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


The HIPAA group provisions ensure access to coverage for groups and individuals in those groups, but also place some limits on insurers ability to segment risks. Insurers cannot charge higher prices to high risk individuals in a group; they cannot exclude entire groups from the risk pool. Risk segmentation results in lower premiums for the healthy than the sick; greater pooling of risks may result in adverse selection and increasing premiums that will cause the healthy to drop coverage. However, HIPAA does not place any restrictions on the manner in which insurers can set premiums, and so insurers retain substantial ability to segment the market (Blumberg and Nichols, 1996). Thus, the HIPAA provisions are unlikely to result in substantial premium increases for those individuals currently purchasing insurance. The Health Insurance Association of America estimates that guaranteed issue provisions have only a small impact on premiums—2 to 4 percent (Thompson, 1992). The empirical evidence supports this. Jensen, Morrisey, and Morlock (1995) found no evidence that guaranteed issue, pre-existing condition limits, or laws limiting exclusions on the basis of condition or occupation resulted in premium increases. Moreover, an analysis of claims experience from a large insurer specializing in the small group market found no difference in average claims for groups that were guaranteed issue and those that were medically screened (Glazner et al., 1995)

However, all states that have enacted guaranteed issue provisions have also adopted some form of rating restrictions for small groups, and observers believe that other states are likely to adopt rating reforms for small groups as they modify their laws to meet the guaranteed issue provision of HIPAA (Litow and McClelland, 1997). Rating reforms are intended to enlarge the risk pool on which premiums for small employers are based, thus making insurance more affordable for high risk groups and encouraging them to purchase insurance. On the other hand, small employers that have a good risk profile (for example, predominantly young workers) may pay higher rates after reforms are enacted because insurers will be limited in the extent to which they can take into account this favorable profile. The effect of rating reforms on premiums will therefore vary from company to company depending on the characteristics of the group.

On average, premiums may rise as well, as higher risk groups are attracted into the market and the lower risk groups discouraged from purchase. Thus, rating reforms in combination with other market reforms may increase the premiums for small businesses that purchase insurance, and lead some of them to drop coverage. There are other forces, however, which might lead premiums to fall with a change in market regulations and rate restrictions. Reforms may encourage greater price competition because insurers are limited in the extent to which they can compete on the basis of risk selection (Buchmueller and Jensen, 1997). Reforms may also improve information and lead to greater shopping.

The overall effect on premiums and access is likely to depend on how stringent the rating reforms are. Under full community rating, the insurer can vary premiums only by family type, geographic location, and benefits design. Only New York currently requires full community rating. Modified community rating reforms (or community rating by class), which allow insurers to vary premiums by a limited number of characteristics of the enrollees (such as age), are more common but do not permit health status or prior claims experience to be factored into the pricing. Some states limit the variation in premiums attributable to these factors. Other states have enacted rating reforms that permit use of health status in setting premiums, but limit the differentials in premiums allowed due to health status differences.

The American Academy of Actuaries (1993) conducted simulation analyses that suggest that average premiums for small businesses would rise by only about 2 percent with modified community rating and by about 5 percent under full community rating. There is little empirical evidence on the effects of rating reforms from states that have enacted them. What little evidence exists is consistent with the analysis of the Academy suggesting that rating reforms result in only modest increases in average premiums. For example, premiums in New York in the small group market rose about 5 percent during the first year that community rating was in effect (Chollet and Paul, 1994). Minnesota, which adopted restrictions on premium rate variations, also experienced premium rate increases of less than 5 percent in the year after it enacted these rating reforms in combination with a number of other small group reforms (Blumberg and Nichols, 1996). In California, premiums fell slightly after the small group reform legislation (Buchmueller and Jensen, 1997). Again analysts attribute the California experience to the highly competitive nature of the market.

Average premium changes of this magnitude are unlikely to lead to significant changes in the number of employers offering insurance. The published research literature suggests that a 5 percent increase in premiums would lead to a reduction of between 10 to 15 percent in the number of employers offering health insurance (Leibowitz and Chernew, 1992; Jensen and Gabel, 1994; Morrisey, Jensen and Morlock, 1994). However, this literature uses proxy measures of the price faced by those who do not currently offer insurance to estimate the response. Experimental evidence suggests that the response is much lower. A number of demonstration studies of the effect of subsidies to small groups on insurance purchase decisions indicate that premium changes up to 50 percent lead to changes of less than 10 percent in the number of firms offering insurance (Thorpe, et al., 1992; Helms et al., 1992). Based on these experimental results, we would expect only about a 1 percent decrease in the number of firms offering insurance in states that adopt a comprehensive new package of small group reforms to meet the HIPAA requirements.

Even if the average price does not change, states that adopt rating reforms along with other group regulatory changes may see substantial changes in the prices faced by individual firms. For example, the American Academy of Actuaries (1993) estimates suggest that about 20 percent of firms would realize premium increases of 20 percent or greater and 20 percent of firms would realize premium decreases of 20 percent or greater under modified community rating. This, in turn, might lead to changes in the firms that do and do not offer insurance, even if the overall numbers remain steady. Over time, however, rating reforms lead to greater stability in premiums faced by individual firms and so on offer decisions (Buchanan and Marquis, 1997).

HIPAA imposes new requirements that may increase the administrative costs of insurance. HIPAA requires employers to provide certification of creditable coverage to employees and their dependents as they leave a group plan; in subsequent contracts, employers are likely to place this responsibility on insurers (Finlay, 1996). Insurers view this as costly and unnecessary, favoring certification on demand. They note that state portability rules have been successfully implemented without global certification requirements (GAO, 1998). The necessity of certifying periods of coverage for spouses and dependents may pose special problems and require costly new record keeping systems. Employers and insurers currently do not have records to track this coverage (Humo, 1997). In addition, there may be other new costs to employers or insurers as their agents in oversight and adherence to the regulations concerning waivers of coverage and timely enrollment of HIPAA eligibles (Deru, 1997).

Some writers also suggest that carriers will adopt some new practices in response to the guaranteed acceptance provisions of HIPPA that may raise administrative costs. They observe that insurers are more closely assessing the risk of an entire group using medical questionnaires for all employees, even if not immediately eligible for coverage, to identify the potential risk of the group should these employees later seek coverage (Deru, 1997, Grosjean, 1997). This practice potentially increases the insurer’s risk assessment costs. Carriers are also more strictly enforcing contract guidelines concerning employee participation and employer contributions (Deru, 1997; Grosjean, 1997), which also raises administrative costs. With guaranteed issue, it is especially important to spread the risk as much as possible, which requires enrolling as many people in the group as possible. Although these new administrative costs are important to the groups affected by them, they are unlikely to lead to significant changes in the overall price of insurance.

Finally, HIPPA’s non-discrimination provisions prohibit carriers from raising rates for particular individuals in a group because of health. This may lead to increases in the price charged for all members of the group. However, guaranteed renewal provisions adopted in 43 states place some limits on these price increases (Landenheim, 1996).