The Regulation of the Individual Health Insurance Market. Impact of State Regulation

12/01/2008

States, in their actions, can and do make very different decisions about how to regulate the individual health insurance market.  These actions reflect different values, political climates, and expectations.  They also are designed to achieve specific policy goals, such as expanding access, with most states having considered laws and/or regulations of guaranteed issue, guaranteed renewability, and rate reforms. However, achieving these goals often requires trade-offs.  For example, establishing rating rules that allow high-risk, older individuals to get low-cost health insurance without exclusions can make health insurance affordable for this population, but increases the price that younger, healthier persons would otherwise pay in this market (New, 2005).  When the pool of insured persons does not include the participation of younger individuals, their absence heightens the need for increasing premiums as health care use and costs rise among the existing pool of older persons.

A paper by the Heritage Foundation (New, 2005) examined several studies on insurance regulation and presented an analysis of state health plan premiums, comparing premiums to the number of mandates and the existence of several types of reforms in the states.  The author concluded that while some of the variation in health insurance premiums could be due to regional differences in underlying health care costs, overall “state level regulations of heath insurance are correlated with higher premiums.”  In terms of the impact state regulation has had on the market for individual health insurance, the research examined indicates that while access to coverage generally increases, affordability is still a major problem.

A study by the Commonwealth Fund (Turnbull and Kane, 2005) examined insurance markets in seven states with varying degrees of market reforms.  Among its key findings was the determination that stricter regulation made an important difference by creating “individual health insurance markets where comprehensive coverage is available to all,” but with premiums more affordable for higher-risk people at the expense of less-affordable coverage for younger and healthier people.  It also found that older and less healthy people faced a range of problems in less regulated states including higher rejection rates for applicants.  Of five states in the study with relatively strict regulations, only three still maintain all of those in place at the time of the study; the other two states subsequently rolled back many of their reforms.

A similar study of eight states by Milliman (Wachenheim and Leida, 2007), that included several of the same states as the Turnbull and Kane analysis, found consistent results of decreasing individual insurance enrollment and increased premiums.  An additional finding in the Milliman study, which concentrated on guaranteed issue and community rating reforms, was that a deteriorated market resulted after reforms were enacted, with insurance companies choosing to stop selling individual insurance.

The table in Appendix A - state mandates compiled by CAHI – includes a column of information that attempts to quantify the cost impact on premiums for each of the mandates listed.  CAHI estimates that mandated benefits increase the cost of basic health coverage from less than 20 percent to more than 50 percent depending on the state and its mandates.

Several other studies conclude that the effect of regulation is small.  While persons with higher expected expenses due to chronic health conditions living in unregulated states paid higher health policy premiums and were somewhat less likely to obtain coverage, the variation between premiums and risk is far from proportional (Pauly and Herring, 2007; Herring and Pauly, 2006).  This is because in looking at regulated versus unregulated states, using guaranteed issue and community rating as measures of regulation, that there was considerable pooling of risk in unregulated states.  They concluded that the effect of regulation was to produce a “slight increase in the proportion uninsured, as increases in low risk uninsured more than offset decreases in high risk uninsured.”

These studies are not inconsistent.  Pauly and Herring do agree that requirements such as community rating and guaranteed issue do cause higher premiums for some insured and lower premiums for others, and lead to an increase in the total number of uninsured. However, they observe a higher degree of risk pooling in unregulated states that would otherwise be believed.  Additionally, other studies looked at requirements beyond community rating and guaranteed issue to include coverage mandates that affected the amount of premiums paid by policyholders.

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