Washington state tries to gauge impact of insurance reforms on individual market
WA Insurance Reforms
March 31, 1997
By now it’s a familiar scenario: A state imposes guaranteed issue and other reforms in its health insurance market, and carriers issue dire warnings about adverse selection and a "death spiral" for insurance premiums.
Washington state is no exception. Two new reports attempt to analyze carriers’ complaints. The carriers say that guaranteed issue, community rating and the state’s three-month limit on exclusions for pre-existing conditions have led to losses in the individual market. According to one estimate, the six largest carriers lost $58 million in 1995.
Citing their losses, higher claims costs, and the potential for spiraling premiums, insurers want the state to modify what remains of 1993 reforms in the individual market. A bill (HB2018) moving through the House of Representatives especially targets what insurers refer to as the "churning" problem. With only a three-month limitation on pre-existing conditions, people are buying insurance coverage, using health services, and then dropping out, insurers say.
Insurance Commissioner Deborah Senn and the Health Care Policy Board both have issued reports analyzing insurers’ claims that the reforms are leading to adverse selection, "churning" and escalating premiums.
The insurers "want to turn the clock back and return to underwriting," says Commissioner Senn, who adds that the proposed bill all but repeals Washington’s 1993 individual market reforms.
The bill is "not a good idea from a public policy standpoint and we don’t have do it," Ms. Senn says. "Our market is having its ups and downs, but, on balance, it’s going to come out of this just fine."
Under HB2018, guaranteed issue, with a three-month limit on preexisting condition exclusions, would be available only for individuals who enroll during the month of July.
The rest of the year, carriers could medically underwrite, exclude coverage for preexisting conditions for up to 14 months, or deny coverage to an applicant. If a carrier denied an application, the bill requires the carrier to expedite the individual’s enrollment in the state’s high risk pool. The bill also would allow carriers to offer discounts of up to 10% to individuals with continuous enrollment for two years or more.
Individuals "get coverage and then they leave the system. So, our ability to spread that risk is significantly undermined," says Jeffrey Roe, vice president of communications at Blue Cross of Washington and Alaska, which has the largest share of the individual market.
The bill also would weaken the Commissioner’s ability to limit rate increases to carriers by instituting a 65% loss ratio in the individual market.
Churning
The Washington State Health Policy Board discounted the degree to which churning has accounted for losses in the individual market. Looking at data provided by one insurer, Pierce County Medical, the board found that churning accounted for 8.6% of the insurer’s losses in 1995.
"This suggests that eliminating churning may not be sufficient to restore carriers’ profitability on their individual lines of business," the report says.
Tom Ansart, a policy analyst with the board, says additional analysis since the report was issued found that most of the individuals who dropped coverage were merely switching insurers, perhaps for better prices or benefits, and not remaining out of the market. There was some evidence, however, that a small number of women were enrolling, having babies and then dropping coverage. Yet, more than 90% of the individuals who came to the market did not game the system, he says.
As for the total losses of the major carrier, the $58 million estimate for 1995, the board noted that this amounted to 2.9% of carriers’ total earned premiums and 8.3% of their net worth.
The Washington State Health Policy Board acknowledged, however, that under current market rules, premiums are likely to continue increasing, resulting in a substantial decline in enrollment. The board concluded that adverse selection was a problem in Washington’s individual insurance market.
"If the individual market ever stabilizes, it is likely to do so at a relatively high premium and with much lower total enrollment than is currently the case," the board wrote. (Since the report was issued, the Board had noted a moderation of premium increases).
One recommendation from the board is to establish a reinsurance mechanism. Reinsurance could cover individual claims in excess of a maximum, such as $100,000 annually, or, preferably, be based on a carrier’s aggregate book of business in the individual market. Payouts could be made when aggregate medical claims exceed 110% of expected claims for a population with average medical risk, the board suggested.
Carrier losses
Ms. Senn’s office issued a 48-page white paper (available at http://www.wa.gov/ins) that also casts doubt on claims that guaranteed issue and other reforms are jeopardizing the financial health of the insurers.
Analyzing financial data from the six largest carriers in the individual market, the report concludes:
• the carriers in the individual market continued to build healthy reserves once the reforms took effect, and reserves were better than those of similar carriers in
other states;
• Washington’s carriers consistently had more favorable loss ratios from 1991-1995 than comparable out-of-state carriers;
• non-claims expenses, such as commissions, advertising and salaries, rose rapidly between 1992 and 1995, suggesting that factors other than open access contributed to the losses in 1995; and
• carriers have not left the state, as some critics had feared. Ms.Senn said there were 22 carriers in the individual market when she took office in 1992 and that 22 remain in the market today.
Ms. Senn believes there is some evidence that premium growth is moderating, and that the market could stabilize.
Two studies in other states could shed more light on the fallout from state efforts to reform their health insurance markets.
Katherine Swartz, of the Harvard School of Public Health, and Deborah Garnick, of Brandeis University’s Institute for Health Policy, have surveyed individuals who were guaranteed enrollment in New Jersey to determine whether adverse selection actually occurred. Results are due in late April, Ms. Swartz says.
A Wake Forest University study will examine small group reforms in 12 states and individual market reforms in Kentucky, New York and Vermont. The study will analyze any efforts to circumvent reforms, and whether reforms create incentives for employers to self-insure.
—Bryan Pfeiffer
Contact Commissioner Senn at 360-753-7300, the Washington State Health Care Policy Board at 360-407-0039, Ms. Swartz at 617-432-4325 and Mr. Hall at 910-759-4476.
Washington state’s insurance market law
• Guaranteed Issue Carriers are required to accept any state resident within the carrier’s service area regardless of the applicant’s health status.
• Guaranteed Renewability Policyholders cannot have coverage discontinued as long as the carrier continues to do business in that segment of the market.
• Preexisting Conditions There is a three-month limitation on exclusion of coverage for pre-existing conditions. After that, carriers cannot deny coverage of a preexisting condition.
• Portability Residents who had similar coverage under a different health plan at any time during the three-month period before applying for a new health plan are not subject to the three-month exclusion for pre-existing conditions.
• Community Rating Carriers can only consider family size, geographical location, age and wellness activities in establishing premiums. Age bands cannot be smaller than five-year increments, and ratios of high-to-low rates cannot exceed 4.25 starting Jan. 1, 1996, declining to 3.75 on Jan. 1, 2000.
Source:: Washington State Health Care Policy Board
Washington state tries to gauge impact of insurance reforms on individual market
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