Baseline Information for Evaluating the Implementation of the Health Insurance Portability and Accountability Act of 1996: Final Report. Effects of Guaranteed Issue


Access and Premiums

Widely discrepant estimates of the effects of the group-to-individual portability provisions of HIPAA on access and premiums in the individual market have been offered. The Health Insurance Association of America, for example, estimated that the HIPAA individual market provisions would lead about 1.6 million new individuals to purchase individual insurance each year (HIAA, 1995). In the long run, this would lead to an increase of 28 percent in the number of covered lives in the individual market. These new entrants are assumed to have higher spending that those currently insured, otherwise they would likely participate in the current market. Assuming spending levels that are twice that of the currently insured, HIAA estimates that prices in the individual market would rise by about 25 percent (HIAA, 1995). This price increase in turn might discourage some who currently purchase in the individual market from doing so. As healthier individuals leave the market, premiums would rise further potentially leading to a collapse in the market.

However, others have concluded the effects would be much smaller. For example, analysis at RAND (Klerman, 1996) indicates that the HIAA estimates substantially overestimate the number of individuals who exhaust their COBRA benefits and thus become eligible under the HIPAA provisions. The RAND analysis also suggests that the HIAA estimates overstate the number of individuals leaving insured jobs at smaller employers who are eligible for HIPAA because they assume that all have 18 months of creditable coverage. The RAND analysis suggests that the increase in covered lives in the individual market would be only about 6 percent, and premiums would rise by only about 6 percent.

The estimates are also sensitive to assumptions about the health risk of the newly eligible population. Evidence from states that have continuation of coverage requirements indicates that claims cost for those who enroll in such coverage is about 150 percent of the average claims cost of members of the group (Gruber, 1994). Combining this estimate of the cost of the new entrants in the individual market with the RAND estimates of the number of entrants, premiums are estimated to rise by only 2 percent (Klerman, 1996).

Moreover, the implications of these estimates of premium increases depend upon state’s actions regarding rate regulation in the individual market. Insurance companies worry that states will impose restrictive rate regulation on the individual market as they pass new legislation to conform to HIPAA (Findlay, 1997). With restrictive rate regulation, those currently insured in the individual market would see their premiums increased as the new, and less healthy, HIPAA eligible individuals enroll. In response, some of those currently insured might leave the market. Because the healthy would be more likely to insure, this would lead to further increases in premiums and flight from the market by the healthier. Some fear that this would then lead carriers to eliminate individual coverage from their portfolios (Deru, 1997: Litow and McClelland, 1997).

However, to date, few states have adopted new rate regulation since HIPAA was enacted. Absent rate regulation, carriers are likely to segment the conversion policies and set separate, and higher, rates for these policies. This may lead to prohibitively high premiums for these policies and discourage the new HIPAA eligibles from purchasing coverage . Early results from the states that adopted the Federal fallback suggest that this, in fact, may be happening in some states (GAO, 1998). However, under this scenario, premiums for the currently insured would not be expected to increase.

The experience in states that had adopted guaranteed issue and rating reforms prior to HIPAA provides some confirmation of fears that imposing very strict pooling in this market too quickly might harm the individual market. The Urban Institute analysis of the effect of insurance market reforms on uninsured rates using the Current Population Survey (CPS), found some evidence that guaranteed issue and rating restriction in the individual market results in an increase in the uninsured rate (Marteller et al., 1998). However, this result is based on observations in a limited number of states. The Galen Institute (Schriver and Arnett, 1998) also used CPS data to compare uninsured rates in 16 states they classified as having stringent individual and group market reforms with other states. Uninsured rates in the former increased by 2 percentage points more than in other states between 1990 and 1996, leading the authors to conclude that the reforms had unintended effects. However, there was considerable variability among the 16 states in the magnitude of the increase, and overall uninsured rates in the tightly regulated states remained below those in the other states. Turning to some state specific experiences, premiums for individual coverage in Kentucky rose more than 60 percent following the enactment of guaranteed issue and community rating for the individual market, driving healthier insured individuals out of the market (Page, 1997a). Carriers faced losses when left with the sicker individuals, and 40 companies left the market. Similar problems were encountered in New Hampshire, leading the largest individual insurer in the state to withdraw (Page, 1997b). Washington also saw a number of insurers leave the state following individual insurance market reforms, and remaining insurers are reported to be incurring large losses (Chollet and Kirk, 1998). New York also saw a reduction in the number of individual policies following strict rating reforms and anecdotal evidence suggests that it was younger, healthier individuals who left the market (Chollet and Paul, 1994; IHPS, 1995). However, few commercial insurers left the New York market, despite threats to do so (IHPS, 1995). Moreover, it is difficult to attribute the changes in the individual market in New York to community rating because Blue Cross and Blue Shield, the dominant carrier prior to the reforms, practiced community rating prior to the New York legislation (Chollet and Paul, 1994).

Other states have implemented guaranteed issue along with rating bands in the individual market; there appear to be less disruptive effects when insurers are not required to adopt complete pooling. While there is little hard data, insurers in Vermont report growth in their business and little adverse selection (Chollet and Paul, 1994). Few insurers left the state following the reforms. Minnesota, which also adopted rating bands rather than strict community rating, reports some fall in participation in the individual market (IHPS, 1995). But as noted earlier, some of this is believed to be a movement to the group market. Some carriers have left the market, but the impact was limited because they held a small market share (IHPS, 1995).

In sum, the effect on both access and premiums in the individual market will depend on how states implement the portability provisions of HIPAA and on how they regulate the market—especially, whether and how they restrict premiums for individual insurance coverage. Ten states already had guaranteed issue and portability in the individual market, and all of these had some rate regulation (GAO, 1996). HIPAA would not be expected to have additional effects in these markets. Twenty-two states and the District of Columbia have introduced risk pools or modified existing risk pools to meet the HIPAA requirements, and so HIPAA will not directly effect premiums or coverage in the individual market. Furthermore, in the remaining states, the effect of the legislation on premiums for current policies will depend on whether the state has or introduces rate regulation, since insurers would be expected to price policies to the new entrants separately if free to do so.

Other Effects

Employment. The availability of post-retirement health insurance is a significant factor in the decision to retire. Employer-provided retirement health insurance reduces the age at retirement by 6 months to 2 years (Madrian, 1994; Blau and Gilleskie, 1997). In addition, the probability of retirement is greater among older workers who have access to mandated continuation coverage—either COBRA or state mandated continuation benefits (Gruber and Madrian, 1995). Thus the group-to-individual portability provisions of HIPAA may affect the supply of labor. The magnitude of this effect is not known, but will likely vary depending on the type of insurance products that are available and state regulations to control their price.

Some have also suggested that portability will enhance entrepreneurial activity, and that the employment-based health insurance system discourages individuals from leaving firms to start their own business. While there is limited empirical work, the evidence does not support this hypothesis (Holtz-Eakin, Penrod, and Rosen 1996).

Benefit Design. The new legislation may also affect the characteristics of products available in the market if they affect carriers’ decisions to participate in the market or alter product lines. Plan design can be a technique to segment the market; for example, plans with high cost sharing are likely to be more attractive to healthier individuals than to sicker individuals. There is some evidence that insurers have turned to plan design as a competitive response in states that have adopted community rating (IHPS, 1995). Plan design changes may also be used to hold down premium increases (IHPS, 1995). These responses will vary depending on whether the state regulation imposes strict pooling through rating reforms.

Administrative Costs. Several states failed to pass conforming legislation and the federal government will be responsible for oversight of HIPAA implementation. The state, however, will continue to enforce existing law. This may lead to administrative duplication and added administrative costs (Aston, 1997a).