms have largely achieved the goals of spreading risk and stabilizing the market for employer groups of 50 or fewer workers.

The reforms weren’t without problems in the individual market. While community rating and guaranteed issue did make coverage available to more higher-risk individuals buying insurance on their own, the study found prices generally rose as a result and enrollment consequently dropped. But in none of the states studied did the reforms cause the notorious "death spiral" — the complete collapse of the market for insured individuals due to an accumulation of progressively higher risk and rates.

"For the small-group market, generally it’s true that even the strongest reforms don’t cause major damage to the market," says the study’s principal investigator, Mark A. Hall, an attorney who teaches health care law and public policy at Wake Forest in Winston-Salem, NC. "I think the only states with major market disruptions have been those that adopted pure community rating and all-products guaranteed issue in the individual market."

The Wake Forest study, funded by the Robert Wood Johnson Foundation in Princeton, NJ, contrasts with another academic work commissioned by the Washington, DC-based Health Insurance Association of America. In the HIAA study, the Center for Risk Management and Insurance Research at Georgia State University in Atlanta concluded that guaranteed-issue requirements coupled with community rating increased the likelihood people would be uninsured. In small employer groups, the increase was between 15.8% and nearly 29%. Similar requirements in the individual market raised the probability of being uninsured by between 5% and 11%. The HIAA study relied on analyses of the March 1998 supplement to the Census Bureau’s Current Population Survey.

Although an HIAA spokesman had not yet seen the Wake Forest analysis, the association maintains that community rating, guaranteed issue, and benefit mandates raise the price of health insurance and therefore cause employers or individuals to drop coverage.

"Our concern has been and continues to be that there is an association between various state mandates and the rising number of uninsured, or precisely the likelihood that one will be uninsured in a particular jurisdiction," says HIAA spokesman Richard Coorsh.

Small-group market stable

The Wake Forest study involved in-depth interviews and insurance data analysis in each state. Although findings are reported separately for each state, taken together they indicate that small group markets remain highly competitive in price, product diversity, and number of carriers, the study authors say.

One key reason for this, Mr. Hall explains, is that there seemed to be no reservoir of severely bad risk waiting to flood the small-group market once the reforms were enacted. And good risk did not flee the market as markedly as people had feared it would.

"So the fear that you drive out the good risk and attract the bad risk just hasn’t materialized," Mr. Hall says.

That is not to say the reforms have greatly expanded insurance enrollment. In New York, for example, the study concluded that even though insurance is now widely and readily available to any group regardless of health status, high prices have kept the reforms from generating a huge influx of new subscribers. Indeed, the percentage of New York workers with small-group coverage declined in the years following reforms. Still, the study concluded that the reforms stabilized the marketplace. "At least it can be said that the deterioration in the small group market that preceded these laws has been slowed, and possibly reversed," the study said.

The greater the reach of the reforms in the individual market, the greater the disturbances to the marketplace, Mr. Hall says. For example, the more a state limited an insurer’s ability to vary prices from a community rate, the more likely it was that insurers suffered adverse selection or left the market entirely, he notes.

"It’s not that everybody pulls out," Mr. Hall explains, "but most of the commercial indemnity insurers will pull out if you adopt pure community rating."

In Vermont, for example, the study concluded that giving commercial insurers the flexibility to vary rates 20% above or below the community rate has helped keep them in the market and avoid possible adverse selection.

While reforms in the individual market have, on balance, clearly raised prices and lowered enrollment, Mr. Hall says the reforms may nevertheless have achieved some of their goals. They have spread insurance risk, particularly removing bad risk from Blue Cross plans, and made insurance available (although not always affordable) to people previously excluded from the market.

In each of the states, the study found subtle or perhaps illegal attempts to circumvent the reforms, notably "field underwriting," in which insurers encourage agents to screen out applicants known or suspected to be higher risks.

Agents use questionable tactics

Indeed, some of the most revealing reading in the state analyses are quotations from agents or insurance company officials given anonymity. In the Florida report, for example, one agent is quoted as describing how insurers become more cooperative and helpful to agents who send them good risk:

"They get things accomplished for you and in return they unsubtly or subtly ask you to be careful what you send them. . . . It’s not anything official. It’s nothing written. It’s nothing official. It’s more or less, I scratch your back, you scratch my back."

The Florida analysis also found that insurers slashed the commissions of agents who enrolled "micro groups," which have one to three employees and are considered higher-risk and more costly to sell and administer. In July of 1998, the Florida Department of Insurance issued a directive prohibiting insurers from lowering commissions based on small group sizes. It also warned against slow processing of applications.

Finally, Mr. Hall notes that many state-level insurance reforms came in the early to mid-1990s, as the economy emerged from a recession and labor market conditions encouraged employers to offer health benefits in order to attract workers.

Full text copies of the Wake Forest analyses will be made available on the World Wide Web at www.phs.wfubmc.edu/insure/. The HIAA report is available at www.hiaa. org/newsroom/custerreport.pdf.