The Regulation of the Individual Health Insurance Market. Access

12/01/2008

States have sought to improve access to insurance policies through several regulatory approaches. Absent state individual insurance regulation, insurers in the individual insurance market adopt practices that seek to minimize risk to avoid losses, including denial of coverage for applicants who have health conditions or a history of health problems.  Because most health care expenses are concentrated in a relatively small percentage of individuals, even a small number of high cost individuals can substantially impact overall insurance results (benefit costs, administration, profitability, etc.) in a particular group of individuals with the same insurance policy.  As a result, an estimated 10 percent of individual insurance applicants are denied coverage for some medical reason(s) (AHIP, 2007).

Standards relating to access address when, and on what terms, health insurers must accept an applicant for coverage.  While most states require insurers to provide coverage to small employers, few apply these requirements to the individual insurance market.  State regulations addressing access involve requirements for guaranteed issue and/or guaranteed renewability of health insurance policies.  Federal law also includes requirements for access under HIPAA.

Guaranteed Issue

Guaranteed issue laws prohibit insurers from denying coverage to applicants based on their health status.  While all health policies sold in the small group market (generally employers of 2 to 50 employees) must be sold on a guaranteed issue basis, only a handful of states require insurers to sell coverage on this basis in the individual health insurance market.  Some states require limited guaranteed access based on HIPAA eligibility [3] and some require open enrollment periods during which insurers may not deny coverage due to a medical condition.  Because these requirements vary by state, this results in consumers in some states having more protections than consumers in other states.

Another means of access to health coverage is through high-risk pools.  Approximately two-thirds of states have implemented high-risk pools as a safety net for the “medically uninsurable” population.  These are people who have been denied health insurance coverage because of a pre-existing health condition, or who can only access private coverage that is restricted or has extremely high rates.  Risk pools are not created expressly to serve the indigent or poor who cannot afford health insurance.  The indigent can access coverage through state medical assistance, Medicaid or similar programs.  Risk pools are designed to serve people who would not otherwise have the right to purchase health insurance protection.  However, some state risk pools do have a subsidy for lower income, medically uninsurable people.

Though differing by state, risk pools operate as a state-created non-profit association overseen by a board of directors made up of industry, consumer and state insurance department representatives.  The board contracts with an established insurance company to collect premiums and pay claims and administer the program on a day-to-day basis.  Insurance benefits vary, but risk pools typically offer benefits that are comparable to basic private market plans.  Generally, there are no exclusions.  However, risk pools do have waiting periods for coverage of pre-existing conditions.  Risk pool insurance generally costs more than regular individual insurance, but the premiums are capped by law in each state.  The caps range from as low as 125 percent of the average for comparable private coverage, up to 200 percent of the average or more.

Risk pools are not a panacea for coverage of the uninsured because of their higher premiums and typical funding concerns.  All state risk pools inherently lose money and need to be subsidized at roughly 40 percent of overall operating costs.  Subsidy arrangements include assessments levied on insurance carriers, HMO's and other insurance providers; appropriations from state general tax revenue; special funding sources, such as a tobacco tax, or a hospital or health care provider surcharge; or a combination of these.  Because of these funding concerns, access in some states is limited by waiting lists.  There are currently less than 200,000 people enrolled in high-risk pools.

Guaranteed renewability

Guaranteed renewability laws prohibit insurers from canceling or not renewing coverage based on medical claims or diagnosis of an illness.  This is a protection afforded to policyholders once coverage is obtained.  Following the passage of HIPAA, all group and individual health insurance policies must be guaranteed renewable.

While guaranteed renewability is at the option of the policyholder, the insurer may increase premiums based on the claims experience of the group of individuals with the same policy.  Insurers are generally prohibited from singling out policyholders for premium increases, called re-underwriting, because they got sick after buying coverage.  However, insurers are not prohibited from canceling all their policies and leaving the market, though there is a time penalty on market re-entry.

Other protections for access to individual private health insurance coverage implemented by states include guaranteed access for special populations such as continued coverage for dependent handicapped adults who were covered by their parents’ policies as minors and automatic coverage of newborns for 30 days under their parents’ policy provided the policy covers dependents.

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