Diving in

Insurance pool slammed by insurers; backers say it would help small firms
A proposal in the biennial state budget that would create a health insurance pool for small businesses has the insurance industry in Wisconsin on the offense.
According to the staff of Rep. Lorraine Seratti, chair of the committee that formulated that provision, insurers have hired telemarketers to call their clients — urging them to support a gubernatorial veto of the budget if it contains the pool provisions.
In the meantime, provisions for the pool have been passed by the Conference Committee; the bill is now in the hands of the governor.
Provisions for the Private Employer Health Care Coverage Purchasing Alliance (PEHCPA) — an insurance pool for companies with between two and 50 employees — were included in the previous biennial budget bill but were flawed, preventing implementation. The budget included $400,000 to fund start-up of the pool. One issue was that the original plan would have required a private program administrator, hired by the state, to actively hold contracts with insured parties. Plan administrators said they could not accept that type of liability, so measures included in the pending budget would fix that and other problems.
But insurance industry groups and corporations do not want them fixed.
Pulling out stops
“The insurance industry has pulled out all the stops on this in terms of getting the governor to veto the obviously bipartisan agreement that came out of the conference committee,” said Seratti, a Republican from Florence County. “They have gone so far as to hire telemarketers to call their clients and ask them to speak to their legislators or the governor’s office and encourage them to eliminate this provision.”
But insurance entities claim their opposition to the pool is strictly in the interest of the rate-paying public. According to the Wisconsin Association of Health Plans (WAHP), the main concern is that rates would be restricted to 10% above or 10% below an average figure. That would mean the majority of rate payers would see an increase in their insurance bills, according to representatives of the insurance industry.
“We would have the same concern over the rate band regardless of the pool,” said Joe Kachelski, deputy director of WAHP. “This pool will affect less than 10% of the market — and will probably only be in urban areas. The costs within the pool will be 7% to 8% higher than in the open market. It is misleading to link this rate issue with the pool.”
Kachelski said the situation is exacerbated by the fact that the rate band and other provisions that apply to the pool would apply to the market as a whole. Drafters of the legislation, which is based on a similar system in California, said they fear that, failing universal applicability of the rate band, healthier, younger groups would avoid pool participation and the cost for pool members would skyrocket.
An additional concern of Kachelski’s is that there would be no phase-in period for the new restrictions. When the existing 30% rate band was imposed, it initially applied to new policies written as of March 15, 1992, and for all policies as of Aug. 15, 1994. There is no such provision in the PEHCPA plan, according to Kachelski.
An industry executive stressed that their interest is insuring as many people as possible — and the pool provisions may drive some small groups out of the market.
“Our interest is that we want to insure as many people as possible in the state of Wisconsin,” said Larry Rambo, Humana, Inc., regional vice president. “Whether we give out rates of plus or minus 10% or 30% is beside the point. We know and understand that a lot of small businesses are going to get very huge rate increases on top of the already huge rate increases they have already seen. This will force them to drop their health insurance and that’s bad for our business.”
The rate band would not only restrict rates to 10% above or below an average, but would eliminate the use of health status and claims history from being considered in setting a rate. Only age and sex would be considered — and demographically similar groups would pay comparable insurance rates.
“What the rate band says is that it doesn’t make much difference what the risk is,” Rambo said. “Whether you have a high-risk group of employees or low-risk — your rate is going to be about the same.”
Proponents of the pool say that the band will make rates more predictable for small groups.
“There are some who say this will make rates more stable,” Kachelski said. “The only thing that will be stable is the increase in health-insurance premiums if health-care costs continue to go up as they have.”
But Seratti’s research assistant Tim Fiocchi claims that while low-cost, healthy small groups may see their rates increase, they can easily find their rates increasing once a significant claim is filed.
“To a certain extent it is true,” Fiocchi said when asked if healthy small groups would see an increase in their rates under pool provisions. “By restricting the rate band from 30% to 10%, many people in the very bottom tier will see a one-time rate increase in their premium. This will not be significant compared to rate increases businesses have already seen recently. The insurance industry was saying there would be eight people who would get an increase for every one that got a reduction. Now they are saying seven in 10 will see an increase. But every single small employer in the state is one major claim away from being put into that high risk tier anyway — that’s just how it works. If a business has 20 employees and one guy has a heart attack — the rate for the entire group will increase. There are going to be some small bumps as the plan is put into place — but all those people are always at constant risk of becoming part of a high cost group anyway.”
Rambo said that currently, if an average rate is $100, the existing 30% rate band would allow for a maximum rate of $130 and a minimum rate of $70 for demographically similar groups. A 10% rate band would require a higher average premium to account for the cost of cutting rates for higher-risk groups.
Fiocchi said that’s inaccurate, and that both the current 30% rate band and the proposed 10% rate band leave insurers plenty of leeway.
“The insurance industry is warning of big increases for those paying the least for insurance,” Fiocchi said. “But consider this. If the midpoint on which the current rating system were $100, then the highest premium would be $130 (+30%) and the lowest would be $70. If there are eight people paying the lowest rate and two paying the highest — and you restrict the percent rate variation based on health risk of zero so that everyone paid the same — the new rate for everyone would be $82. That’s a huge decrease for the top tier and a pretty small bump for the bottom. Since we are allowing the 10% up or down variation, there will be a slightly smaller cut for the high risk and a slightly smaller bump for the low risk. The point is to stabilize the market for everyone.”
Fiocchi said that under the 10% rate band, the new midpoint would be right around $87.50 with a high end of $96 and a low end of $79. “This is still a small bump for the low-risk folks — from $70 under the 30% band — and a dramatic decrease from $130 for the high-risk folks assuming carriers hold that $820 figure constant,” Fiocchi said.
But Kachelski still says the pool would punish healthier groups.
“What you are doing is telling some people that they are not paying enough for insurance,” Kachelski said.
California dreaming?
Insurance industry representatives also claim that California’s pool plan is a failure because health-insurance rates in that state are higher than they are in Wisconsin. Information supplied by WAHP — and used by lobbyist George Petak on behalf of the industry — claim that California’s health-insurance rates are 30% higher than those in Wisconsin.
“That is patently false,” Fiocchi said. “According to the Medical Expenditure Panel Survey by the U.S. Department of Health and Human Services, the 1998 California average cost for a single payer premium was $2,000 per year. In Wisconsin it was $2,395. The average weekly cost for family coverage was $47.60 while the average in Wisconsin was $56.40.”
More recent information indicates that the situation has not changed significantly since the collection of comprehensive data in 1998, according to Fiocchi.
But Rambo said the trend nationally is still against rate band restrictions.
“Only the State of California has a rate band this punitive,” Rambo said, referring to the 10% restriction. “And Wisconsin’s uninsured population is 10.6% — while California’s is 23.5%.”
Rambo said he did not know what variables apart from regulation of the insurance industry may be affecting California’s rate of uninsured workers. But a study conducted last year by the nonpartisan Washington-based Employee Benefit Research Institute — Health Insurance Coverage and the Job Market in California — indicates that the disparity is due entirely to the large number of Hispanics in agricultural jobs. The study concluded that 70% of agricultural workers lacked any form of health insurance. About 16.5% of workers said their employers offered health insurance but nearly one-third of those said they couldn’t afford the premiums or co-payments and didn’t use the insurance. The study also concluded that many migrant workers did not understand the American system of health insurance and health care — and that many agricultural employers that try to offer insurance have a hard time getting workers interested.
Texas — another state with a high Hispanic immigrant population — is a close second to California in the rate of uninsured workers.
Regardless, Rambo said the trend is away from rate bands and toward a more open market.
“There is no other state in the country that has lowered its rate band in the last three years,” Rambo said. “Two states have eliminated the rate bands — or have loosened them.”
Kachelski said Maine is considering loosening its rate band to 30% and that Florida is going back to a system allowing for the use of health status in setting health insurance rates.
“There is a market disruption that follows this artificial pricing constraint,” Kachelski said. “You can not repeal the laws of economics.”
Flee the market?
Pool critics have charged that the rate band will drive insurers out of the market, but Rambo said would not be the case for Humana.
“We aren’t saying that at this stage,” Rambo said when asked if Humana would stop offering insurance in Wisconsin should PEHCPA become part of the statute. “We can operate with any rate band — but we think that we will be insuring fewer people because fewer people will choose to purchase health insurance based on the rate increases we will be forced to give most of our customers. It would be ridiculous of us to say that we can’t do it — we are doing it in California.”
Rambo did say that, in Colorado, insurers are fleeing the market and that the industry in that state is in crisis. Fiocchi stressed that the Wisconsin pool plan is not based on Colorado’s but on California’s.
“The industry has been saying that this is going to cause all the insurers to leave the market — which certainly has not been the case in California,” Fiocchi said. “As far as I can tell, it is just patently false. In California, insurers said they were going to leave — and some did. But others came into the market. In California, the pool that was created by the state is completely privatized. It was actually privatized a year ahead of time. As a matter of fact, insurance agents have created a second pool to compete with the existing one.”
Aug. 17, 2001 Small Business Times, Milwaukee