Insurance Reform Is Mixed Bag

July 3, 2003
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LANSING — The potential effects on the small business health insurance market that may result from legislative reforms enacted in Lansing will, depending on whom you ask, either begin to address the rapidly escalating costs of coverage, or merely accelerate the problem and make it worse.

Backers of the legislation contend it will “even the playing fold,” lure more insurers to the state and increase competition, and help Blue Cross Blue Shield of Michigan — which controls some 70 percent of the small group market — by preventing competitors from allegedly cherry-picking younger, healthier employee groups that are less costly to insure.

The Blues, the “insurer of last resort in Michigan” that must provide coverage to all who apply, blames that practice, known as adverse selection, for much of its financial woes, although the company last year posted a $101.6 million profit, which came after losses of $48.3 million and $27.4 million in each of the two previous years.

On the other side of the issue are those who fear the legislation will merely give BCBSM an even larger market share, driving or keeping others out of the market and leading to even higher health care premiums that are already rising at double-digit rates annually.

“It will not help small business,” said Charles Owens, state director for the Michigan chapter of the National Federation of Independent Businesses.

“Small business was basically used as a ruse to get this kind of legislation to make Blue Cross bigger,” said Owens, who questions whether adverse selection is nearly as big of a problem as the Blues claims.

The bill creates rate bands that provide parameters on how health plans can alter premiums in a given period. In a measure to address adverse selection against the Blues, the law also enables an insurer to require a set percentage of eligible employees to enroll with a health plan for the company to receive coverage.

The Blues and its backers praised the legislation, which passed the state House and Senate June 26 and awaits Gov. Jennifer Granholm’s signature.

Yet at the same time they offered the same sense of caution that they have in the past on how much the legislation may affect rising premiums, if at all. The reform legislation, they said, can only bring stability to the market and at best may only partially stem the tide of double-digit premium increases.

The Blues this year alone implemented an average 22 percent increase in insurance premiums for small businesses.

“This is a victory for small business in our state and while it won’t solve all problems in health care it will stabilize the market,” BCBSM President and Chief Executive Officer Richard Whitmer said.

Rob Fowler, president and CEO of the Small Business Association of Michigan, which was among the Blues’ strongest allies in the push for market reforms, said the legislation alone “will not lower the cost of health insurance.”

The answer to that problem, he said, needs to come from addressing the multitude of factors diving up health care costs that include burgeoning utilization rates, the cost of pharmaceuticals, increasing the use of information technology to generate efficiencies, and individual responsibility and behavior.

“We now look forward to working with the Legislature to further address the other underlying causes of skyrocketing health insurance costs,” Fowler said.

Kim Horn, chief executive officer at Priority Health in Grand Rapids, the state’s second-largest health plan, now wants to see the Legislature go further and free up health plans from coverage mandates and regulations that drive up costs. In an era of rapidly rising health care costs, such flexibility would enable health plans to better fashion benefit packages to what an employer needs and can afford, Horn said.

“And that shouldn’t be determined by the state but by the market,” Horn said.

The reform legislation, she said, “didn’t go far enough.”

“What are we doing to allow flexibility and allow innovation in our state?” Horn said. “It’s just one step, I hope, to a pretty long process in improving health insurance. I hope it’s not the end of the debate.”

The new law will take effect in phases over three years beginning Jan. 1, 2004.

As passed, the legislation covers small businesses with two to 50 employees and sole proprietors. The law allows insurers to impose enrollment requirements on small businesses seeking coverage — 100 percent for employers with 10 or fewer eligible employees, 75 percent for those with 11 to 25 eligible employees, and 50 percent for companies with 26 to 50 employees.

In offering coverage, Blue Cross Blue Shield may use an employer’s industry group and the age of employees to determine premiums, a mechanism that will replace the current community rating system that bases Blues’ rates solely on geographic regions of the state.

HMOs can use age, industry and group size to set premiums for employers and sole proprietors in a region. Commercial carriers may use age, industry, group size and health status to set rates.

The rate bands imposed under the new law limit rate adjustments by BCBSM during 2004 to no more than 15 percent above and 35 percent below the index rate. Adjustments are limited to 35 percent above the set rate during 2005 and thereafter.

Commercial carriers cannot adjust rates by more than 70 percent in a rating period during 2004, 55 percent in 2005 and 45 percent in 2006 and the years after. Rates for HMOs cannot change by more than 35 percent during any rating period.

One of the goals of the legislation is to bring new insurers into the market, increasing competition and helping stem rate increases.

A representative from one major national commercial carrier that wants to increase its presence in Michigan says the company is taking a wait-and-see approach.

Tim Snyder, director of state government relations for Humana Inc., says it’s far too early to tell what effect the new law will have on his company, which has more than 35,000 small-group subscribers in Michigan.

Still, Snyder described the legislative package that passed as “disappointing.” The concerns of Humana and others, including the NFIB’s Owens, is that the new law will give BCBSM more market clout in the state, essentially creating a monopoly and resulting in competitors avoiding the market.

The thinking is that rate bands will lead to higher rates for commercial carriers, prompting young, healthier employee groups that cost the least to insure to go without health coverage. Since those groups help to subsidize those that are more costly to cover, losing them would skew the risk pool in a manner that results in higher premiums for all, Snyder said.

“We need to make sure we have as many people insured as possible. To do that, we need to keep insured the folks who are younger and healthier,” Snyder said. “We’re going to be vigilant in monitoring the impact of this thing.”

Passage of the legislation ended an 18-month legislative struggle that began in January 2002 when former Gov. John Engler called for reforms in the insurance market to prop up BCBSM, which had lost hundreds of millions of dollars on the small-group market since the late 1990s.

But Engler’s efforts stalled when he insisted on internal changes at the Blues as well. The issue came up again this year and finally passed after varying House and Senate versions were reconciled in a conference committee. The bill passed the Senate on a 34-3 vote and in the House 81-27.               

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