Colorado Passes AHP and Mandate-Lite

Published October 1, 2003

Sensing Colorado’s small group health insurance market was nearing collapse, the state legislature broke a long-standing political logjam to enact several reform measures in 2003.

Aiming to make health insurance more affordable by loosening the mandates that had the small group market tied in knots, the legislature granted carriers limited rating flexibility and permission to sell “mandate-lite” policies. Lawmakers also authorized the creation of association health plans, allowing small employers to band together to enjoy economies of scale.

The centerpiece of the reform effort was H.B. 1164, a dense document sponsored by two legislative heavyweights, House Speaker Lola Spradley and Senate Co-Majority Leader Mark Hillman.

H.B. 1164 started out as Spradley’s crusade to make health insurance affordable in her Pueblo district by encouraging the creation of association health plans, also known as Multiple Employer Welfare Arrangements (MEWAs). Recognizing MEWAs have had a troubled track record, Spradley incorporated several consumer safeguards in her bill.

Unfortunately, the bill adopted a strict “community rating” regimen making it unlikely to pass. Community rating requires insurers to charge a single premium for all insureds, regardless of their age, the demographics of their community, lifestyle choices, and health status.

Saving the Day

The politically adept Hillman saved Spradley’s measure by hitching his free-market reforms to her MEWA bandwagon late in the session. Hillman’s contributions permit small group carriers to price their products based on use: Groups with few claims may qualify for premium discounts up to 25 percent; heavy users, including smokers, may see their rates go up by as much as 15 percent.

With “rate banding,” small group carriers have a fighting chance to compete for the healthy, low-cost groups that are necessary to offset the enormous costs associated with the relatively few unhealthy individuals in the population.

Until now, those healthy consumers tended to migrate to less-expensive individual and self-funded plans, where rating flexibility has been permitted all along. The resulting loss of business in the small group market produced large rate increases and a shrinking number of carriers competing for business.

There are encouraging signs that these reforms are already producing the desired results. The measure permits carriers to begin offering 15 percent discounts on September 1, 2003; all have announced their intention to do so. In September 2004, the full 25 percent discount is allowed, as is the 15 percent rate hike for heavy insurance users.

Hillman’s amendments to the original MEWA bill also allow carriers to begin selling mandate-lite policies starting January 1, 2004. Such policies empower consumers to decide for themselves whether to pay for procedures like prostate and mammography screenings, rather than having third-party insurance companies decide for them.

Mandate-lite plans are more affordable. For those who don’t like them, dozens of other policies containing all state mandates will remain on the market.

The small group reforms embodied in H.B. 1164 were greeted with skepticism by a narrowly divided and partisan legislature. Even with Governor Bill Owens (R) rowing in unison with Spradley and Hillman, the bill’s fate was uncertain in the Republican-controlled legislature until the session’s final hours.

If reform does nothing more than stabilize small group rates and increase competition by inducing carriers to re-enter the Colorado market, it will have taken an important first step in the right direction.

Spencer Swalm is an employee benefits broker and legislative chair for the Colorado State Association of Health Underwriters. He can be reached at 303/228-1675.