Bills To Create Insurer Rate Bands

February 28, 2003
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A new legislative package in Lansing would alter how health insurers — most notably Blue Cross Blue Shield of Michigan — set rates for small businesses and seek to draw new competitors into the state market.

The five-bill legislative proposal would establish “rate bands” requiring all insurers to establish a range for their rates that use risk factors such as age, health, occupation, industry and other risk factors to set premiums for an employee group seeking coverage. Insurers would then have to maintain rates within that band with a set variation, even if a covered group becomes a bad risk.

The change is designed to benefit Blue Cross Blue Shield of Michigan, the state’s largest health insurer that covers a majority of small businesses. Present state law requires the Blues to set premiums based on a community-rating system that treats and charges employee pools the same.

The bills would also allow the Blues to set minimum participation requirements for employers seeking coverage, enter the long-term care market, contract with care providers in other states and require the insurer to offer prescription drug benefits for Blues products sold to individual subscribers. The Blues would regain the authority to establish participation requirements under provisions that allow all insurers to require at least 75 percent of the employees in a group of six or more to enroll and 100 percent for employers of less than six workers.

Unlike commercial carriers, the Blues has been unable to set minimum participation requirements since losing that authority a few years ago.

In terms of market reform, the bills would put into place in Michigan the National Association of Insurance Commissioners reform model that has been used in many other states.

The main thrust of the small-group market reforms included in the package is to eliminate “adverse selection” in Michigan, the alleged cherry-picking of younger, healthier employee groups by commercial carriers that leaves Blue Cross Blue Shield of Michigan with an older, unhealthier customer base that’s more costly to insure.

“What this legislation is going to do is reintroduce the principle in health insurance that all insurers should be obligated to retain coverage on customers who become sick as well as those who remain healthy,” Blue Cross Blue Shield of Michigan President and CEO Richard Whitmer said. “The absence of a law in Michigan that would prohibit cherry-picking and dumping has produced an effort that really injures all small businesses.”

The bills, introduced Feb. 25, were referred to the state House Health Policy Committee. They come as small businesses continue to struggle with yet another year of double-digit increases in health premiums, including the average 22 percent rise implemented statewide for 2003 by Blue Cross Blue Shield of Michigan.

Backers of the bills see rate bands as creating an even playing field for the Blues and competing commercial carriers that would enhance competition and help to stem the tide of rapidly rising premiums. The idea is that one underwriter would not have an advantage over another.

Even as the bills were introduced, the new head of one small business organization was tempering the expectations of their effect on rising health insurance costs.

Rate bands are only one element of needed reforms and alone will not reduce the cost of health care, said Rob Fowler, CEO-elect of the Small Business Association of Michigan that markets Blues policies to its members.

Establishing rates bands in Michigan “will help to moderate the increases and set the foundation where, combined with other reform measures, they will help reduce our health care cost problem,” Fowler said.

“The best we can expect is to contain the increases in the short term and possibly reverse the trend over the long term,” he said. “We’re on a journey here and this is kind of a big step.”

But what one group in Lansing sees as part of a broader solution, another sees as contributing to the problem.

While willing to give Blue Cross Blue Shield some flexibility in how rates are set, address adverse selection and create minimum participation rules, the Michigan chapter of the National Federation of Independent Businesses is unwilling to back creation of rate bands in the state.

“Let’s not hamper things for the entire market because they (the Blues) have a problem. That’s just not going to help anything,” said Andrew Deloney, the assistant state director for the NFIB in Michigan.

NFIB equates rate bands with dreaded price controls and Deloney believes the bills introduced last week would result in less competition in Michigan, ultimately giving Blue Cross Blue Shield a monopoly over small business coverage and causing commercial carriers to leave or stay out of the market. The Blues now covers about 70 percent of the small businesses in Michigan and has lost millions on the small-group insurance market in recent years.

“What they want is complete dominance of the market,” said Deloney, who sees changes on the way for the bills once lawmakers begin debating them in earnest and interested parties offer their perspectives.

“This is a marker. This is obviously not going to be what’s enacted,” he said of the legislative package. “It’s going to be interesting.”

The new legislative proposals come following an effort in 2002 that linked small-group insurance reform with regulatory reforms and internal changes at the Blues, including streamlining the insurer’s 35-member board of directors.

The Blues mustered its considerable political clout against the proposals, pushed by Gov. John Engler. The legislative session ended in December without action on the reform proposals.

The new package is absent of regulatory and Blues reforms and focuses solely on market reforms. It was met with ringing endorsements from the Blues and its allies such as the Small Business Association, which has worked closely with the Blues and others to craft a legislative package for small market insurance reform.

Minus the other issues, the Small Business Association’s Fowler believes the package has a good chance of winning passage. Most important, he said, is that Engler is no longer governor and his issues of regulatory and Blues board reform are included in the new proposals.

“Those were John Engler conditions and John Engler’s gone,” Fowler said. “The stars are now aligned.”

Still, the stars could change quickly, particularly if a pending Senate version of market reform includes provisions to restructure the Blues.    

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