Colorado Health Insurance Market Evaporating

Published August 30, 2002

Colorado’s small group health insurance market displays all the symptoms of a patient in dire distress. While premiums and the ranks of the uninsured soar, the number of carriers plummets.

The legislature, retired for the year, has done little to stabilize the patient. The question hanging in the air with the urgency of an unanswered “code red” alarm is, “What can be done to resuscitate Colorado’s small group market?”

Mandate Madness

The ills of that market are all too familiar. Rate hikes of 40 to 50 percent are commonplace, causing 85,000 Coloradoans to lose small group coverage last year. Many legitimate carriers have left the state. Arising in their place are scam artists that collect premiums and then fail to pay claims.

Changing this gloomy prognosis will be politically challenging. Nonetheless, the undeniable severity of the crisis may finally provide an opening to get something done. If so, a solution may well revolve around two key issues: suppressing the impact of mandated guaranteed-issue and promoting consumer-driven health care.

Much market disruption occurs when guaranteed-issue laws are imposed and when people who know they need insurance successfully obtain it after the fact. In other words, a homeowner is happy if he can persuade an insurance company to sell him a policy while his house is burning. Obviously, in the absence of fraud, he will rarely succeed. This is a good thing, not only for the profits of the insurance company, but also for homeowners who play by the rules and buy insurance before they know they need it.

For a variety of reasons, however, politicians have decided health insurance carriers must sell comprehensive policies to small companies (1-50 employees), and carriers must charge the same price to all comers, regardless of health conditions.

In the larger small groups, the law of averages works in favor of insurance companies: Only a few employees are seriously ill at any given time. A 1999 University of Northern Colorado study showed average monthly claims in groups from 5 to 50 people ranged from about $90 to $110.

Unfortunately, a different law is at work in smaller groups. The average monthly claim for groups of just 2 to 4 persons was about $170; for a group of one, it was nearly $220. When the rules say you can wait to buy insurance until your house is on fire, why be a sucker and pay for it before then? Economists call this a “moral hazard,” and its predictable result is ruinous losses for insurance companies and staggering rate increases for the rest of us.

Reducing the negative impacts of guaranteed-issue won’t be painless. It will probably involve making it both more difficult and more expensive for small groups to buy insurance after they already know they need it. Nonetheless, to preserve affordable health insurance for all Coloradoans, responsible action is imperative.

Market Forces

Consumer-driven health care means patients, not just insurance companies, have a direct financial stake in what health care costs. Without co-pays, patients neither know nor care what providers charge the insurance company. Low co-pays encourage a use-it-or-lose-it mentality: If you don’t use the plan, you are “losing” your premiums.

To some degree, skyrocketing premiums are dragging consumers back into the health care financing equation. Increasingly, small employers are turning to PPO plans with high deductibles and co-insurance to hold down costs. When the patient is faced with paying 20 percent of the bill, what providers charge becomes a matter of real interest.

Over time, a crucial ingredient in the struggle to restrain exploding costs is to align the system so that patients and insurers have similar goals: getting the most bang for each health care buck.

Is there anything the legislature can do to encourage the move to consumer-driven health care? Yes: Make Colorado safe for Medical Savings Accounts (MSAs).

Derided as a toy of the “healthy and wealthy” when HMOs were cheap, MSAs are now widely viewed by experts as being an important part of the solution. MSAs combine high-deductible insurance policies with tax-advantaged saving accounts to pay medical bills not covered by the policy. Giving carriers greater latitude to set premiums based on risk is essential if Colorado is to enjoy a viable group MSA market.

Breathing life back into Colorado’s comatose small group health market will not be easy, but it is possible. Limiting mandates like guaranteed-issue and promoting consumer-driven health care options should be parts of the cure.

Spencer Swalm, an employee benefit broker, heads the Legislative Committee of the Metro-Denver Association of Health Underwriters. He can be reached at 303/228-1675.