Myth Busters #13: Small Group Reform

Policy makers discovered the great fun of controlling insurance companies. There was so much money available and they could push social agendas without having to raise taxes! Plus, if things didn’t work out it would be the insurance companies held to blame, not the policy makers. Sweet deal, indeed.

They could make the insurance companies pay for social programs such as treating alcoholics, the mentally ill, infertile couples. They could throw money at politically correct professions like psychiatric social workers, nurse midwives, dieticians, nutritionists — you name it. What fun!

Of course, there was one small problem. Health care costs were soaring in the late 1980s, the mandates added even more to the rising costs, and those nasty insurance companies loved to discriminate against people with problems. That wasn’t fair, and the universal health programs passed by several states didn’t work out very well. So, we have to DO SOMETHING to fix the new problems we created.

Now there was a rush at the state level to better control, not just the benefits offered, but the way these companies did business. These issues included underwriting practices, rating methodologies, marketing activities, and a host of other concerns such as how reserves are invested and how contracts are written.

It is doubtful that any other industry has been subject to this level of micro-management. Even utility regulation generally sets prices but doesn’t get involved with the internal management decisions of the companies.

This is the consequence of the political class coming to see health insurers as quasi-social welfare organizations. The companies may be privately owned, but should operate like government agencies.

The National Association of Insurance Commissioners (NAIC) decided it had to step in and try to shape the new regulatory fervor. It launched a major initiative around small group reform in the late 1980s. This was a welcomed step by most of the industry. Yes, they would be much more tightly regulated, but at least it would be done by people who actually knew something about the business of insurance.

The NAIC was pretty realistic about what it could achieve. It knew very well it couldn’t do much about lowering costs – these were determined by broader trends in the health care system. It might be able to help with access to coverage, but mostly it focused on “stability” in the small group market.

It developed several model acts to guide the states in reforming their markets. (Since ERISA prohibits the states from regulating employer health plans, they are confined to the fully insured part of the market — which is mainly small group insurance.) In a memo releasing two of these proposals, then-NAIC president Jim Long said the goals were:

1. Assuring that coverage is made available to all small businesses, regardless of the health status or claims experience of their workers.
2. Incorporating limits on abusive rating and renewal practices currently used by some insurers, and
3. Providing continuity of coverage for insured small businesses changing carriers and for insured employees changing jobs.

An NAIC advisory committee noted that:

(These) reform measures are not intended to address the underlying problem of high health care costs – the most frequent reason small employers give for not having health insurance.  By bringing high-risk small employers and individuals in groups into the system, the committee believes that the reforms may in fact add to the cost of coverage for some small employers, especially for healthier groups.

These proposals were aimed at spreading the added costs across the industry through some form of reinsurance or risk allocation mechanism, but few states adopted that approach. Most of them simply adopted the rating restrictions (limits on how much rates could vary based on age or health status) without including the cost-sharing aspects.

One consequence was a drastic consolidation of the industry as smaller insurance companies found it impossible to comply with the variations in state regulations, and did not have enough enrollment volume to absorb the added risk of the new regulations.

This consequence was fine with many regulators who had long complained that there was too much choice in the small group market, and that employers were confused by so many choices. They felt that the market would be better served with just three or four (maybe five) different carriers to choose from.

In this, they were incredibly successful. There is now a virtual oligopoly of sellers in the health insurance market, made up of the Blues, Aetna, Cigna, United, Humana, and sometime Kaiser.

Next time we’ll look at how same states adopted “reforms” that went astray.

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