State Reforms

Often overlooked in the debate over national health insurance is the role of the states in health care reform. Since 1989, almost all states have passed some type of legislation to make medical expense coverage more available and less costly to certain segments of the population. Some of this legislation was passed before the initial national health insurance proposal of the Clinton administration, and it is interesting to note that some of the administration's ideas reflected practices already instituted in some states. Other states continued to pass their own reforms as the debate over national health insurance continued at the national level during most of the first Clinton administration. The potential importance of state actions should not be overlooked. There has been and continues to be considerable support in Congress for having the states, rather than the federal government, take the initiative in health care reform.

State reforms fall into two categories. One category is laws and regulations aimed at uninsured individuals other than employees. The other category is those laws and regulations that constitute what is commonly referred to as small-group reform. It is in these groups of fewer than 25 or 50 employees that the majority of employees without employer-sponsored coverage is found. Most states have passed National Association of Insurance Commissioners (NAIC) model legislation, and a few states have gone even farther with other types of legislation. Unfortunately, the results seem to be somewhat mixed. Some states report modest results, but the national percentage of employees with medical coverage under small-employer plans has remained static. In addition, several insurers no longer choose to write business for small groups because of the limitations imposed by the legislation. While coverage is still more readily available, the legislation does not make it more affordable. Some small employers cannot afford to pay a significant share of the cost for their employees, and the employee share under contributory plans is often in excess of what employees can or are willing to pay.

NAIC Model
The most common approach to state reform has been the adoption of one of the versions of the NAIC Small Employer Health Insurance Availability Model Act. The stated purpose and intent of the model act are "to promote the availability of health insurance to small employers regardless of their health status or claims experience, to prevent abusive rating practices, to require disclosure of rating practices to purchasers, to establish rules regarding renewability of coverage, to establish limitations on the use of preexisting-conditions exclusions, to provide for development of basic and standard health benefit plans to be offered to all small employers, to provide for establishment of a reinsurance program, and to improve the overall fairness and efficiency of the small-group health insurance market." While some provisions of the model act may result in lower costs for certain employers, the main emphasis of the model act is on the availability of coverage, not on the employer's or employees' ability to afford the coverage.

Although the following discussion focuses on the provisions of the NAIC model act, it is important to remember that states often adopt model acts with variations. Some of the more significant variations are described.

Plans Subject to the Act
The model act defines a small employer as one who had 25 or fewer employees working on at least 50 percent of the days during the previous calendar quarter. Several states extend their legislation to employers with as many as 50 employees and/or exclude groups of one or two employees.

The model act applies to most medical expense products provided by insurance companies, HMOs, and prepaid service plans. Certain types of coverage are specifically excluded from the act's provisions: dental insurance, vision insurance, Medicare supplements, long-term care insurance, and disability income insurance. In addition, payroll deduction plans of individual medical expense insurance under which the employer pays no portion of the cost may or may not be subject to a specific state's legislation.

The small-group legislation does not force the providers of medical expense coverage to operate in the small-employer market. However, if a provider of coverage does sell medical expense coverage to small employers, the provisions of the legislation must be followed.

Benefit Provisions
The model act establishes a committee representing providers of medical expense coverage, employers, employees, health care practitioners, and agents to recommend the form and level of coverage to be made available to small employers. The committee must recommend a basic plan and a more comprehensive standard plan and make decisions regarding benefit levels, cost-sharing levels, exclusions, and limitations. In designing the basic plan, the committee can ignore any state mandates for benefits unless the small-group legislation specifically requires them.

Preexisting-conditions provisions are allowed, but with limitations. A medical condition can be treated as preexisting if it was treated (or if a prudent person would have sought treatment) within a specified prior period, which cannot exceed 6 months. Coverage for preexisting conditions cannot be excluded for more than 12 months following the effective date of coverage. Preexisting conditions must be covered as any other medical conditions if a person had benefits for the medical condition under a prior medical expense plan for at least 90 continuous days prior to the effective date of the new coverage.

One unfortunate and probably unintended side effect of the small-group legislation is that the policies that must be made available in many states are very precisely prescribed, making it impossible for insurance companies to use the same policies in multiple states. The expense of designing and refiling policies for many states, coupled with rate controls and the inability to underwrite for medical conditions, has resulted in several insurers leaving the small-group market.

Underwriting
With few exceptions, coverage must be written for all small employers. An insurance company or other provider of medical expense coverage is permitted to have requirements for minimum participation and minimum employer contributions as long as these requirements are the same for all similarly sized groups. These requirements cannot be increased after an employer has been accepted for coverage.

Coverage must be made available to all employees and their dependents. However, persons who did not enroll when initially eligible can be denied coverage for up to 18 months or have coverage excluded for preexisting conditions for up to 18 months.

Rates and Renewability
The model act prescribes a procedure for determining an "index rate" to be charged by each provider of medical expense coverage. Under certain circumstances, such as the use of more than one type of marketing system, the provider can use different rates for different classes of business to reflect substantial differences in expected claims experience or administrative costs. However, the index rate for any class of business cannot be more than 20 percent higher than the index rate for any other class of business.

Although the act allows rate differences among groups because of variations in age, sex, industry, geographic area, family composition, and group size, far fewer refinements are allowed than would be the case without this legislation. Some states have adopted more restrictive legislation and require community rating.

At annual renewals, rates can be changed because of changes in the index rate, changes in the mix of employees, and possibly group experience. In the latter case, the size of the adjustment is limited to a modest amount. The provider of medical expense coverage must renew all policies subject to certain exceptions, such as nonpayment of premium or the failure to meet any minimum participation requirement. The provider may also elect not to renew all policies for small employers in a state. However, proper notification (usually 180 days) must be given to the insurance commissioner and all employers.

Relation to New Federal Legislation
The Health Insurance Portability and Accountability Act (HIPAA) contains provisions that are similar to many provisions of the NAIC model act. State law continues to apply to insured medical expense plans unless it interferes with the new federal legislation. Provisions of the state law supersede the federal legislation if they are more generous toward insured individuals. For example, the maximum allowable length of preexisting-conditions periods may be shorter in some states than under the federal legislation.

Other State Reforms
Other reforms passed by the states include the following:

Tort reform. Several states have passed legislation to control medical malpractice suits. This legislation ranges from limiting recovery for noneconomic loss to mandatory arbitration.

Claim administration reform. A few states now require the use of standardized claim forms, including a uniform system of coding diagnoses and procedures.

The establishment of health insurance purchasing cooperatives (HIPCs). Several states have laws that establish HIPCs, entities that act as brokers between the purchasers and providers of medical expense coverage. They negotiate alternative plans of coverage on the basis of price and quality. Those eligible to use the HIPC, which may vary from all purchasers to small employers only, may elect one of the available plans directly from the HIPC. With some HIPCs, an employer deals directly with the cooperative without using agents or brokers. In one state, however, an employer can purchase coverage through an agent or broker or deal directly with the cooperative and receive a discount equal to the commission that would be paid to an agent or broker. An unexpected result of this arrangement is that almost 70 percent of the employers have elected to use an agent or broker. Clearly, these employers feel that the services agents and brokers provided are worth the extra cost.