The limits of insurance reform - Column

Business & Health, April, 1995 by Steven Findlay

The timing couldn't have been worse. Just as lawmakers in Washington were beginning to draw together around a health-reform package aimed primarily at restructuring the small-group insurance market, a research group said last month that such reforms in 12 states have failed so far either to lower premiums significantly or to extend coverage to the uninsured.

The group's conclusion echoed loudly in the halls of Congress: "Small-group market reforms...are unlikely to solve the problems of affordability and availability of insurance." Put more simply by one of the study's authors, "The main reason people don't have insurance is that they or their employers don't have enough money to buy it."

Does this mean that health reform goes back to the drawing board yet again? Or does it just demand a little deeper thinking about the exact purpose and limitations of insurance market reforms? I think the latter.

The report had its own limitations. Conducted by the Intergovernmental Health Policy Project (IHPP), a Washington, D.C., research group specializing in state health policy, and paid for by the Commonwealth Fund, the study is not based on any actual numbers. Instead, the researchers talked to insurance regulators in 12 states, who told them that the market reforms hadn't affected things powerfully one way or the other. The regulators did think, however, that premium hikes had slowed in the small-group market. And they were particularily pleased that insurers had not pulled out of their states.

Despite this limited methodology, IHPP's conclusions put insurance market reforms in blunt perspective. While lower prices and extension of coverage are hoped for, the main purpose of market reforms is to impose regulations that specifically prevent the most egregious insurance company behavior. Like turning away people who are not in good health; or dropping employers that have a couple of big claims; or not covering people for up to two years if they have pre-existing conditions.

Some 45 states have barred some or all of these practices. Lawmakers in Congress also think restricting these practices is such a good idea that they are proposing the most extensive federal regulation of health insurance ever.

Such regulations are needed, and they should be passed this year. But they won't solve the problem of the uninsured or put money in the pocket of small employers to buy coverage. That can be done only with federal subsidies, which Congress appears in no mood to deliver.

There is one other big glitch: The impact of market reforms will be severely limited if ERISA is not amended. If self-funded employers, which now cover over half of all Americans, are allowed to operate outside market reform regulations, they can simply set their own rules. In the case of small companies, they will do so in rapidly increasing numbers: 28 percent of employers with 100 or fewer workers now self-insure, up from 8 percent in 1988.

Most observers believe that insurance reform in the absence of ERISA changes is almost certain to exacerbate an evolving two-tiered small market--with the good-risk self-insured paying lower rates and the poor-risk fully insured paying higher rates.

Among the solutions proposed: Amend ERISA to establish national standards for all public and private health-benefit plans. Market reforms supported by Democrats and Republicans (guaranteed issue, renewability, portability, and modified community rating) would apply to both fully insured and self-insured plans. Big business doesn't care for this idea since it guts what they see as the essential thrust of ERISA--no regulation at all of their health-benefit plans either by federal or state government.

The second and newer proposal is to amend ERISA to allow small businesses to band together for the purpose of self-insuring and creating ERISA-qualified benefit plans. A bill to do this was submitted in the House last month and has already garnered the support of the National Federation of Independent Business, the National Association of Manufacturers, and the National Business Coalition on Health. The vision of the bill's sponsors is to have most employers' health-benefit plans tucked under ERISA's deregulating wings.

The debate has just begun. But it's already clear that insurance market reform is neither a panacea nor an easy step for Congress to take--if it wants to make a real difference.