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Maine.gov > PFR Home > Insurance Regulation> Administrative & Enforcement Actions > Document 623 : INS 99-14 : Hearing Decision
STATE OF MAINE
DEPARTMENT OF PROFESSIONAL AND FINANCIAL REGULATION
BUREAU OF INSURANCE
NOW COMES Intervenor, MHA, Inc. (MHA), through its undersigned counsel, and submits this Prefiled Testimony of Kevin Behre, Vice President, Finance, of the Maine Hospital Association, consistent with the terms of the Superintendents Procedural Order of November 4, 2000.
Q: Please identify yourself and your current employment.
A: I am Kevin Behre, Vice President for Finance, Maine Hospital Association, 150 Capitol Street, Augusta, Maine 04330.
Q: How long have you been employed in this capacity, and prior to holding this position, what position did you hold?
A: I have served as Vice President of Finance for the MHA since July, 1998. Prior to this, I served from 1986 to 1998 as the Chief Financial Officer of the Blue Hill Memorial Hospital in Blue Hill, Maine.
Q: Please provide a brief summary of your educational background and related matters.
A: I am a native of White Plains, NY. I received a BS degree from Bentley College in Waltham, MA. I am a candidate for a Masters degree in Business Administration, at Kennedy Western. Before working at Blue Hill Memorial Hospital I was the Director of Fiscal Services at Downeast Community Hospital in Machias, ME from 1982 to 1986. Prior to 1982, I held fiscal management positions for a total of 5 years in firms outside of the health care field.
Q: What will be the focus of your testimony?
A: I will focus on the Standards and Requirements sought by MHA in these proceedings, and will provide certain statistical and financial information in support of these requirements.
Q: Do you have an opening statement?
A: I do. The MHA decided to intervene as a party to this proceeding because the matters being considered by the Superintendent are very important to the MHA and its members. We comprise 39 hospitals and affiliated health care organizations throughout the State of Maine.
Maines hospitals have enjoyed a long and positive relationship with Blue Cross Blue Shield of Maine (BCBSME). This goes back to the 1930s when the national Blue Cross organization was founded. The American Hospital Association and the American Medical Association were instrumental in the start-up of the national Blue Cross organization. Maine hospitals and physicians worked cooperatively with the local Blue Cross organization in the late 1930s in establishing the Maine organization. In those years, Blue Cross stepped forward to provide cost-effective insurance coverage to Maine citizens. This was critically important in the depression years as hospitals faced the mounting burdens of difficult economic times and an inability to pay on the part of many of Maines citizens.
While our national economy is now booming, and Maine is benefiting as well, we continue to face some of the same problems that led to the founding of BCBSME. We are concerned with the growing uninsured population, declining federal support for the Medicare and Medicaid program, and a growing shortfall facing all employers and payors of healthcare and services. Increasingly, Maine employers are finding it difficult if not impossible to continue coverage for their employees. Co-payments and deductibles are growing. Unless careful attention is given to this problem, it has the potential for spiraling out of control and having a devastating impact upon our economy and our hospitals.
In this environment, Maines hospitals are deeply concerned with the financial health of the non-governmental payors, including Blue Cross, CIGNA/Healthsource, AETNA U.S. Healthcare, Harvard-Pilgrim, and Tufts Health Plan. The New Hampshire liquidation proceedings involving Tufts Health Plan and the Massachusetts receivership proceedings involving Harvard Pilgrim Health Care are deeply troublesome to our members. The rehabilitation and ongoing financial health of the health insurers serving Maine is vital to the financial health of Maines hospitals.
BCBSME has a dominant share of the non-governmental health insurance market in the State of Maine. It is critically important that the Superintendent of Insurance take action to assure that the conversion of BCBSME to Anthem occurs in a manner that serves to protect Maines hospitals, Maines physicians, their patients and their families.
Our members have a significant stake in these proceedings and are gratified that the Superintendent saw fit to permit us to intervene. We are hopeful that Superintendent Iuppa will give careful consideration to the issues we are raising, and that he will craft appropriate standards and requirements to provide meaningful protection to subscribers, providers and other public interests.
Our Board of Directors, Health Policy Council, and Committee on Economics and Finance have devoted considerable time and attention to identifying our concerns and to developing specific standards and requirements, which we believe to be necessary in order to limit some of the potential negative consequences of this transaction.
Q: Can you identify the Standard and Requirements sought by MHA in these proceedings?
A: Yes. Attached as Behre Exhibit No. 1 is a complete copy of these Standard and Requirements. I ask that this be incorporated as part of my testimony.
Q: Can you provide background regarding the genesis of these Standards and Requirement?
A: Yes. They were developed by the Maine Hospital Associations Committee on Economics and Finance and its Council on Health Policy. They were ultimately adopted by our Board of Directors at a meeting on February 22, 2000. They set forth a number of standards and requirements, that the MHA views to be necessary prerequisites to approval of Anthems acquisition and conversion of BCBSME. We are urging the Superintendent of Insurance to give serious consideration to adopting each of these as the Standards and Requirements in these proceedings.
Q: Can you comment on some of the factors influencing MHAs testimony and its advocacy of these Standards and Requirements?
A: A very major concern to our Association and its members has been the financial difficulty recently experienced by a number of the non-governmental payors in the Maine market, including particularly Tufts Health Plan and Harvard Pilgrim Health Care. We are also concerned about the financial health and well being of the Maine Blue Cross Plan. It is fair to say, however, that many of our concerns arise from the insolvency of Tufts Health Plan (THP) and the significant financial exposure this has caused for Maine hospitals, physicians and other providers. As an organization of community health care providers, dedicated to the long-term well-being of those we serve, we also felt a responsibility to address certain implications of the sale of BCBSME that may not directly affect hospitals financially. We are concerned about the potential adverse impact of this transaction on small employers, on access to coverage under small group and individual plans, and hence the effects it could have on the patients in our member hospitals who are employees for those small employers. Access to quality health care also depends on an adequate network of financially viable hospital and non-hospital providers, and we recognized the substantial exposure that they have in any fundamental restructuring of Blue Cross.
Q: Do you have data on the exposures facing Maine providers from Tufts financial difficulties.
A: Yes. For the past several months, the MHA and its members have tracked the receivables owed them by Tufts. I am attaching as Behre Exhibit No. 2 a table setting forth past due receivables presently owed to Maine hospitals and to physicians employed by them.
Q: Can you summarize the information in these tables?
A: Yes. They show that as of December Tufts owes Maines hospitals approximately $18 million.
Q: What are the prospects for recovery of these amounts?
A: We are receiving regular briefings from Superintendent Iuppa and other officials from the Maine Bureau of Insurance. They are following closely the solvency proceedings pending before the New Hampshire Department of Insurance. Based on these briefings, it is our understanding that the prospects for recovery of bills rendered following December 19, 1999 are reasonably good. For bills representing services provided prior to December 20, 1999, the prospects for full recovery are far less favorable.
Q: You also referenced Harvard Pilgrim Health Care (HPHC). Please describe the problems facing HPHC.
A: Harvard Pilgrim Health Care has been subject to receivership proceedings on the part of the Massachusetts Department of Insurance. I am attaching as Behre Exhibit 3 the "Plan of Rehabilitation" recently filed in the Massachusetts Superior Court proceedings. This provides a summary of the difficulties experienced by HPHC and highlights the importance of the plans survival to providers and consumers. More detail is available in the numerous other filings available on the Internet. I also attach, as Behre Exhibit 4, a schedule of receivables owed by HPHC to Maine hospitals.
Q: What impact have proceedings such as these had on Maine providers and the MHA?
A: We have certainly been concerned about the growing potential for rehabilitation and insolvency proceedings affecting Maine carriers. Our consciousness has also been heightened regarding the importance of Maine-based regulation and supervision for each of our carriers. As a result of these proceedings, Maine hospitals are now aware of the need to book potential losses on accounts receivable from commercial, third-party payors. Prior to this, and particularly in the case of Blue Cross, this was perceived as unnecessary, because the receivables were always realized. Removing the fundamental reliability of Blue Cross as a payor would dramatically diminish the financial stability of Maine health care providers.
Q. Can you comment on the vital community roles and financial vulnerabilities of Maines Hospitals?
A. Several of Maines hospitals have been recognized by the Health Care Financing Administration as "sole community providers". Thirteen hospitals, one third of our total number, have been given this status. These are: Millinocket Regional Hospital, St. Andrews Hospital (now a Critical Access Hospital), Waldo County General Hospital, Rumford Community Hospital, Charles A. Dean Memorial Hospital (now a Critical Access Hospital), Houlton Regional Hospital, Down East Community Hospital, Franklin Memorial Hospital, Northern Maine Medical center, Calais Regional Hospital, Penobscot Valley Hospital, Penobscot Bay Medical center, and Mayo Regional Hospital. Three Maine hospitals have been recognized as "critical access" hospitals by state and federal authorities: Blue Hill Memorial Hospital, Charles A. Dean Memorial Hospital and, St. Andrews Hospital. Recognizing the importance of these hospitals in their respective communities and also recognizing the difficulties of operating a hospital in an isolated rural community, each of these statuses provides these hospitals with some financial relief under the Medicare program. At the same time, the financial health of many of these institutions is fragile.
Further, the vast majority of Maines hospitals are financially vulnerable to
changing reimbursement policies on the part of federal and state government, and commercial payors. Maine experiences an unfavorable Medicare reimbursement rate and is subject to a very significant "Medicare shortfall," currently totaling $44.0 million annually. This shortfall must be made up by other non-governmental payors. It is estimated that for the most recent available year, hospitals incorporated an additional $116 million into their charge structures in order to recover the unreimbursed costs of providing services to Medicare patients.
Q: Please identify the first Standard and Requirement sought by MHA.
A: Our first requirement would be to require that Anthem Blue Cross Blue Shield be a corporation domiciled in Maine, both initially and permanently thereafter.
Q: Could you provide further background and justification for this request?
A: We want to be sure that in future situations involving financial difficulty for Maine health carriers, these carriers will be subject to the direct oversight and supervision of the Maine Bureau of Insurance, and not an out-of-state entity.
Q: What is your understanding of Anthems status as a Maine-based or out-of-state company?
A: We understand that Anthems Form A, September 15, 1999 filing states that Anthem/BCBSME will be a Maine domiciliary company. We seek an approval condition that makes sure this requirement will be ongoing. We are concerned that in the absence of this requirement, Anthem could, in the future, restructure itself, potentially, to be an out-of-state corporation, and that this could be acceptable to the Maine BOI, as it was in the case of Tufts, and also in the case of Harvard Pilgrim.
Q: Please describe the second Standard and Requirement sought by MHA.
A: The second Standard and Requirement seeks to Require Anthem Parent to Guarantee Satisfactory Performance of all Insurance and Provider Contracts and other Obligations of Anthem Blue Cross Blue Shield.
Q: Can you provide further background as to the reasons behind this request?
A: With the transfer of Blue Cross and Blue Shield of Maine to an out-of-state company, a previously non-existent risk to this insurers financial strength, and hence to the viability of Maine's community hospitals, will arise. This risk grows out of the various ways that parent a company can extract cash from its subsidiaries. This need not take the form of outright transfers. It can be accomplished by charging substantial fees to the Maine entity for services rendered by the parent company, whether for claims processing, quality assurance, utilization review, or through other activities of the organization. There is no mechanism in place, absent special conditions established by Maine regulators, for control of what those fees are or what any other transfers can be made or would be made. This unprecedented capacity to move cash generated from Maine activities to another entity outside the State could, in essence, practically force a condition of insolvency, thereby effectively countering any control that might otherwise be exercised over the in-State entity. Given this degree of control held by Anthem, it is essential that they guaranty the Maine companys performance, in order that Maine providers will not lose a critical source of reliable payment with the transfer and conversion of Blue Cross. We also feel we will receive more timely and better information regarding future problems that may be faced by Anthem prospectively, if the parent company has these direct responsibilities.
Q: Anthem has objected to this condition and has stated that the proper focus of the Maine Superintendent ought to be on the local Anthem entity. Can you comment?
A: To evaluate Anthems argument on this point, we should look at our neighbors next door in New Hampshire with Tufts. They were looking at the local Tufts entity and still, I believe, find themselves hamstrung and unable to do anything about the circumstances. Even in the liquidation process, the parent company is pulling significant expenses out of Tufts of New England through the liquidation process. As a result, serious consideration is being given by the affected parties in New Hampshire to identifying a third-party administrator other than the parent company to complete the claims processing effort.
Q: Are there related reasons?
A: Yes. The uncertainties facing Maine hospitals and providers from the financial difficulties that have arisen in the context of Tufts and HPHC serve to compel the Maine BOI to impose additional protective requirements in order to prevent these problems from occurring in the future.
If Anthem is already committed as part of its overall Blue Cross agreement to guarantee the obligations of the local entity, to the full extent of Anthem assets, we believe that imposition of such a requirement as part of the Maine approval process will go a long way to assuring the ongoing financial integrity of the Maine operation and prevent a recurrence of the Tufts problems in the future.
Q: What is MHAs third Standard or Requirement?
A: MHA seeks to prohibit or Limit Anthem Ability to Upstream or Transfer Maine Resources to other States
Q: Could you elaborate?
A: Blue Cross Blue Shield of Maine is presently a Maine-based company. Its resources are available to meet the needs of Maine, and there is no out-of-state parent to whom funds can be transferred. We seek to assure that the successor Maine Blue Cross entity provides Maine consumers the same level of protection and serves the public interest in Maine to the same extent as has Blue Cross Blue Shield of Maine.
Q: Are you aware that the Deputy Superintendent has deemed this issue to be irrelevant?
A: Yes. I have been informed that his March 22, 2000 Order included such a ruling. I believe this ruling makes it all the more important that MHA Standards 1 and 2 above be adopted.
Q: Please identify the Fifth Standard and Requirement that you are seeking.
A: MHAs fifth Standard and Requirement is to Require Anthem to Continue Certain Other Provider Contracting Practices of BCBSME.
Q: Please elaborate upon your reasons for each of these requirements.
A: The various contracting practices of Blue Cross and Blue Shield of Maine have, over time, built up a longstanding positive relationship between BCBSME and Maines community hospitals. Hospitals have benefited from this by being able to avoid significant administrative burdens of the kind that the claims processing practices of other insurers have imposed. As a result, there is a high degree of confidence in the claims processing, utilization management, and related practices of BCBS their accuracy, their utilization review, their care management all of those have been done well and have not created unnecessary procedural hurdles to payment. This, in turn, has benefited their subscribers by avoiding the significant overhead costs that less reasonable practices impose on hospitals. Their history of prompt claims adjudication and the system of periodic interim payments have been the basis for a substantial portion of the discount that has been provided to them through the years, as recognized officially by the Maine Health Care Finance Commission during its existence. This has continued to be the basis for negotiated discounts that have lasted through the years since the Maine Healthcare Finance Commission.
In addition to the claims processing relationship and the prompt payment and handling of clean claims, the other relationship that exists is that Blue Cross Blue Shield has provided a network of services that has included all of the hospital community throughout the state. Other products that may come into the state will identify a market in which they can negotiate with the providers and then sell that product, and their intent has been to grow onto a statewide network . Here we have a true long-standing full statewide network that includes all of the hospitals and many of the providers within those communities. When somebody buys Blue Cross coverage they know theyve bought into a product that will be accepted and can be used throughout the State of Maine. Continuing to provide this level of access and quality to the public in Maine requires continuation of that statewide network, including all of the hospitals within that relationship.
Q: Mr. Behre, are you aware of any circumstances in which Anthem has taken over Blue Cross plans elsewhere and cut back on statewide networks?
A: My understanding is that in Ohio a number of rural providers are not included in the network. Weve recently been looking at Medicare shortfalls in Maine and one of the reasons that we find ourselves as having the worst reimbursement rate in the country is that much of Medicares reimbursement system works against rural hospitals. Consequently, Im painfully aware of the extent to which rural hospitals are financially at risk. If they were excluded from the product or the network that would be offered by Anthem, the publics need for access to acute health care services would be seriously undermined.
Q: Are you aware that the Deputy Superintendent has deemed irrelevant the MHA issue seeking to require Anthem to maintain the current Blue Cross network of providers?
A: I am aware of this ruling. The MHA is urging that the Superintendent reconsider his prior ruling. The testimony of Mr. Peterson is especially persuasive in demonstrating the importance of maintenance of the statewide network as it affects Aroostook County. Mr. Kemptons and Mr. Digginss testimonies are also supportive of this requirement as it affects other areas of the State.
Q: Please identify the seventh Standard and Requirement.
A: MHAs seventh Standard and Requirement is to Require Anthem to Continue to Offer Full Range of Individual and Small Group Products and Require Appropriate Marketing of Products.
Q: Please provide further policy and background for the basis of this request.
A: We know this issue has been one of significant concern to the Legislature and to the Superintendent. Under the conversion statute, the BOI has prepared and submitted to the Legislature a report on the individual health market. A copy of this report dated January 11, 2000, is attached to this testimony as Behre Exhibit No. 5. This report speaks for itself, and notes that there is a significant crisis in affordability and availability of individual insurance and further notes the potential that the individual health insurance market may currently be in a death spiral. See page 5 of the report.
Q: Can you comment on some of the solutions that other states have imposed?
A: The report notes that various approaches have been taken to the issue of reportability. The report notes that New Hampshire was nearly left with no carriers in the [individual] market when Blue Cross Blue Shield of New Hampshire announced it was withdrawing from the market. The report notes that the State took emergency measures, (and later by statute), to assess group health carriers a specified amount per covered person per month and these sums are distributed to individual carriers according to a formula.
Other approaches have been taken in Washington and Kentucky. See the report, Appendix C. The State of Washington has enacted a health insurance pool for high risk individuals who cannot access individual insurance through other means. Kentucky has enacted a "guaranteed access plan", but only two carriers in Kentucky offer individual health insurance.
Still other states have other approaches, including Massachusetts, which requires all small group carriers to offer individual coverage.
The Maine report notes that HMOs are required by state law to offer individual coverage, but for those wanting indemnity coverage, the choice is limited to only two, one of which is Blue Cross Blue Shield of Maine.
Q: Can you describe the significance of Blue Cross for purposes of providing indemnity coverage in Maine?
A: As of September 30, 1999, the Blue Cross indemnity plan had 19,700 members, whereas the only other plan, Conseco, had approximately 10,700 members. Further, the Blue Cross rates were significantly lower than Consecos. Based on these figures, coverage availability through Blue Cross is critically important to Maines citizens.
Q: Mr. Behre, maybe you can comment further on the practices of insurers other Blue Cross that give rise to your concern about the potential change that could occur with acquisition by Anthem.
A: As I said before, BCBSME and the hospitals have had a good working relationship. The expectations of BCBS for claims that they receive are clear and well known and understood by the hospitals in Maine. As a result, there is a high degree of what you would call clean claims your claims that are handled without any delay pending subsequent approval or looking for records of prior approval to make sure that the services were in fact covered services, etc. those types of items. With the other insurers, there are significant claims that are held up, that are "pended," that are initially denied and otherwise treated as requiring further examination to the point where there are significant cash flows that are held up, a number of days in accounts receivable that are held out. These practices increase the risk, as weve seen, especially in the Tufts and the Harvard Pilgrim Plans recently, of substantially aged receivables. A significant portion of those receivables are waiting some additional information or being pended, and that level of delay and administrative overhead just does not exist with BCBS. As a matter of fact, the PIP arrangements that Blue Cross has offered really negate any incentive that they would have in delaying claims in those ways, contributing to the good working relationship I described earlier.
Q: Beyond the raw numbers of indemnity plan membership, are there other aspects of your experience with Blue Cross that distinguish it from other carriers in terms of making meaningful indemnity coverage available in Maine?
A: Not only is the coverage available, but BCBS has gone out to find the market, they have invested in the marketplace, and have worked to inform the public of the product being available.
Q: Does that differ from other carriers in your experience?
A: From what we have heard and, as noted in the report of the Bureau of Insurance noted earlier, there are other products that are available for small markets but have not been promoted, have not been marketed, and to the extent that those products are sold through the broker community, were aware that theyre not providing commissions on those smaller market products. In essence, theyre not providing any incentive to get the market sold.
Q: Why must this issue be addressed in the context of the Anthem acquisition?
A: We are concerned that a new owner of the Blue Cross Plan might choose to eliminate indemnity coverage for individuals and small groups.
Q: Do you have a reason to believe this?
A: The February 1 filing of Anthem for an HMO certificate of authority responds to Issue 2-A(n) relating to the offering of coverage for purchase of individuals, as follows:
In accordance with this requirement, Anthem/BCBS intends to comply with applicable requirements to continue to offer the individual HMO basic and individual HMO standard coverage.
We hope this response was phrased in this way as the certificate of authority application related to HMO coverage. The failure to mention continuation of the indemnity coverage is, however, of concern to us.
Q: How would you address this concern?
A: We believe the Superintendent ought to mandate that Anthem continue offering and marketing individual indemnity coverage, and make all of the HMO individual coverages available on an ongoing basis. We note that the New Hampshire Order of Approval, paragraph 9, obligated Anthem to maintain all existing products for 36 months, unless a plan is filed with and approved by the New Hampshire Commissioner.
We believe this is an appropriate requirement to address these public interests.
Q: Please identify the eighth Standard and Requirement.
A: Our eighth Standard and Requirement is to Prohibit "most favored nation" requirements in Anthem provider contracts.
Q: Please elaborate.
A: Most favored nation clauses are not unfamiliar to the hospital community in Maine. In fact, were aware of BCBSME trying to insert those types of clauses into hospital contracts in the past. I am not aware of them being successful in having any of those inserted, and quite a bit of it was because it would take too much away from the hospitals ability to negotiate contracts in the future. To steer new volume in for many hospitals can be a very attractive opportunity, and they should be able to price accordingly and not feel as though they are tied in the marketplace by the predominant player forcing them to get the best deal. Additionally, a number of hospitals have not established community health networks, but they are looking to and they may want to be able to contract directly with employers that are dominant employers in their communities, and may want to contract directly with those employers. The terms of contracts such as those would be very difficult to try to meet if a most favored nation clause were in effect for a large carrier like BCBSME. As a result, hospitals have found that the MFN clause was not conducive to competition or to maximizing patient access to care, even with a payer that had a history, and a very credible history, up and until that point in time.
Now assuming the purchase of BCBS by Anthem, we could see an entity entering a marketplace by, basically, buying a dominant role in the marketplace. A most favored nation status in the contracts that they would be negotiating from that point forward would allow the new entity to lock in place this market dominance, even though, unlike the predecessor company, Anthems performance in the marketplace is unproven. Given the significant dampening effect that an MFN clause can have on innovation and competition, particularly where there is excess capacity, it is in my view dangerous to Maines hospitals and hence Maine people to give Anthem such a powerful tool at the outset. Hospitals should instead be provided the opportunity to work with the new company for a period of at least several years, during which new forms of competition may emerge, before Anthems conduct could "earn" them the right to negotiate a clause of that type, of that magnitude.
Q: Are you aware that this issue has been deemed "irrelevant" by the Deputy Superintendent?
A: Yes. Again, I understand that his March 22 ruling so stated. MHA is asking the Superintendent to reconsider this ruling and restore this issue to consideration as part of these proceedings. Aside from the particulars of the legal issues involved, the Association urges the Superintendent to consider the practical impact of this issue on Maine hospitals, and to include it in his consideration. The New Hampshire Commissioner of Insurance paid careful attention to this issue and included a condition in her final Order relating to MFN clauses.
Q: Please identify the ninth Standard and Requirement.
A: Our ninth Standard and Requirement is to Require Anthem to maintain reserve funds in Maine adequate to pay claims and all related provider obligations for at least the time period equivalent to the notice period required to terminate contracts by either party.
Q: Please elaborate.
A: Many contracts require notice of 60 days, or more in some cases, before the provider can elect out of the contract. Reserve requirements in many cases are only for 30 days claims outstanding, so under those circumstances the providers are on the hook to provide services well beyond what the carrier may be able to pay for, and we would know that up front. What we should do is put into synchrony the necessary reserves and the lead time that a provider is required to give before exiting a contract. If you have 30 days reserves, then no more than 30 days notice should be required for the provider to get out of the contract.
Q: Anticipating that Anthem would argue that the same reserve argument could be applied to any insurer and should be a matter of general regulatory policy, not a condition of this transaction, could you comment on why it is especially important to pay attention to those reserve requirements in this case?
A: I think that goes back to the relationship that the hospitals have had with BCBSME. As I said before, theres a relationship of credibility, theres almost an inherent trust thats built into that relationship. Now were talking about the possibility of an insurance company that is ultimately owned out-of-state, paying fees for services provided out-of-state, perhaps there are transfers of assets interstate transfer of assets outside, leaving Maine, to fund that same parent company. Its a completely different set of circumstances than weve had and a significant change from the relationship that weve had with Blue Cross historically.
Q: What is MHAs tenth Standard and Requirement?
A: MHAs tenth Standard and Requirement is to Assure more public scrutiny of financial analyses and further public input.
Q: Can you explain this requirement further?
A: Our document attached explains our position further as follows:
Q: Please identify the eleventh Standard and Requirement sought by MHA.
A: The eleventh standard is to Urge full consideration by BOI of alternative valuation methodologies.
Q: Please elaborate.
A: Our Standards document attached describes this requirement as follows:
Q: Does this conclude your Prefiled Testimony?
A: Yes, I welcome the opportunity to respond to questions from the Superintendent and the other parties to this proceeding.
DATED: March 28, 2000
Sandra L. Parker, Esq. Esq. John P. Doyle, Jr., Esq.
Charles F. Dingman, Esq.
Attorney for MHA, Inc. Attorneys for MHA, Inc
MHA, Inc. PRETI, FLAHERTY, BELIVEAU,
150 Capitol Street PACHIOS & HALEY, LLC
Augusta, Maine 04330 One City center
e-mail: email@example.com P.O. Box 9546
\\AWORD1\CFDINGMA\MHA\ANTHEM\TESTIMONY BEHRE.032800.FINAL.DOC (3/28/00 2:03 PM)
CERTIFICATE OF SERVICE
The undersigned hereby certifies that on March 28, 2000 a copy of PREFILED TESTIMONY OF KEVIN BEHRE, VICE PRESIDENT, FINANCE, MHA, and the exhibits referred to therein, were served via hand delivery, overnight mail or electronic mail on each of the persons listed below.
Jeffrey M. White, Esq.
Catherine R. Connors, Esq.
Portland, Maine 04101
(Anthem Insurance Companies, Inc )
Robert S. Frank, Esq.
HARVEY & FRANK
Two City center, Fourth Floor
P.O. Box 126
Portland, Maine 04101
(Blue Cross/Blue Shield of Maine)
Judith Chamberlain, Esq.
State of Maine
Department of the Attorney General
286 Water Street
Augusta, Maine 04333-0006
(Bureau of Insurance)
William H. Laubenstein, Esq.
State of Maine
Department of the Attorney General
286 Water Street
Augusta, Maine 04333-0006
(Office of the Attorney General)
Gordon H. Smith, Esq.
Maine Medical Association
30 Association Drive
P.O. Box 190
Manchester, Maine 04351
(Thomas D. Hayward, M.D.,
Maroulla S. Gleaton, M.D.,
And the Maine Medical Association)
Joseph P. Ditre, Esq.
Consumer Health Law Program
One Weston Court, Level One
P.O. Box 2490
Augusta, Maine 04338-2490
(Consumers for Affordable Health Care Foundation/Coalition)
Michele M. Garvin, Esq.
Ropes & Gray
One International Place
Boston, Massachusetts 02110-2624
(Central Maine Healthcare Corporation; Central Maine Partners Health Plan)
Robert I. Goldman
Maine Council of Senior Citizens
27 Bowery Beach Road
Cape Elizabeth, Maine 04107
(Maine Council of Senior Citizens)
Executive Director of the Maine Ambulatory Care Coalition
Rte 202, Oakes & Parkhurst Business center
P.O. Box 390
Manchester, Maine 04351
(Sacopee Valley Health center, Regional Medical center at Lubec, Eastport Health Care, Inc., and the Maine Ambulatory Care Coalition)
Maine Peoples Alliance
192 State Street
Portland, Maine 04101
(Maine Peoples Alliance)
Michel Lafond, Esq.
Sulloway & Hollis
9 Capitol Street
Concord, New Hampshire 03301
(co-counsel for Maine Medical Association)
Donald E. Quigley, Esq.
465 Congress Street, Suite 600
Portland, Maine 04101-3537
(Maine Medical center)
Sandra L. Parker, Esq.
Attorney for MHA, Inc.
150 Capitol Street
Augusta, Maine 04330
Kellie P. Miller, M.S.
Maine Osteopathic Association
RR 2, Box 1920
693 Western Avenue
Manchester, Maine 04351
(Maine Osteopathic Association)
DATED: March 28, 2000
Charles F. Dingman, Esq.
Attorney for MHA, Inc.
PRETI, FLAHERTY, BELIVEAU, PACHIOS & HALEY, LLC
One City center
P.O. Box 9546
Portland, Maine 04112-9546
Behre Exhibit No. 1
February 29, 2000
Standards and Requirements Sought by MHA for Purposes of Protecting Subscriber, Provider and Public Interests in BOI Approval of Anthems Purchase and Operation of Maine Blue Cross Blue Shield
The following are standards or requirements that MHA will advocate be incorporated into the Superintendents final order approving Anthems purchase, conversion and ongoing operation of the Maine Blue Cross Blue Shield Plan (BCBSME). These standards and requirements arise from a variety of sources, including the October 26, 1999 Final Order adopted by the New Hampshire Insurance Commissioner, and points that are of concern to MHA members or have arisen in other states.
COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss: SUPREME JUDICIAL COURT
FOR SUFFOLK COUNTY
PLAN OF REHABILITATION FOR HARVARD PILGRIM
This Plan of Rehabilitation (the "Plan") for Harvard Pilgrim Health Care, Inc., Pilgrim Health Care, Inc., and Harvard Pilgrim Health Care of New England, Inc. (collectively, "HPHC"), sets forth the means by which Linda L. Ruthardt, Commissioner of Insurance of the Commonwealth of Massachusetts ("Commissioner"), in her capacity as Temporary Receiver (the "Temporary Receiver") of HPHC, and Thomas F. Reilly, Attorney General of the Commonwealth of Massachusetts ("Attorney General"), shall rehabilitate HPHC.
AINES INDIVIDUAL HEALTH INSURANCE MARKET
PREPARED BY THE STAFF OF
JANUARY 11, 2000
ALESSANDRO A. IUPPA
Table of Contents
Individual health insurance, also called "non-group" health insurance, is generally purchased by those not eligible for employer-sponsored plans. An estimated 38,000 Mainers are covered by individual health insurance. However, the future viability of the individual health insurance market in Maine is uncertain. Rates have risen steeply in the past two years, making coverage unaffordable for many. This not only results in more people becoming uninsured, it also can cause a deterioration of the average health of the remaining pool of risks. This is because those who have health problems and utilize their insurance benefits are much less likely to drop coverage than are healthy individuals. In turn, deterioration of the risk pool could lead to further rate increases, causing more people to drop coverage. If this cycle were to continue, it could lead to a collapse of the individual health insurance market. This phenomenon of a shrinking pool of risks and higher insurance rates is sometimes referred to as a "death spiral."
While affordability is the immediate problem, availability is also a concern. Since HMOs are required by law to offer individual coverage, HMO coverage is readily available to those who can afford it. However, for those wanting indemnity coverage, the choice of carriers is currently limited to two, down from five in 1994.
This paper examines some of the possible causes of these problems in Maine's individual health insurance market, some possible solutions, and the advantages and disadvantages of each possible solution. Measures to address the broader problems of the overall costs of health insurance and health care are beyond the scope of this paper. This paper is not intended to endorse any of the proposed solutions, but rather to provide a framework for discussion.
Health care in Maine and throughout the United States is financed through a variety of private and public mechanisms. Public programs, including Medicare, Medicaid, and others, cover approximately 25% of Maines population. Approximately 61% of Maine's population is covered privately, while 14% are uninsured.1 Most private coverage is employer-based. Employer-based coverage falls into two categories insured plans and self-funded plans. Insured plans are issued by insurers and health maintenance organizations (HMOs). Self-funded plans may be administered by an insurer or an HMO, but the risk is borne by the employer.2 While insurers and HMOs are licensed and regulated by the state, states are pre-empted from regulating self-funded plans.3
1 1998 Current Population Survey, U.S. Census Bureau.
In 1998, 62,000 Maine residents had health insurance coverage that was not paid for by their employer4 . Those covered by individual health insurance are a subset of this number. Other subsets include self-employed individuals covered by group plans5 and those covered by other types of group plans, such as association groups.
4 1998 Current Population Survey, U.S. Census Bureau.
Individual health insurance is generally purchased by individuals and families who are ineligible for public programs or employer-based health plans. These include employees whose employers do not offer health benefits, employees such as part-time or seasonal workers who do not qualify for their employers plan, self-employed individuals, and the unemployed, including retirees. Since Medicare covers most of those over age 65 and those who have been disabled for two years, these individuals are generally not covered in the individual health insurance market. 6,7 Approximately 38,000 Mainers were covered by individual health insurance as of September 30, 1999 8 , of which approximately 3,500 were covered by HMOs. 9 However, the future viability of the individual health insurance market in Maine is uncertain. The purpose of this paper is to explore options to improve the viability of this market.6 The Medicare supplement market is a separate insurance market. 7 Due to guaranteed renewability requirements, those who purchase individual health insurance prior to Medicare eligibility can keep it even after they are on Medicare. Those with substantial prescription drug needs are particularly likely to do so because of the limited pharmaceutical benefits available in Medicare supplement plans. These individuals tend to have high claim costs and therefore the effect is to increase rates for other individuals due to modified community rating. The law was amended in 1997 to permit carriers to rate Medicare-eligible individuals separately, but in 1999, the effective date of this amendment was delayed until July 1, 2000.
8 Survey of carriers by the Bureau of Insurance.
9 Annual Statement data.
Rates for individual health insurance in Maine have risen steeply in recent years, particularly in 1998 and 1999. For indemnity coverage, 10Blue Cross Blue Shield of Maine (BCBSME), the dominant carrier in this market, has doubled its rates since individual health insurance reforms took effect in December of 1993, and has increased rates 39% in the last two years. Individual HMO rates have increased even faster than indemnity with some rates more than doubling over the last two years. 11 As a result of these increases, fewer people are able to afford individual coverage. Many have switched to "catastrophic" health insurance plans with very high annual deductibles. BCBSMEs $5,000 annual deductible plan is currently its most popular plan. However, recent rate increases on this plan have caused some individuals to drop coverage entirely. This not only results in more people becoming uninsured, it also causes a deterioration of the average health of the remaining pool of risks. This is because those who have health problems and utilize their insurance benefits are much less likely to drop insurance coverage than are healthy individuals. The deterioration of the pool causes further rate increases, leading to more people dropping coverage, etc. This can result in a collapse of the individual health insurance market, sometimes called a "death spiral."
10 For purposes of this paper, indemnity coverage means medical coverage other
than an HMO plan. Indemnity plans generally allow choice of provider and do not require
referrals from a primary care provider in order to access specialty care. Indemnity plans
typically have an annual deductible and percentage coinsurance.
It is difficult to say whether Maines individual health insurance market is currently in a death spiral. A death spiral is easier to recognize after it has occurred than when it is in its early stages. The market for individual HMO coverage is of particular concern due to both the high level of rates and the steep rate of increase. In the larger indemnity market, rate increases have been less dramatic, but a death spiral is at least a potential problem, and even if the market were to stabilize, it would be at a level that many individuals would be unable to afford.
While affordability is the immediate problem, availability is also a concern. Since HMOs are required by state law to offer individual coverage,12 HMO coverage is readily available to those who can afford it. However, for those wanting indemnity coverage, the choice of carriers is limited to only two.13
12 Title 24-A M.R.S.A. § 4204(2-A)(N).
Affordability and availability problems in individual health insurance are not unique to Maine. Other states have had similar problems. For example, New Hampshire was nearly left with no carriers in the market when Blue Cross Blue Shield of New Hampshire announced it was withdrawing from the individual market. The New Hampshire Insurance Department took emergency measures to preserve the market. Under the system adopted through emergency rule-making, and later by statute, all group health insurance and excess loss carriers in New Hampshire are assessed an amount (36 cents monthly in 2000) per covered person. Funds are distributed to individual carriers according to a formula designed to compensate those with large losses.
The state of Washington has faced similar availability problems. In that state, commercial insurers have left and indemnity coverage has disappeared. In some counties, no private individual coverage at all is available. Kentucky has also experienced limited availability of individual health insurance. The situations in both of these states and their causes are described in Appendix C.
This table shows the increase for each carrier since the coverage was first offered, and also the increase over the last two years. Current rates for each plan are also shown, as is the number of members covered. It should be noted that those with the largest rate increases do not necessarily have the highest rates.
Rates shown are community rates for the Standard and Basic plans, which all carriers in the individual and small group markets are required to offer. 14 These plans are outlined in Appendix D.
14 Title 24-A M.R.S.A. § 2736-C(8), Title 24-A M.R.S.A. § 2808-B(8), and Bureau of Insurance Rule 750.
* Indemnity rates shown are for $500 deductible. $250, $1,000 and $1,500 deductibles
are also available.
There are several factors that may be contributing to the problems in Maine's individual health insurance market. However, it is not clear to what extent, if any, each factor is causing the problems.
After a brief hiatus, health care costs are on the rise. Prescription drug costs in particular are increasing rapidly. This is resulting in rate increases on group coverage as well as individual coverage, although the group increases are not nearly as large. A Hewitt Associates survey shows an average 1999 increase of 7.8% for employer plans compared to annual increases averaging only 2.1% in the previous four years.15
15 Hewitt Associates, LLC Company Press Release, November 9, 1999.
As a percentage of Gross Domestic Product, national health care expenditures rose steadily from 5.1% in 1960 to 13.7% in 1995. They then decreased slightly to 13.5% in 1997, but have increased again to an estimated 13.9% in 1999 and are projected to reach 16.2% by 2008.16
16 U.S. Department of Health and Human Services, Health Care Financing Administration, Office of the Actuary.
Different payors pay different prices to hospitals and other health care providers. Government programs such as Medicare and Medicaid pay according to formulas established by law. Managed care plans pay based on contracts entered into with providers. Since in the aggregate, the provider needs a certain amount of revenue, lower payments by some payors can result in costs being shifted to other payors. In particular, recent changes in Medicare reduced the amounts that would otherwise have been payable to hospitals and other providers for services to Medicare beneficiaries.17This may have resulted in providers being less willing to accept contracts with managed care plans without higher reimbursement levels, and in higher charges to those who are not subject to contracted fees.
17 Balanced Budget Act of 1997.
HMOs were required to begin offering individual coverage on a guaranteed issue basis in 1995. Some HMOs underestimated the extent to which health care costs for this population would exceed costs in the group market. It took some time before HMOs had sufficiently credible experience to determine that their rates were inadequate. As a result, six of the seven HMOs had at least one rate increase of 25% or more in 1998 or 1999.
As noted in Section II, as rates rise, healthier individuals are more likely to drop coverage than are those with health problems, leaving a higher average level of risk in the remaining insured pool. One indication of a deteriorating risk pool in Maines individual health insurance market is that rates in the individual market are significantly higher than in the group market and, at least for HMOs, the disparity is growing. While the difference is partly attributable to administrative efficiencies in the group market, the major cause appears to be the difference in the risk pool (see Table B).
Comparison of Maine Individual Rates to Group as of 11/1/99
Rates are community rates for Standard plan for one person. Adjusted group rates are intended to reflect group claim costs but individual administrative expenses, which are higher than group. The adjustment assumes individual rates are priced at a 75% loss ratio and group rates are priced at an 85% loss ratio.
Since December 1993, carriers offering individual coverage have been required to accept all applicants, regardless of health status.18 As a result, healthy individuals who are uninsured and develop a health problem can buy coverage at any time. For those who have had no coverage in the prior three months, the carrier can exclude pre-existing conditions for the first year, but after that, full coverage must be provided. For those who have had prior coverage within the prior three months, full coverage is immediate.19 According to a study by Towers Perrin, guaranteed issue is the primary reason for the limited availability of individual indemnity coverage.20
18 Title 24-A M.R.S.A. § 2736-C.
The 1993 market reforms also restricted the extent to which carriers can vary rates based on age and other factors. While claim costs for a 60-year-old are about four times those for a 25-year-old, the rates charged can only be 50% higher. As a result, coverage is a "good deal" for older individuals, while younger individuals must pay more than would be justified based on their own claim costs.21 This results in the risk pool having a higher average age and therefore higher costs.22
21 This statement applies to younger and older insureds in the aggregate. It may
not be true for a given individual. A young individual with a serious health problem may
pay far less than his or her expected claim cost, while an older individual in very good
health may pay more than his or her expected claim cost.
It is possible that the individual health insurance market would attract more good risks if carriers marketed the products more actively. This could be accomplished through advertising, through increased commission scales, or by other means. Some carriers do not pay commissions to producers for selling individual coverage. Bureau of Insurance Rule 750 was amended in 1998 to require carriers to pay at least as high a percentage commission on individual coverage as on group coverage unless they have an approved alternative marketing mechanism. However, not all carriers are complying with this requirement.
Increased marketing efforts could attract poor risks as well as good risks. However, poor risks are more likely to seek out coverage in the absence of marketing than are good risks. On the other hand, to the extent increased marketing costs result in increased rates, there could be a disincentive for good risks to purchase coverage.
Some plan designs are particularly attractive to high-risk individuals, while others are more attractive to healthy individuals. Generally, high-risk individuals will choose more comprehensive benefits. Healthy individuals place more emphasis on cost and are therefore more attracted to policies with high deductibles and/or benefit limitations. This affects the market in two ways. First, there is a tendency for the market to become segmented, with high-risk individuals in richer plans. If each plan is priced based on its own experience, the difference in rates will be greater than would be actuarially justified based only on the difference in benefits and the rates for the richer plans can become unaffordable. Second, the range of plans available in the market may affect the overall risk level in the market. For example, if only very comprehensive plans are available, healthy individuals are less likely to purchase coverage.
All carriers are required to offer certain standardized plans, as described in Appendix D. They may offer additional plans if desired. In the indemnity market, the design of these plans does not seem to be a factor contributing to increasing rates. However, some HMOs have asserted in the past that the Standard plan required to be offered in that market had unusually rich benefits, particularly for prescription drugs, and was a magnet for high-risk individuals. In response to these concerns, the Bureau of Insurance increased the drug deductibles from $3 for generic drugs and $6 for brand name drugs to $10 for generic drugs and $20 for brand name drugs when Rule 750 was amended in 1998. Nonetheless, the prior levels may have contributed to past rate increases and if the plan did attract high risks into the pool, residual effects may last several years. Also, some HMOs believe that the current plan design is still too comprehensive.
Some insurance producers have also argued that both of the standardized plans are too expensive for many individuals and a third option is needed. Unlike the indemnity market, where carriers have offered high-deductible plans in addition to the Standard and Basic plans, HMOs have offered only the two standardized plans. In recent years, this may be in part due to a provision of Rule 850 requiring all HMO plans to be at least as comprehensive as the Basic plan. However, even before Rule 850 was adopted, HMOs did not offer alternative plans in the individual market. Pursuant to legislation enacted in 1999,23 the Bureau is currently working on a new rule that will supersede this provision of Rule 850 and set a lower minimum standard for HMO benefits.
23 1999 Public Law Chapter 223, "An Act to Clarify Basic Health Care Services to be Offered by Maine Health Maintenance Organizations."
Mandated benefits are often mentioned as a cause of high health insurance rates. It is important to point out that individual plans are currently exempt from the most costly mandates mental health and substance abuse. The mandates that do apply to individual plans are estimated to constitute at most 2.9% of premium. The largest components of this figure are chiropractic care (1.0%), contraceptives (0.8%), and prostate cancer screening (0.7%). A full list of existing mandates and approximate costs are set forth in Appendix A.
In conformance with federal law,24 Maines Bureau of Medical Services operates a Private Health Insurance Premium Program25 under which it pays health insurance premiums for some Medicaid enrollees when it is cost-effective to do so. The requirement that it be cost-effective means that Medicaid enrollees are only placed in this program if their claims are expected to exceed their premiums. Generally, these are enrollees with serious medical conditions. The result is more high-risk individuals in the individual health insurance market.
24 United States Code, Section 1396a(a)(25)(G) and 1396e.
The Bureau of Medical Services indicates that it does not actively seek private insurance coverage for Medicaid enrollees, but will evaluate this option when the enrollee requests it. As of December 1999, there were 74 enrollees in this program of which 12 had individual coverage, with the remaining 62 under group plans.
The following are some possible measures to address Maine's individual health insurance market, with corresponding advantages and disadvantages. These proposed solutions are aimed at reducing the disparity between the costs of group and individual health insurance coverage, at increasing the range of coverage available in the individual market, or both. Measures to address the broader problems of the overall costs of health insurance and health care are beyond the scope of this paper.
As discussed above in Section III, Part 4, rates in Maine's individual health insurance market are significantly higher than in the group market and, for HMOs, the disparity is growing. Because employers heavily subsidize group coverage, low-risk employees are much more likely to participate in employer-sponsored plans than are low-risk individuals in the individual market. Also, employees in group plans are generally at least healthy enough to be working, although their dependents may not be. This may not be true in the individual market where retirees or unemployed individuals may purchase coverage regardless of health status.
As a result, low-risk purchasers of individual coverage bear a proportionately greater burden in subsidizing high risks than do purchasers of group coverage. Therefore it may be more equitable to spread the risk evenly over the entire health insurance market rather than segmenting the market into group and individual. This could be achieved through a risk adjustment mechanism in which carriers with lower-than-average risk are assessed in order to fund the "excess" costs of carriers with higher-than-average risk.
Full integration of the market in this manner does not appear feasible. First, employers would likely view this approach as a subsidy from them to the individual market. Philosophical and political considerations aside, any system that significantly increased the cost of coverage for employers would be (i) an incentive for employers to reduce or drop coverage, (ii) an incentive to relocate to another state, and (iii) a disincentive to new employers locating in Maine.
Partial integration, with a cap on the increment to group premiums, might mitigate these drawbacks. By setting the cap at a relatively low level, it would not be a significant incentive for employers to drop coverage or leave the state. As an example, if the group market is 16 times larger than the individual market,26 then an assessment on group premiums capped at 1% would enable a 16% rate reduction in the individual market. Also, capping the transfer of funds from the group market to the individual market at a level far below the level that would be needed to fully equalize the risk pools would make it unnecessary to determine the actual differences in the risk pools for each carrier, thereby simplifying the mechanics of the system.
26 This is an estimate based on limited available information and may be inaccurate.
While the above example uses an assessment based on premium, this would not be the best method because an assessment on group premiums would not affect self-insured employers. This would be inequitable and would provide additional incentive for employers to self-insure. A system recently adopted in New Hampshire avoids this problem by basing the assessment on the number of covered lives and applying it to stop-loss carriers as well as group carriers.27 New Jersey and New York also have systems that partially integrate the group and individual markets. Massachusetts requires all group carriers to offer individual coverage (similar to Maines HMO law) but does not require any merging of the risk pools. Appendix B provides further information about the systems in all four of these states.
27 Although at least one federal circuit court has upheld a similar law, it remains an open question whether such an assessment mechanism would be preempted by ERISA.
28 Bureau of Insurance Rule 281.
A risk adjustment mechanism within the individual health insurance market alone would be possible. A risk adjustment mechanism shifts premium dollars from plans with relatively healthy or young enrollees to plans with sicker or older members. This could be based on demographic factors, on certain high-risk health conditions, or on some other factor. Risk adjustment would help ensure an even distribution of risks among carriers in the market.
Under an assigned risk pool, carriers could initially reject high-risk individuals, who would then be assigned to a carrier. Each carrier would be assigned a number of risks based on their market share. This is essentially a form of risk adjustment mechanism and subject to the same comments noted above. This would help ensure an even distribution of risks among carriers in the market, although this does not currently appear to be a problem.
As discussed in section III, the 1993 reforms may have had a role in increasing the number of high risks and reducing the number of low risks in Maines individual health insurance market. However, there is no empirical evidence to support this or to quantify the effects, although there are studies based on the experience of other states. For example, the Wake Forest University Health Insurance Market Reform Study30 reviewed data from several states and reached the following conclusions:
30 This study can be viewed at http://www.phs.wfubmc.edu/insure/.
It should be noted that this study was based on experience through 1997, when reforms had been in effect only a few years. During that period, rate increases were not as substantial as those we have seen more recently.
Maines individual market reforms have been popular with the Legislature and the public, and we would not support major changes in these laws in the absence of clear evidence that the reforms are causing major problems. However, some minor changes may be desirable. One possibility would be to relax or eliminate the restrictions on age rating. Maine is one of very few states that imposes such restrictions. Another possibility would be to allow limited rate variations based on health status. For example, allow a "good health discount," based either on a period of time with no claims or on health factors such as no smoking, no obesity, etc.
Currently, small group carriers that do not offer individual coverage are required to offer group coverage to self-employed individuals even if they have no other employees. This is called a "one-life group." Federal small group laws31 apply only to employers with two to fifty employees and do not require group coverage for one-life groups. Due to the potential for adverse selection, one-life groups on average have higher claim costs than larger groups. Because of this, as well as increased administrative expenses, rates are often higher than for larger groups, though not as high as rates for individual coverage. On average, these individuals are healthier than are those in the individual market. If these individuals bought individual coverage rather than group, the average risk in the individual market would be improved. Those already covered by group policies could keep that coverage as it is guaranteed renewable. However, those purchasing coverage in the future could be required to do so in the individual market.
31 Health Insurance Portability and Accountability Act of 1996 (HIPAA), U.S. Public Law 104-191.
32 Carriers vary considerably in the amount, if any, by which their one-life
group rates exceed their rates for larger small groups.
One-life group coverage is generally more affordable than individual coverage and a greater choice of carriers is available. Availability of this type of coverage could be increased by requiring all small group carriers to offer it, even if they offer individual coverage. Another way to increase availability would be to liberalize the standards for determining who is "actively engaged in a business,"35 thereby making more individuals eligible. A related issue is the difference in premium rates between a one-life group and larger groups. Maines small group law, unlike some other states, allows rates within the small group market to vary by group size.36 The additional premium for one-life groups is as high as 40% for some carriers. The rationale for this is the greater adverse selection and greater administrative costs associated with one-life groups. Eliminating rate variations by group size would lower costs for sole proprietors, but at the expense of other small employers. An intermediate approach would be to allow rate variations by group size only when justified by cost variations.
35 This is part of the statutory definition of an eligible group [Title 24-A
M.R.S.A. § 2808-B(1)(D)].
One way to improve availability and increase the range of options in the individual health insurance market would be to create an incentive for group carriers to write individual coverage, similar to the New Jersey approach (see Appendix B). Group carriers in New Jersey can avoid the assessment to subsidize losses in the individual market by writing their proportionate share of individual business.
Another approach would be to require all group carriers (or all small group carriers) to offer individual coverage, similar to what is already required of HMOs. Massachusetts adopted this approach and only two carriers exited the small group market to avoid the requirement. However, many carriers have not actually sold any individual policies.
Many states have high risk pools for those unable to obtain health insurance elsewhere. Maine had such a program from 1987 to 1994, but it was phased out when guaranteed issue laws were enacted. Creating a new pool could remove some high risks from the individual market. However, criteria would need to be established as to when a carrier could reject an individual, thus making him or her eligible for the high risk pool. To allow carriers to reject any individuals considered to be unfavorable risks and send them to the pool would represent a major retrenchment in the reform laws and would therefore be unacceptable to many.
Another concern with a high risk pool would be funding. Rates in a high risk pool are generally higher than in the commercial market, but are not self-supporting. Some states assess insurers to make up the shortfall. However, most of these states allow a premium tax deduction equal to the assessment, so it is in effect state-funded. If no tax deduction is allowed, the burden is placed on the insured population while self-insured employers escape the assessment. As discussed above, it is possible to design an assessment that indirectly charges these employers through their stop-loss coverage. Maines former pool was initially funded by an assessment on hospitals on the theory that the cost would be passed on to both insured and self-insured groups. Although the assessment was a small fraction of a percent of hospital revenues, the hospitals opposed the assessment and succeeded in having it replaced by general fund revenues. The number of individuals in the pool was capped at a low level37 due to the scarcity of funding.
37 The cap was changed from time to time, but was in the range of 300 to 600.
38 Most high risk pools set premiums at 150% of the average standard rate in the individual market.
A purchasing alliance (also called a purchasing cooperative or purchasing pool) is an arrangement for purchasing health care for members. Alliances typically contract with a variety of health plans (insurers, health maintenance organizations, etc.), achieving cost savings through volume purchasing. Employees of employers participating in the alliance can choose among the available health plans. While some alliances allow only employers as members, others include individual members.
In 1995, the Maine Health Care Reform Commission (MHCRC) presented the Legislature with recommendations for incremental reform of the current health insurance system. The creation of a purchasing alliance formed the centerpiece the MHCRC proposal. One factor often cited as key to the success of a purchasing alliance is a critical mass of members. Without a large number of members, there is little incentive for health plans to negotiate favorable rates for the alliance. For this reason, MHCRC proposed that state employees form the core of the alliance. However, this feature of the proposal was not enacted. Instead, the legislation permitted formation of private purchasing alliances.39 To date, none have been formed.
39 Title 24-A M.R.S.A. Chapter 18-A.
Formation of a public purchasing alliance could result in more affordable coverage available to individuals. Alternatively, there may be ways to make formation of private purchasing alliances more attractive.
Creation of new programs or expansion of existing programs that provide or finance medical care could reduce the number of uninsured individuals. Such programs can be categorized as two types those that target lower-income individuals who cannot afford health insurance, and those that target individuals with serious health problems. While programs for the low-income category are socially worthwhile, they would have little impact on the individual health insurance market and are therefore beyond the scope of this paper. Programs targeting those with serious health problems, on the other hand, could reduce the number of high risks in the individual pool.
A state subsidy to help individuals purchase coverage would increase the number of low-risk individuals in the individual health insurance market, thereby potentially reducing premiums even for those who are not subsidized. It could take the form of a direct subsidy based on income, a tax deduction or tax credit, or some other form.
Currently, a partial tax deduction is available for premiums paid by self-employed individuals. Under federal law,40 the portion of the premium that may be deducted has increased from 45% to 60% in 1999 and will further increase to 70% in 2002 and to 100% in 2003. There is federal legislation41 that has passed the House and the Senate, but has not yet come out of conference committee, that would accelerate the 100% phase-in. Under Maine law, the deductible portion currently remains at 45% due to legislation enacted in 1999.42 A Governors bill that would restore conformity with federal law is currently pending.43
40 Tax and Trade Relief Extension Act of 1998.
Premiums paid by individuals who are not self-employed are not tax-deductible under federal or state law unless the individual itemizes deductions and has medical expenses in excess of 7½% of income.
A Maine law enacted in 1998 provides for a limited tax credit for small employers that provide health insurance for dependents of low-income employees.44 This would generally affect group rather than individual coverage.
44 1997 Public Law 775.
It is not possible to precisely measure the impact of mandated benefits. However, it is possible to estimate an outside limit, the maximum possible increase in health insurance premiums resulting from mandates. These estimates are based on the estimated portion of claim costs that mandated benefits represent, as detailed below. The true cost impact is less than this for two reasons:
While both of these factors reduce the cost impact of the mandates, we are not able to estimate the extent of the reduction at this time. Following are the estimated claim costs for the existing mandates without the reductions:
These costs are summarized in the following table:
45 This has become a standard benefit that would be included regardless of the mandate.
New Hampshires system was first instituted on an emergency basis in 1997 when Blue Cross Blue Shield of New Hampshire, then the only significant writer of individual business in the state, withdrew from the market. It has since been incorporated into statute.
All group health insurance and excess loss carriers are assessed an amount (36 cents monthly in 2000) per covered person. Funds are distributed to individual carriers according to a formula designed to compensate those with large losses.
The system is administered by an association composed of all group and individual carriers.
New Jersey allows only standardized plans to be offered. There are five standardized indemnity plans and one HMO plan. All group carriers must either write their proportional share of individual business or share in the individual line losses of other carriers. There is a 75% minimum loss ratio for individual health. The system is administered by a state agency.
New York has a complex risk adjustment mechanism based on high-cost medical conditions. Our understanding is that small group carriers on average pay in more than they receive while the opposite is true for individual carriers, resulting in a subsidy from small group to individual.
Massachusetts requires all small group carriers to offer individual coverage (similar to the Maine requirement for HMOs) but there is no subsidy from group to individual each segment can be rated based on its own experience. While carriers are required to offer individual coverage, many carriers have not actually sold any individual policies.
Some states have experienced availability problems for a variety of reasons resulting from reforms of their individual health insurance markets. New Hampshire was discussed in Appendix B. This Appendix C describes problems experienced by two other states Washington and Kentucky.
Even before enactment of market reforms in 1993, Washingtons individual health insurance market was dominated by regional Blue Cross and Blue Shield plans, HMOs, and county medical societies. However, subsequent to reform, indemnity coverage through commercial insurers disappeared entirely. Factors likely contributing to this were guaranteed issue, a three-month limit on pre-existing condition exclusions, and a requirement that all plans issued after 1995 be HMO or point-of-service (POS) plans.46
46 This requirement was repealed in 1995.
More recently, a number of managed care plans have also suspended the sale of individual coverage. Reasons cited include large losses and inability to get rate increases approved by the Insurance Commissioner. Reasons cited for the large losses include the three-month limit on pre-existing condition exclusions and adverse selection due to benefit design. As a result, individual health insurance is unavailable through private insurers in several counties in the eastern part of the state. Coverage is available through two state programs: the Basic Health Plan and the Washington State Health Insurance Pool.
The Basic Health Plan was created under the 1993 reforms to provide subsidized coverage for low-income workers. It is also available at an unsubsidized rate for those who are above the income limit. The unsubsidized rate increased by 62% in 1999. This plan has been subject to adverse selection in part because it is the only plan in the state that provides maternity benefits.
The Washington State Health Insurance Pool is a high-risk pool available to those unable to get coverage elsewhere.
Kentucky is a rural state where managed care has not gained a significant foothold. In 1994, Kentucky enacted a health reform bill that included individual health insurance market reforms. These included guaranteed issue, modified community rating, and standardized benefit plans. The reforms were controversial and several insurers left the state.
In 1996, the laws were amended to increase the permitted pre-existing condition exclusion for six to twelve months and to increase the permitted rate variations for age, gender, occupation, and healthy lifestyles. Despite this, carriers continued to leave the market. Reasons cited, in addition to guaranteed issue, included standardized benefits and a difficult rate approval process, including mandatory hearings for increases more than three percentage points above the increase in the Consumer Price Index. By 1997, individual coverage was available only from Anthem Blue Cross Blue Shield and Kentucky Kare, the self-insured plan for state employees that sold coverage to individuals through a purchasing alliance created by the 1994 reforms.
In addition to availability concerns, the possibility of a death spiral was feared. The 1996 amendments exempted associations from the individual market reforms. This caused a segmentation of the market with the better risks turning to associations for coverage. In 1998, the market reforms were repealed and replaced by a less ambitious "Guaranteed Access Plan, " which permits rate variations based on health status within limits. There are still only two carriers in Kentuckys individual health insurance market: Anthem Blue Cross Blue Shield and Humana, which offers HMO coverage in areas of the state where it has a network and indemnity coverage elsewhere.
Last Updated: January 21, 2014
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