REVITALIZING THE SMALL EMPLOYER GROUP HEALTH INSURANCE MARKET IN TEXAS A Practical Approach
Mayor’s Office City of Houston August 2008
Elena M. Marks, J.D., M.P.H. Director of Health and Environmental Policy Phyllis Griffin Epps, J.D. Assistant Director of Health Policy Aasim Saeed, B.A. Health Policy Intern
EXECUTIVE SUMMARY This paper explores opportunities to increase the viability of the commercial market for small employer group health insurance in Texas and thereby reduce the number of uninsured Texans. Texas has the highest percentage of uninsured residents in the U.S., and the majority of them work full time. Many of the uninsured work for the three-quarters of Texas businesses that are considered “small employers” (fewer than 50 employees) for health insurance purposes. While the rates of insurance coverage for Texans in public programs (such as Medicaid and CHIP) and large employer group products are slightly lower than the national averages, the rate at which small employers purchase group health insurance lags the national average by 22.5%. This is a significant disparity that must be addressed. The small employer group health insurance market in Texas is characterized by financially sound carriers offering many products that yield high margins. Recent data collected by the Texas Department of Insurance (TDI) show that the margins on small employer products average 36.3% and that half of the companies reporting data had margins in excess of 35%. This market appears extremely robust for carriers, but based on a 33.6% uptake by small employers, the market is dismal. The regulatory framework in Texas results in a market that does not meet consumers’ needs. TDI reviews proposed premium rates to ensure that they are high enough to cover anticipated claims, but unlike its review of proposed property and casualty rates, the agency does not review premiums for excessiveness. In fact, the agency acknowledges that it does not believe that this issue is within its purview. TDI’s inability to collect and publish data regarding product performance is an additional barrier to consumer uptake. The agency’s use of “rate bands” rather than “community rating” to regulate the variation in rates charged to different consumers for identical products further disadvantages small employers. This paper proposes the following solutions: • • • • • Increase transparency and accountability by requiring insurance companies to report data regarding premiums, claims, and medical loss ratios. Charge TDI with the responsibility of considering market penetration and consumer uptake when evaluating the strength of the small employer market Require TDI to consider reasonableness/excessiveness of premiums in the small employer market Set a minimum medical loss ratio requirement or, in the alternative, require carriers to submit standardized medical loss ratio data to TDI Adopt community rating or adjusted community rating in order to bring more small employers into the group health insurance market
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CURRENT STATUS OF THE SMALL EMPLOYER GROUP HEALTH INSURANCE MARKET IN TEXAS Texas has the highest percentage of uninsured persons in the U.S., and the majority work full time. Texas leads the nation in the percentage of nonelderly adults without health insurance, and is second only to California in the overall number of uninsured.1 Texas also ranks first in the percentage of uninsured nonelderly persons who live in a household with at least one full-time worker.2 In fact, 68% of nonelderly uninsured adults in Texas work full-time for at least part of the year.3 The cost of care for uninsured persons is a factor in the increase in healthcare costs overall. Uninsured patients pay approximately 10% of the actual costs of their care.4 Institutions that provide care without compensation must increase charges billed to persons with private insurance. Data indicate that the higher the rate of uninsured residents in a community, the higher the average in premiums charged to persons with private insurance.5 Three-quarters of Texas businesses are small employers, yet uptake of group health insurance among small employers lags the national average by 22.5%. Nearly three-quarters (72.4 %) of private-sector businesses in Texas are small businesses, or firms with fewer than fifty employees.6 In 2005, small businesses employed 24.25 % of private-sector employees in Texas, with the largest proportion employed at firms with fewer than ten employees.7 Small businesses consist of three subgroups: firms with 25 to 50 employees; firms with 10 to 24 employees; and firms with fewer than 10 employees.8 Over half of private-sector small businesses in Texas have fewer than ten employees.9
The Henry J. Kaiser Family Foundation (Kaiser), Health Insurance Coverage of Adults 19-64 (20052006)(hereinafter “Coverage of Adults”), available at http://www.statehealthfacts.org. The rate of uninsured among adults in Texas is 30 %, compared to 20 % nationally. Id. 2 The Henry J. Kaiser Family Foundation, Uninsured Rates for the Nonelderly by Family Work Status (20052006)(“Family Work Status”), available at http://www.statehealthfacts.org. 3 Kaiser, Coverage of Adults, ibid. at note 1; The Henry J. Kaiser Family Foundation, The Uninsured: A Primer (2007). 4 Greater Houston Partnership Public Health Care Task Force Report (2004), available at http://www.houston.org/pdfs/PublicHealthTaskForce.pdf. 5 eHealthinsurance, Inc., The Most Affordable Cities for Family Health Insurance (2004). 6 Agency for Healthcare Research and Quality (AHRQ), Medical Expenditure Panel Survey (MEPS) Table II.A.1.a (2005), available at http://www.meps.ahrq.gov/mepsweb/. Nationally, 75.4 % of private-sector establishments are firms with fewer than fifty employees. Id. 7 AHRQ MEPS Table II.B.1 (2005). Nationally, 27.86 percent of private-sector employees worked at small businesses. 8 See Table 1. 9 Ibid. at n. 6.
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TABLE 1: SMALL EMPLOYERS IN TEXAS 50 employees employees employees employees Percent of number of privatesector establishments by firm size10 Percentage of private-sector establishments that offer health insurance by firm size11 Average total single premiums per enrolled employees12 54.2% 13.0% 72.4% 25.9% 52.6% 33.6% $4,608 $4,388 $4,270 $3,544 $4,065 18.1% 93.4% 5.2% 27.6%
Only a third (33.6 %) of small employers in Texas offered health insurance to employees in 2005. This rate is well below the national average of small employers who offered health insurance (43.4 %). Within the largest group of small businesses -- firms with fewer than 10 employees -- only a fourth (25.9 %) offered health insurance to their employees.8 Texas, the second most populous state, ranks near the bottom (41st) nationally in the percentage of small businesses that offer health insurance to employees.13 For many Texans who work in a small business, job-based health insurance is not an option because relatively fewer employers participate in the commercial market for small group health insurance. Rising health care costs disproportionately affect small employers. The cost of providing health insurance increases every year and consumes a greater portion of payroll expenses. Between 2000 and 2005, the national median cost of health insurance relative to payroll increased 43.5 % for small businesses with fewer than 25 employees.14 The smallest employers pay the highest average total premiums per employee enrolled in employee-only coverage.9 Small employers – firms with fifty or fewer employees -- spend the highest percentage of payroll on health insurance. The RAND Corporation reports that small businesses devote an average of 11 % of payroll to health insurance costs, compared to 7 % in large firms.15 In Texas, as in every other state, the very smallest businesses commit the greatest proportion of payroll to the cost of health coverage, pay higher average premiums for employee-only coverage, and require employees to contribute more toward the cost of coverage than their counterparts at large businesses. The average total family premium
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Id. AHRQ MEPS Table II.A.2 (2005). 12 AHRQ MEPS Table II.C.1 (2005). 13 U.S. Census Bureau, available at http://www.census.gov. 14 Christine Eibner (Kauffman-RAND Institute for Entrepreneurship Public Policy), The Economic Burden of Providing Health Insurance: How Much Worse Off Are Small Firms? (2008). 15 Id.
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charged to a small business in Texas was $ 10,970 in 2005, more than the national average of $10,632 and an 11.6 % increase from $ 9,831 in 2003.16 Small business employees in Texas absorb disproportionately more of the cost of health coverage compared to small business employees in other states. Employees enrolled in family coverage through a small business in Texas paid an average of 38.6 % of the total premium in 2005, the sixth highest average contribution in the country.17 According to a 2003 Texas Department of Insurance survey of the small employer market, most small employers cite affordability as the primary reason behind the employer’s decision not to provide health insurance. In its analysis of the uninsured in Texas, Code Red recommended that “modifications in insurance practices to further enhance small business coverage are essential to improving access to care and the overall health of the population”.18 Greater availability of affordable employer-based coverage in the small group health insurance market will decrease the number of working adults without health insurance and lessen the strain on the healthcare system used by insured and uninsured persons alike. Local and regional efforts to improve small employer uptake have not succeeded. Local and regional efforts to increase the number of small employers that provide health insurance have suffered due to disincentives built into the commercial market for small group health insurance in Texas. City of Houston’s Request for Proposals —2005 The City of Houston purchases health insurance on behalf of 67,000 employees, retirees and dependents. As such, it is one of the largest employer-based insurance customers in the Houston area. The City issued a Request for Proposals (RFP) for its health insurance needs in 2005 that included a number of questions regarding the proposers’ willingness to offer products that would assist in covering the growing number of uninsured persons in Harris County. The RFP described the City’s interest in increasing the number of Houstonians with health insurance with the issuance of reasonably priced products or programs directed to: (1) part-time employees of the City; (2) the general public, with products priced appropriately so that they are affordable to working families; (3) small businesses; (4) employers with plans in place that do not include all employees (e.g., parttime employees); and (5) businesses that partner with the City through contracts and grants issued by the City. Five companies responded to the RFP, including four of the largest health insurers in the Texas market. The respondents discussed their various existing offerings and the charitable efforts they had undertaken to support programs addressing the needs of the uninsured. Not a single company, however, offered to develop a new product or to modify an existing product in order to reach the populations described in the RFP. Only one of the companies agreed to consider any form of modified community rating, and none was willing to consider any sort of pooling arrangement outside of MEWAs or coops. The City had hoped to be able to consider the contribution of the companies to the problem of the uninsured in evaluating the proposals, but the remarkable unwillingness of
AHRQ MEPS Table II.D.1 (2003, 2005). AHRQ MEPS Table II.D.3 (2005). 18 Task Force on Access to Health Care in Texas, Code Red: The Critical Condition of Health in Texas (2006).
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any of them to offer any meaningful assistance rendered them indistinguishable from one another on this ground. Greater Houston Partnership’s RFP for Small Employer Products—2005 The Greater Houston Partnership (GHP) has also been at the forefront of tackling the problem of the uninsured. In 2005, following analysis of the role played by chambers of commerce in other communities, the GHP issued a RFP soliciting companies for the following variety of plans for small employers: (1) $5,000 deductible HSA-compatible HDHP (no co-payments or separate prescription drug program); (2) $2,000-3,000 deductible HDHP; (3) $1,000 - 1,500 deductible 80/60 PPO plan with office visit copayments and a drug plan; and (4) $500 - 1,000 deductible 90/60 or 90/70 plan, with office visit co-payments and a drug plan.19 The RFP also requested that the proposers provide information about rates, networks, and other features of each plan proposed. Not a single health insurance company responded to the request. There were four responses from other groups, all of which were brokers or agents. None of the proposers offered to develop a product. Two respondents offered to form co-ops, one proposed to sell individual policies that small employers could buy for their employees, and one was an employee leasing company that does not offer or sell insurance products. In short, the GHP was unable to generate any interest from the insurance industry in providing new, affordable products for small employers. Harris County Healthcare Alliance’s TDI Grant—2006 The Harris County Healthcare Alliance partnered with the Texas Department of Insurance (TDI) to implement a $400,000 grant from the federal Health Resources and Services Administration to develop a small employer health insurance product for Houston area small businesses. The Alliance solicited active participation in the project’s steering committee from representatives of local hospitals/health systems, physician groups, insurers, insurance brokers, legislators’ offices, and the Greater Houston Partnership. The Alliance obtained considerable amounts of consulting and research assistance, including information regarding benefit plan designs, actuarial assumptions and projections, and means of marketing small employer products. Based on this research, the Steering Committee developed two prototype benefit plans with support from the Milliman actuarial consulting firm; each was priced at an average premium of $150 per month per person. TDI and Alliance staff conducted 25 focus groups with Houston area small businesses and their employees during July and August 2006. Both plans were priced using a “modified community rating” system, which determines premiums based solely on the age and gender of each company’s employees. One of the plans provided significant coverage for primary and preventive care, somewhat limited inpatient hospital coverage, and lower deductibles, coinsurance and annual maximum. The other plan provided a large annual maximum benefit and greater inpatient hospital coverage, but included a higher annual deductible, higher coinsurance and out-of-pocket maximum. While the Committee had anticipated bringing only one product to market, feedback from the focus groups of small business owners indicated a preference for the latter, more catastrophic type plan, but focus groups of small business employees preferred the primary/preventive plan. Thus, the group
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HSA = Health Savings Accounts, HDHP = High Deductable Health Plans, PPO = Preferred Provider Organizations
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decided to offer a product with the dual options. The overwhelming majority (88 %) of the employers surveyed indicated a willingness to purchase the products even before the minor modification to the plan designs they suggested were incorporated. With the planning work for the product essentially complete, TDI and the Alliance prepared to issue a Request for Proposals (RFP) to small group carriers active in the Houston market who were willing to market and offer the product designed. An informational meeting with insurance carriers convened at TDI offices in December 2006, with every carrier active in the Houston small group market -- and even some not then active in the Houston market -- in attendance. The meeting produced a series of Questions and Answers that became an Appendix to the Request for Proposals that issued in February 2007. The Alliance received three proposals in response to its request. However, the initial proposals submitted were defective in that none provided a price quote for the products outlined in the request. Carriers provided quotes only on their existing products, which resembled to varying degrees the benefit plan designs outlined in the request. None of the carriers was willing to use the modified community rating strategy for pricing its products and all took issue with one or more of the design features, despite the fact that the products were designed with the same nationally recognized actuarial firm that most of them utilize. Nor did carriers offer creative, alternative means to create similarly priced programs, as encouraged in the RFP. When given an opportunity to modify their proposals and provide a quote for the products designed, only one firm agreed to do so. The Alliance spent several months negotiating with that carrier to try to reach agreement, but ultimately was unable to do so. HoustonHealthChoice.com—2008 In April 2008, the City of Houston launched a website, HoustonHealthChoice.com, to enable consumers, including small employers, to obtain and compare consumer-friendly, reliable information about health insurance products. The site contains information about individual, family and small employer products. Part of the objective of launching the site was to increase the purchase of products by families and small employers. These groups often lack access to reliable information about health insurance products. In developing the site, it was necessary to work with the carriers to understand their products so that the information could be presented as completely and accurately as possible, including price information. The City had significant difficulty obtaining pricing information about small employer products. Ultimately, the carriers provided broad ranges of pricing information. The lack of transparency in the pricing of small employer products impedes the City’s attempt to promote access to these products. The small employer group health insurance market in Texas is characterized by financially sound carriers offering many products that yield high margins. TDI’s primary role in regulating the insurance industry is to ensure that companies offering products for sale are solvent and can pay for claims made under the policies sold.20 Within
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Texas Department of Insurance/Office of Public Insurance Counsel, Sunset Staff Report, May 2008 available at http://www.sunset.state.tx.us/81streports/tdi/tdi_hm.pdf .
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this very narrow definition, the agency is successful. TDI does a commendable job in making certain that many products are on the market and that those companies doing business in Texas have the financial wherewithal to stand behind their products. The small group health insurance market in Texas is one of the largest, if not the largest, in the nation. According to TDI, as of January 2008, there were 47 companies offering hundreds of small employer products.21 The largest carrier in the small group market in Texas – United Healthcare – has a 16 % market share, significantly below the national median of 43 %.22 The five largest carriers have a combined market share of 37 %, which further indicates the competitiveness of the marketplace.23 Data regarding premium and loss experience in the small employer group health insurance market suggest that Texas carriers enjoy solid margins. For carriers that responded to a TDI survey on the subject, the margin beyond which premiums collected exceeded claims paid in 2006 averaged 36.3%, with half reporting margins in excess of 35% .24 For the preceding three years, the average margins trended upward from 36.5 % in 2003 to 41.4 % in 2005.25 Nationally, the health insurance industry is profitable. Each of the five largest publicly traded managed care organizations reported profit margins in each of the past several years. According to one study, medical loss ratios (the percentage of premium money that is spent on reimbursement to providers for rendered health care services) fell in 2007, meaning that insurers spent fewer premium dollars on health care costs. In other words, insurers are spending less on reimbursement for medical care at a time when the cost of health insurance coverage to employers and employees is higher than ever. At least one analysis suggests that the difference between ever-higher insurance premiums and lower medical loss ratios appears in the profits reported by insurers each quarter.26 While the small employer group market is healthy and robust in that there are many products offered by financially sound companies, the market does not meet the needs of the majority of small employers. The lack of uptake by small employers—consumers—of the products should be considered by TDI as a failing of this market. However, TDI does not believe that its role includes ensuring that companies offer products that consumers can and will purchase. As the Sunset agency staff noted in a recent report, “the extent to which the State, and TDI, as the agency that regulates insurance, should be involved in ensuring that companies offer fair, competitive, and affordable insurance products to all Texans remains
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Texas Department of Insurance, Listing of Companies Licensed to See Small Employer Accident and Health Coverage in Texas, available at http://www.tdi.state.tx.us/pubs/consumer/serglist.html. 22 TDI 2007 Annual Report – Part IV (2007)(based on 2006 Texas Written Premium with Percentage of Market Share). See U.S. General Accounting Office (GAO), Private Health Insurance: Federal and State Requirements Affecting Coverage Offered by Small Businesses (2005 update to 2003 report). 23 TDI 2007 Annual Report, ibid. 24 TDI, 2003-2006 Texas Group Accident and Health Insurance Surveys, Texas Small Employer Group Business: 2003-2006 Premium and Loss Experience. The average for the year reflects 29 carriers surveyed, of which 18 responded that collected more than $1 million in premiums. Id. 25 Id. 26 The Verden Group, Verden Report: Cost versus Profit in Managed Care Today (2007), available at www.theverdengroup.com.
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unclear.”27 The result is an environment in which a strong market refers to the economic well-being of industry and largely excludes the needs of consumers. The regulatory framework in Texas does not result in a small group insurance market that meets consumers’ needs. Texas’ rate-setting system does not protect small employer consumers against unreasonably high premiums. Insurance companies wishing to offer small employer health insurance products in Texas must file their proposed rates with TDI and, if TDI does not disapprove their proposals within a specified period of time, the rates go into effect. This system, often referred to as “file and use,” is used by many other states and is used by TDI in rate-setting for other insurance products. The success or failure of the system in managing a healthy market depends on the factors the agency considers when deciding whether or not to disapprove filed rates. When TDI reviews carriers’ proposed rates for small employer health insurance, the agency considers factors relating to whether the rates are high enough to cover the anticipated claims, but does not consider whether the rates are unreasonably high. The result is a market full of products that are priced so high that the uptake by small employers is among the worst in the country. In Texas, a small employer carrier must set rates within a class of business in a manner that assures that premium differences among health benefit plans for identical small employer groups vary only due to “reasonable” and “objective” differences in the design and benefits of the plans and are not due to the actual or expected health status related factors of the small employer groups that choose or are expected to choose a plan.28 Small employer health insurance carriers must develop a rate manual for each class of business.29 With few exceptions, the manual is the sole allowable basis for computing base premium rates and new business premium rates charged to small employers.30 Rate manuals are subject to approval by TDI, but modifications and rejections are rare.31 The Commissioner may reject a change to the rating method used in the rate manual for a class of business if the rating method is (a) not actuarially sound, (b) not appropriate to assure compliance with the Insurance Code, or (c) likely to produce differences in rates charged for each small employer health plan that are not “reasonable” or reflect differences in plan design that are not “objective.”32 Although the manual must illustrate the relationship between premium rates charged for each plan in a single class of business, the rules that govern review of rating methods and other reporting requirements do little to
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TDI/Office of Public Insurance Counsel, Sunset Staff Report, May 2008. 28 TAC Rule § 26.11 (c). 29 28 TAC Rule § 26.11 (a). The manual specifies the rating method, including risk characteristics and all other factors considered by the insurer in setting base premium rates and new business premium rates. The rate manual also describes the method of allocating administrative expenses to plans in that class of business. 28 TAC Rule § 26.11 (c). 30 28 TAC Rule § 26.11(a). 31 The carrier must notify TDI of any proposed changes to the rating method used in the rate manual pursuant to a “file and use” system. The carrier must file notice of the change at least 60 days before the proposed date of effectiveness; the carrier may presume approval unless the Commissioner disapproves the filing before the expiration of 60 days from the date of filing. Id. 32 28 TAC Rule § 26.11 (b).
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restrict the insurer and nothing to account for excessive profit or harmful effect on market competition. Actuarial soundness is a mechanism many states, including Texas, use to control the overall price of health insurance by ensuring that the calculation of premium rates rests on objective and appropriate criteria. All premiums must be actuarially sound, which means that insurers must adhere to specific standards ensuring that premiums can cover losses and that the plan has adequate financial reserves. When filing proposed changes to a rating method, the insurer must include a “certification from a qualified actuary that the new rating method would be based on objective and credible data and would be actuarially sound and appropriate.”33 This assures that the rates are high enough, but does not address the issue of excessiveness. The property and casualty insurance market also uses a “file and use” system for ratesetting. However, unlike the review process conducted by TDI in the small employer health insurance context, TDI disapproves property and casualty rates that are “excessive.”34 TDI’s review of the rates and fees proposed by property and casualty carriers specifically includes a review of the profitability of the product and guards against potentially excessive premiums. TDI, which does consider margins and profit/cost ratios in the property and casualty market, does not acknowledge the regulation of excessive profit margins in the group insurance industry as part of its purview. The result is a state regulatory agency that implements policy to ensure a strong and robust market for small group health insurers, but fails to protect consumers by ensuring diverse products within that market, including products that are affordable to small employers. Texas’ use of “rate bands” rather than “community rating” to regulate the variation from base rates for premiums charged to different consumers of identical products disadvantages small employer consumers. Texas is one of 37 states that use “rate bands” to limit the variation of premiums. Rate bands limit the degree to which premiums may vary within a class of business or between rating periods. The current rate setting structure in Texas allows the small employer insurance industry to use medical underwriting and other rate factors that favor the industry and raise the price of products, thereby reducing the number of small employers willing to purchase group health insurance.35 Among the 37 states that regulate small employer premiums with rate bands, Texas ranks near the bottom in terms of consumer uptake. In states that use rate bands, premium rates for small employers are subject to regulations that limit variation from the index rate. The index rate for a class of business is the average of the base premium rate and the corresponding highest premium rate for the preceding rating period as reported statewide.36 The base premium rate is the lowest premium rate
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28 TAC Rule § 26.11 (b)(1)(D). 28 TAC Rule § 5.9332 (e). 35 In fact, state regulations expressly allow “cost containment” practices, including measures that facilitate insurers’ efforts to control medical loss ratios. 28 TAC Rule § 26.21. 36 Tex. Ins. Code, Tit. 1, Art. 26.02 (13); 28 TAC Rule § 26.1 (25).
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that can be charged, under a rating system, to small employers with similar case characteristics within a class of business.37 After setting base rates, insurers in Texas may adjust premiums based on geographic area of residence, age, gender, industry classification, and the number of employees and dependents.38 Insurers may not use the health status of a firm’s employees or dependents to determine whether to issue coverage, but may adjust premium rates based on health status and other risk characteristics of the group once the policy issues.39 Insurers use the health status of the entire group to calculate the “risk load,” the additional percentage above the base premium rate that is charged to the employer to reflect risk characteristics of the group.40 The risk load may increase no more than 15 % from the previous rating period.41 In Texas, premium rates may not vary from the index rate by more than 25 % for small employers within the same class of business.42 As a result, the total variation between the lowest and highest premium charged to a small employers in the same class of business is approximately 67 %. For example, if a small business class has an index rate that is set at $2000 annually, an insurer can charge $2500 for the most expensive plan and $1500 for the cheapest plan. This equates to a range of $1000 for two firms in the exact same class of business, a variation that allows insurers to offer a small business that employs elderly or high-risk populations plans that are 67 % more costly than the same plans when offered to comparable businesses with younger, healthier employees.43 The insurer can adjust the amount of the base by as much as 67 % based on health status, duration of coverage, or other characteristics related to the health status of the group.44 Thus, a small business with higher-risk employees and dependents may be charged several thousand dollars more per year than the small business with younger, healthier employees and dependents.45 Rate bands are only one of several approaches to regulating health insurance premiums. The states with the highest rates of small firm participation in the health insurance market employ one of two alternative approaches: “pure community rating” or “adjusted (modified)” community rating, both of which prohibit variations in premiums based on
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A class of business is a group of all small employers or else a subgroup of small employers defined by a difference in expenses for claims and administration. One carrier may establish up to nine separate classes of business, subject to the approval of the Commissioner. Tex. Ins. Code, Tit. 1, Art. 26.31 (b), (d). An employer cannot establish a separate class based on (1) participation requirements or (2) the fact that coverage is provided on a guaranteed issue basis or is subject to underwriting. Tex. Ins. Code, Tit. 1, Art. 26.31 (e), (f). 38 Tex. Ins. Code, Tit. 8, § 1501.210; Tex. Ins. Code Art. 26.36 (c). The highest rate factor associated with industry classification cannot exceed the lowest by more than 15%. Regarding the use of the number of employees and dependents of a small employer, the highest risk factor cannot exceed the lowest by more than 20%. 39 28 TAC Rule § 26.11; Tex. Ins. Code, Tit. 8, § 1501.205. 40 Tex. Ins. Code, Tit. 8, § 1501.205 (b). 41 28 TAC Rule § 26.11 (f). 42 Tex. Ins. Code, Tit. I, Art. 26.32 (c); Tex. Ins. Code, Tit. 8, § 1501.204 (2). The index rate for a rating period for any class of business may not exceed the index rate for any other class of business by more than 20 %. Tex. Ins. Code, Tit. I, Art. 28.32 (b); Tex. Ins. Code, Tit. 8, §1501.204 (1). 43 U.S. General Accounting Office (GAO), Private Health Insurance: Federal and State Requirements Affecting Coverage Offered by Small Businesses (2003 and 2005 update). 44 U.S. General Accounting Office (GAO), Private Health Insurance: Federal and State Requirements Affecting Coverage Offered by Small Businesses (2003 and 2005 update). 45 GAO (2005).
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health status.46 The pure community rating model requires consistency in premium rates charged to consumers in a defined community and prohibits variation in premiums based on health status, claims history, or age. Adjusted or modified community rating also prohibits variation based on health status or claims experience, but allows limited variation based on other factors.47 Nine of the ten states that employ one of the two alternative regulation systems have significantly higher rates of small business participation than the national average, including the seven highest rates in the country.48 Community rating systems are based upon the concept of spreading risks across large numbers of people. The elimination of medical underwriting standardizes, or greatly limits, the range in premiums charged to small employers and recognizes that as a practical matter, their risks are spread across all of the insured community within a carrier’s portfolio. Under the rate band system, a band that limits variation from the index rate to 25 percent can yield a total variation of 67 percent between the lowest and highest premiums charged to small firms in the same class of business. The wide variation tends to hit the smallest firms hardest because the small group size does not allow for much risk spreading. Many cite community rating as an effective mechanism for limiting premium variation and increasing small employer participation, especially for the smallest employers.49 In 2005, New Hampshire returned to adjusted community rating after an experiment with rate bands caused premiums for the smallest firms to increase dramatically.50
Kaiser, Small Group Health Insurance Market Rate Restrictions, 2007. As of recently, New York is the only state that employs pure community rating in the small group market. The nine states that employ modified community rating are Connecticut, Maine, Massachusetts, New Hampshire, Vermont, New Jersey, Maryland, Oregon and Washington. Three states and one district have no rating restrictions: Virginia, Pennsylvania, Hawaii and Washington, D.C. 47 This category includes states that adopted the National Association of Insurance Commissioners model, which allows geographical location, family composition and age, used in conjunction with rate bands. A few states allow insurers to vary deductibles and copayments. 48 AHRQ MEPS Table II.A.2 (2005). Data is from 2004 and 2005, during which time Vermont employed pure community rating in the small group health insurance market. 49 Families USA, Understanding How Health Insurance Premiums are Regulated, (Sept. 2006), available at www.familiesusa.org/assets/pdfs/rate-regulation.pdf. 50 Id.
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OPPORTUNITIES TO IMPROVE THE SMALL EMPLOYER INSURANCE MARKET IN TEXAS The preceding discussion highlights the elements of the current small group health insurance market and illustrates the need to increase insurance availability. The ensuing discussion presents various opportunities to lower the number of uninsured in Texas by revitalizing the market for small group health insurance. These recommendations presume that the true measure of a healthy and robust market must include market penetration and value for consumers as well as industry. The availability of products that small businesses will purchase should be of concern to TDI and the state because the scarcity of health insurance has severe repercussions for state and local economies, especially in the wake of a national health care crisis. Increase transparency, flow of information and accountability The state and consumers should have easy access to information that enables comparisons between and among products authorized for sale. In the case of small employer health insurance products, the available information is difficult to find and understand. The experience of the City of Houston in obtaining information for HoustonHealthChoice.com illustrates the opacity of this market. TDI’s own website struggles to convey meaningful information for consumers in this market, and is unable to provide the depth and breadth of information for small group products available for other products, including other health insurance products. Basic information regarding the pricing of small employer products is virtually impossible to obtain with any reasonable specificity, outside of working with a broker, agent or company to develop a quote for sale. The lack of access to readily available data on the use of premiums, including medical loss ratios and premium and loss experience, for small employer products is an additional obstacle to understanding the market. Carriers doing business in Texas should be required to disclose this information annually to TDI so that the agency can provide consumers with information about premium and loss experience for carriers in the market. Currently, TDI surveys willing carriers for information regarding premium and loss experience, but the agency has no established purview to require responses in the small group insurance market. Based on information available on the number of carriers active in the state, the response rate has averaged slightly better than 50 % over the past several years. If the agency is to achieve the same level of regulatory oversight for the small group health insurance industry that exists for the property and casualty industry, TDI must (1) require carriers to report annual experience and loss data and (2) publish these results in a manner that demonstrates the conventional or customary practices of the industry for both carriers and consumers, while still protecting the anonymity of the reporting carriers and encouraging industry cooperation. The lack of public access to premium and loss experience data is also an obstacle to the consumer seeking value for cost. Consumers who pay premiums cannot easily learn how their insurer measures up against its competitors. By promoting public access to information about an insurer’s historical use of delivering value for the cost paid by the consumer, the state will empower the consumer to shop responsibly. If the consumer has any power or influence at all in the marketplace, the insurer will have the incentive to respond to a more educated consumer. Finally, publication of premium and loss experience 13
data allows the market place to identify and reward the insurers that return value for cost. TDI must have the authority to enforce the collection of this data and monitor the distribution of information necessary to ensure a marketplace that serves insurers as well as employers seeking to purchase coverage. Charge TDI with the responsibility of considering market penetration and consumer uptake when evaluating the strength of the small employer market. As noted by the TDI staff in the sunset review, TDI has not received clear direction to consider whether companies offer fair, competitive, and affordable products. The agency noted that the review process, which highlighted the lack of consideration of market penetration, set the stage for a more comprehensive discussion about these issues by the Legislature. The Legislature should take the opportunity to direct TDI to consider this important issue in the future. TDI should guard against the current situation, in which the market is characterized by financially sound carriers offering with many products that the majority of consumers do not want. A market should not be considered strong or sufficient when the majority of consumers are not participating. Require TDI to consider reasonableness of profits likely to result from rates charged in the small employer group health insurance market. Consumers in the small employer market deserve the protection of TDI to ensure that the products they purchase do not result in unreasonably high margins. TDI must be directed to consider the interests of consumers, including the rate of uptake, in determining whether the small employer market is healthy and robust. The agency currently lacks the clear legislative direction necessary to protect consumers and expand coverage because there is no mention of a commitment to consumer protection, assistance, and education in its mission statement or statutory duties. TDI should be required to review premiums for excessiveness as carefully as it reviews them for actuarial soundness. TDI’s authority in the small employer health insurance market should be comparable to what exists for the property and casualty market. In the property and casualty market, TDI acts as an advocate for the consumer by objecting to proposed rate changes that are likely to yield unreasonable profit margins.51 A similar grant of authority in the health insurance context will be consistent with the agency’s charge to monitor the viability of the market and necessary to extend TDI’s role in consumer advocacy in the health insurance market. TDI must have the authority to monitor practices that prevent consumers from participating in the market, thereby eroding the market. Just as TDI rejects rates that are too low to be actuarially sound and therefore harmful to the market, the agency should have the authority to reject rates that are too high and would yield unreasonable profits. This authority would empower TDI to do in the small employer market what it already does in the property and casualty market.
51
Stacey Pogue, “Texas Needs Tools to Increase Private Health Coverage,” Center for Public Policy Priorities, Jun. 23, 2008, avail. at http://cppp.org/research.php?aid=769.
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Set minimum medical loss ratio requirements or, in the alternative, require carriers to submit standardized medical loss ratio data to TDI . Several states have implemented medical loss ratio (MLR) requirements in an effort to limit the overall price of health insurance. MLR refers to the amount of premium revenue that an insurer spends solely on reimbursement for medical services, rather than administrative costs and profit. In a typical scenario, a state sets a minimum percentage of premium dollars that an insurer must spend on medical services. Insurers set premiums based on calculations of losses anticipated over the coming year. If actual expenses do not meet the medical loss ratio, the state may require the insurer to refund the excess premium dollars to consumers. The state must set clear criteria for the collection of medical loss ratios and require carriers to report data according to that criteria. A clear and precise definition of the kinds of expenses that qualify as MLR must be developed so that reporting across carriers is consistent and comparable. Examples of states requiring minimum MLRs follow. New Jersey, which has the second-highest rate of small employer uptake in the nation, requires small group insurers to spend a minimum of 75 % of premium dollars on medical care. The state reports that the small group market remains competitive. This requirement is intended to ensure that increases in the overall price of health insurance premiums are not attributable solely to an insurer’s motivation to maximize profit at undue expense to consumers, health care delivery infrastructure, and the state economy.
52
Minnesota also uses MLRs in the small group health market, but takes a different approach. For health plan companies with more than 10 % of the total private health insurance market in Minnesota and HMOs with more than 3 % of the total market, the minimum loss ratio is 82 %. For HMOs with less than 3 % of the market, the minimum loss ratio is 71 % for policies covering fewer than 10 employees and 75 % for all other small employer policies. For other health plan companies, the minimum is 60 %. If the loss ratios of the largest health plans in the small group market are currently at or near the statutory minimum, then the plans have little room to raise premiums except to cover the cost of medical claims. Premiums continue to increase, but only to the extent that underlying claims costs also continue upward. Minnesota continues to have one of the lowest rates of uninsured in the nation. Even if Texas does not require a minimum MLR, collection and publication of standardized information on MLRs would provide valuable information for the state and consumers. Currently, TDI obtains some revenue and expense information from some carriers, on a voluntary basis. The availability of standardized MLR data would give consumers better information from which to make purchasing decisions. Increased public access to medical loss information would enable providers to avoid insurers with an unattractive history of reimbursement, particularly relative to the amount of premium dollars received by the insurance company. Finally, publication of medical loss information allows the marketplace to identify and reward insurers that return value for cost. What is more, the results could extend beyond downward pressure on the overall cost
52
Health Economics Program – Minnesota Department of Health, Trends in Minnesota’s Small Group Health Insurance Market (2003), available at www.health.state.mn.us/divs/hpsc/hep/publications/privatemarkets/2003-10.pdf.
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of health insurance to include greater efficiency and corporate stewardship within the industry. Adopt community rating or adjusted community rating in order to bring more small employers into the health insurance market. Community rating effectively spreads the risks associated with healthcare costs across a larger community, which is the underlying premise of insurance. There is concern that the implementation of a community rating system would have the effect of raising premiums for many Texans. In fact, many of the states with the highest average premiums employ community rating systems in some form. However, despite the use of rate bands instead of community rating, the total average family premium in Texas —$10,970—is higher than the national average of $10,632.53 In other words, the rate band system that presumably allows insurance companies to maintain average premiums lower than under the community rating system has not yielded lower prices in Texas. The higher average total premiums charged to small firms in states that use pure or adjusted community rating methods might suggest a lower rate of market participation, or take-up by small businesses in the health insurance market. In fact, the opposite is true. Nine of the fifteen states with the highest percentage of small firms that offer health insurance use pure or adjusted community rating in the small group market.54 Every state that uses some form of community rating can boast a small-business take-up rate better than the national average for small firms (43.4 %) and far, far better than the average in Texas (33.6 %), which ranks 11th worst in the country. Movement from rate bands to community rating would create winners and losers: premiums for firms with high-risk employees would decrease while premiums for firms with low risk employees would increase. The largest category of small employers (<10 employees currently pays the highest premiums for both individual employee and family plans. The smallest firms allow for less risk pooling; insurers therefore set higher premiums as a hedge against losses incurred by payouts for illnesses suffered by one or several employees within the firm. Small firms do not employ “high-risk” or older employees at a disproportionate rate, but the use of community rating would likely decrease premiums for firms with an older or high-risk employee base because insurers would set premiums without reference to health status, age or other population characteristics. For the same reason, community rating could cause an increase in premiums charged to small firms with healthier, low-risk employees, but could still prove effective if the overall stability in price attracted more small firms, the foundation of the state’s workforce, to make health coverage available to employees.
53
MEPS Table II.D.1 (2005). Also, the average total single premium charged to small firms in Texas in 2005 was $4,270, compared to an average of $4,121 for small firms nationwide. MEPS Table II.C.1 (2005). 54 Based on data from 2003-2005, during which time Vermont used pure community rating in the small group health insurance market.
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SMALL GROUP HEALTH INSURANCE IN TEXAS <10 employees Number of private-sector employees in Texas by firm size55 Percentage of all privatesector employees (includes large group employees)74 Percentage of small group private-sector employees74 Average monthly premiums paid by small group size (individual / family)56 Percentage difference from US National Average for monthly premiums for all small groups ($311 / $814)75 785,173 10-24 employees 710,110 25-50 employees 481,522
9.63% 39.72%
8.71% 35.92%
5.90% 24.36%
$376 / $985
$314 / $822
$313 / $821
20.9% / 21.0%
0.96% / 0.98%
0.64% / 0.86%
In other words, community rating avoids price discrimination to a degree that inhibits businesses from offering health insurance. The use of community rating is linked to higher premiums but also higher take-up rates among small businesses. The greater percentage of small businesses that offer health insurance in these states supports the conclusion that community rating helps make health insurance available to more people.
55 56
AHRQ MEPS Table II.B.1 (2005). America’s Health Insurance Plans (AHIP) Center for Policy and Research, Small Group Health Insurance in 2006: A Comprehensive Survey of Premiums, Consumer Choices, and Benefits (2006), available at http://www.ahipresearch.org.
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CONCLUSION Texas, the second most populous state, has the highest percentage of uninsured residents in the US. Many of those uninsured are adults who work full time for small employers. Only a third of the small businesses in Texas, which make up 72 % of all businesses in the state, offer health insurance – a rate so low as to signal the need to consider alternative means of promoting a healthy market for small group health insurance. The effects of a crumbling infrastructure for health care delivery on the state economy are further reason to consider whether and what options exist for improvement. Improvement will require affirmative steps that acknowledge the importance of the consumer to a competitive market that serves, and does not harm, the public interest. TDI must receive the authority and accept the responsibility to regulate the small group health insurance market with vigor equal to that evident in the property and casualty insurance market, for one example. Policy makers have several options that will remove barriers to small firm participation in the health insurance market and should consider seriously the opportunities described in this paper. Without these changes, Texas is doomed to continue to be the state with a “healthy and robust” insurance market that somehow excludes more persons than markets anywhere else.
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