In the early 1990s, Empire Blue Cross Blue Shield (BCBS) in New York was the largest private not-for-profit insurer in the nation. But its financial statements showed a company in serious trouble. It had violated state insurance regulations and pressed for enormous premium increases on individual policy holders, while at the same time selling health insurance polices below cost to major corporations and large employer groups.
Guaranteed issue (GI) laws forbid health insurance companies from denying coverage to anyone who applies for health insurance, including those individuals who apply for insurance after the onset of a chronic health condition or who have made lifestyle choices known to be unhealthy. Adopted to help end “job lock,” GI has the unintended consequence of encouraging people to wait until they get sick before buying health insurance, which increases the number of uninsured and the premium costs for those who remain insured.
Pure community rating (CR) laws require health insurance companies to charge the same premium to everyone, regardless of age, sex, health history, lifestyle choices, and regional demographics. This one-size-fits-all rate results in charging young and healthy people higher premiums than their expected medical expenses would otherwise justify in order to subsidize rates for middle-aged, older, and less-healthy people.
Under “modified” CR, premium variations are allowed to compensate for certain risk characteristics such as age, sex, and family size, but not for others such as health status or lifestyle choices.
Elizabeth McCaughey, Republican candidate for lieutenant governor at the time, described the situation in a September 1994 essay for the Wall Street Journal. “The financial statements [for Empire Blue Cross and Blue Shield] complete a distressing picture drawn by the U.S. Senate Permanent Subcommittee on Investigations last year. Federal investigators concluded that Empire BCBS lacked the ability to ‘properly execute the most basic functions of an insurance company.'”
As insurer of last resort for New York residents, BCBS sold community rated, guaranteed issue policies at state-regulated prices in exchange for an exemption from state and local income taxes. It was allowed to pay hospitals lower prices for services than other commercial health insurers in the market were allowed to pay.
In Need of a Bailout
As premiums increased and financial problems continued to mount, it became clear BCBS needed some kind of bailout. When a for-profit company is poorly managed, the stockholders are the losers. When a non-profit insurer is badly managed, it is the policyholders who get hurt.
Telling the state legislature it was about to lose more than $438 million from combined underwriting losses in 1991 and 1992, BCBS lobbied for a whopping rate increase. The insurance commission approved an increase of 25.5 percent.
The situation made legislators think further reforms were needed to control the entire health insurance market and protect BCBS from further losses. In 1993, they imposed community rating and guaranteed issue mandates on the state’s individual and small group insurance markets. According to a New York Times report dated April 2, 1993, “BCBS maintained the new laws applying to private insurers would make the entire market more competitive.”
The state’s intervention in the insurance market affects not only insurance carriers and policyholders, but brokers and insurance agents as well. Insurance professionals are forbidden from selling or servicing individual health insurance policies in New York, even if the professionals are state-licensed and represent state-licensed health insurance companies that offer legitimate insurance policies. New Yorkers must purchase directly from an HMO or Healthy New York, the government-run insurance program.
Explained Patti Goldfarb, past president of the New York State chapter of the National Association of Health Underwriters, “If you are self-employed or you’re an individual whose employer does not offer health insurance, your insurance options have been severely limited. There is no professional insurance support; your ability to research the available insurance companies is limited, and the ability to have someone advocate for you when claims are denied is greatly curtailed. This [fighting denial of claims] is a difficult undertaking for most individuals.”
“The New York version does not have a high-risk pool, does not allow age weighting, and disallows any medical underwriting,” Goldfarb said. “Everyone has to be accepted at the same rate–healthy or not.”
Mickey Lyons, downstate president of NAHU and Goldfarb’s partner at Medical Link, Inc. New York City, added, “The impact on health insurance premiums was enormous. Insurance underwriters recognized that the law now required them to assume greater unknown risks and were forced to increase premiums accordingly and significantly.”
Average Annual Insurance Premiums in New York
Before Community Rating
After Community Rating
|Single Male Age 30
|Single Female Age 30
|Family Age 30
|Single Male Age 45
|Single Female Age 45
|Family age 45
|Single Male Age 60
|Single Female Age 60
|Family Age 60
|Source: March and April 1993 figures compiled in April 1993 by Conrad F. Meier from data supplied by New York State Department of Insurance.
July 2003 figures represent an average of the lowest HMO premium offered in each of the nine regions established by the state for health care insurance purposes. Complete rate breakdowns are available at http://www.nyshmoguide.org/guides/2003GuideToHealthInsurers.pdf.
One month after the community rating and guaranteed issue mandates went into effect, nearly 10 percent of the state’s insured population experienced premium increases ranging from 20 to 59 percent. Rates for a 30-year-old single male increased by 170 percent. By July 2003, individual and family policy rates were higher still. (See Figure 1.)
“We are astounded,” Senator Guy Velella (R-Bronx), a lead sponsor of the mandate bill, told the New York Daily News on March 10, 1993. “I don’t know of one legislator who was prepared for the size of these [premium] increases. Consumers are outraged.”
Toby McAfee, from Yonkers, was one of those outraged consumers. He wrote to the New York Times in August 1993, “My wife and I eat carefully, do not smoke, and exercise regularly. Are we paying health insurance premiums based on the poor health habits of others under the New York State law that mandates community rating rather than experience rating?”
In an answer that rings of Orwellian newspeak, John Calagna, a spokesman for the Department of Insurance, responded, “When it comes to health insurance, there are only two types of risks–poor risks and those that will become poor risks. It’s a fact of life that as we grow older, our need for medical services intensifies.”
A study released in September 2002 by the online health insurance brokerage ehealthinsurance puts New York’s insurance rates into perspective. The study compared the cost of 20,000 policies, with 7,000 different benefit “mixes,” issued in 42 states by more than 70 insurers, including large group plans offered by BCBS.
In California, which imposes neither community rating nor guaranteed issue on individual health insurance, the average holder of an individual policy paid an annual premium of $1,538. In Pennsylvania, the premium would be $1,236; in Texas, $1,397; and in Florida, $1,821. But in New York, ehealthinsurance reports that person would have paid $3,589 for similar benefits.
Average Annual Insurance Premiums
Family Coverage through Small Groups
|Highest Average Annual Premiums
|Lowest Average Annual Premiums
|Source: Medical Expenditure Panel Survey, Agency for Healthcare Research and Quality, 2000. http://www.meps.ahrq.gov
Data compiled by the Medical Expenditure Panel Survey (MEPS), a project of the Agency for Healthcare Research and Quality, finds New York to be the second most-expensive state in the country (behind Massachusetts) for family insurance offered in the small group market. At an average annual premium of $8,427.50, such insurance in New York is 42 percent more expensive than in California and 48 percent more expensive than South Dakota, the least-cost state. (See Figure 2.)
The Mutual Experience
Before community rating and guaranteed issue, Mutual of Omaha, one of the largest providers of individual indemnity health insurance policies in the state and the last to exit the market, charged a 25-year-old male on Long Island $81.64 a month. By contrast, a 55-year-old Long Islander buying the same policy paid $179.60.
Almost immediately after the mandates were passed, both residents paid a monthly premium of $135.95–a 67 percent increase for the 25-year-old and a 25 percent decrease for the 55-year-old. The older policyholder’s gain at the expense of the younger was short lived: By 1994, declining participating by younger people in the individual insurance market caused monthly premiums for both males to reach $183.79. The 55-year-old was now paying more than he had before community rating and guaranteed issue.
By 1997, the monthly premium had risen to $217.59. Even more people dropped their individual health insurance polices, and many were forced to rely on charity health care, state government-run health plans, and Medicaid.
The New York Department of Insurance reported 43,666 individual policyholders canceled their insurance within 12 months of the mandates’ effective date. The share of the state’s population that was uninsured jumped from 20.9 percent in 1990 to 24.8 percent in 1995. The national average in 1995 was just 17.4 percent.
According to the actuarial firm Milliman and Robertson, Inc., the mandates caused policy cancellations on a much greater scale than the Department of Insurance acknowledged. Milliman estimated 500,000 New Yorkers with individual and small group health insurance canceled their policies, reducing the number of insured from 2.8 million to 2.3 million. One out of every six New Yorkers covered by individual or small group policies became uninsured as a result of the community rating and guaranteed issue mandates.
In 1994 Mutual of Omaha reported it insured nearly 90,000 New Yorkers through individual plans in 1993. Fifteen months later, 43 percent of those policies had lapsed. All private insurance companies doing business in New York at the time had similar experiences.
More than half of those who dropped their policies, reported Mutual of Omaha, were under 35 years of age. The average age of those who renewed was 45. Forty-three percent of those who dropped a policy did not replace it with other coverage, becoming one more statistic in the state’s uninsured population.
Between 1992 and 1993, Mutual of Omaha’s claims cost doubled in New York. Nationally, the company’s claims cost increased just 12 percent over that same period. Dr. John C. Goodman, president of the National Center for Policy Analysis, explains, “As the younger, healthier generation drops out of the health insurance rating pool, the remaining insured are older, sicker, and more expensive.”
More than 20 commercial indemnity companies, including Mutual of Omaha, either left New York entirely or stopped writing health insurance policies between 1993 and 2000. Competition in the industry became almost non-existent, leading to continued double-digit premium inflation among the few carriers that remained.
According to U.S. Census Bureau figures, 11.5 percent of New York residents were insured in the individual market in 1992. By 2001, that share had fallen to just 5.6 percent. By comparison, in the U.S. roughly 12.7 percent of the population had individual coverage in 1992, falling to 8.3 percent by 2001.
Burden Shifts to Taxpayers
Health insurance reformers refused to admit, even after they were warned by policy experts, that the situation they faced was due primarily to the mandates they had passed earlier, with only a small part attributable to normal health care price inflation.
In 2000, alarmed by the high number of uninsured people in the state, now 3 million, the state legislature created a state-run health insurance bureaucracy called Healthy New York (HNY). Instead of repealing the mandates responsible for the situation, HNY would insure the uninsured at artificially low premiums subsidized by taxpayers. Between January 2001 and July 2003, HNY benefitted from taxpayer subsidies totaling $130 million.
To qualify for coverage under HNY, an applicant must have an annual income at or below 250 percent of the federal poverty line–about $50,000 for a family of four; must have been uninsured for the previous 12 months; and must not be eligible for private group insurance, Medicare, or Medicaid. New Yorkers covered by HNY pay premiums that are 50 percent of the market rate; taxpayers make up the difference.
The state was divided into nine geographical regions, with HNY being the primary, government-run subsidized health insurance option in all nine regions. The number of participating HMOs varies from three in Buffalo to 13 in the Long Island region. Different HMOs operate in different regions.
Premiums paid by those insured under HNY are community rated, although geographical variances are permitted. Annual rate increases up to 10 percent are permitted without approval from the Department of Insurance. Policies are subject to the guaranteed issue mandate, but the provider can impose a pre-existing condition limitation based on treatment or advice given up to six months before the policy’s effective date.
“Finger in the Dike”
While efforts to restore the free market for individual and small group insurance have been slow in coming, a step in the right direction was taken during the 2002 legislative session.
In an effort to make health insurance more affordable for the individual sole proprietor, the state legislature passed and the governor signed Senator James Seward’s (R-Otsego County) bill that re-defined “small group.” Before the measure passed, “small group” meant a group of 2 to 50 employees. With Seward’s measure, “small group” now means 1 to 50 employees.
The distinction is of great importance to small businesses. According to Elliott Shaw, director of government affairs for The Business Council of New York State, Inc., “This legislation allowed sole proprietors to continue to purchase individual health insurance [at small group rates]. Failure to pass this measure would have meant sole proprietors would have been forced to either pay the inflated individual premium, go uninsured, or turn to government programs.”
Shaw also told Health Care News that the legislation, while beneficial, was only a “finger in the dike.”
“During the current 2003-2004 premium rate cycle, small employer groups have experienced a 30 percent premium increase,” he noted. Shaw further explained the smallest groups, particularly those with 1 to 7 employees, adjusted to the cost by letting one employee go in order to afford health insurance for the remaining six.
Sun Rises on the HSA
Shaw told Health Care News that Seward was expected to introduce a bill in the current legislative session to formally recognize Health Savings Accounts (HSAs) as a legitimate consumer option in the New York market. By allowing consumers to purchase higher-deductible individual insurance plans, HSAs allow consumers to avoid some of the inflationary consequences of community rating and guaranteed issue. If Seward’s measure passes, New Yorkers would find their HSA premiums significantly lower than what they currently can buy.
The New York legislature should also consider the establishment of a workable high-risk pool in the state, which would address the needs of the medically uninsured and uninsurable without skewing the insurance market for everyone else. The federal government has made available $1 million in seed money for states to launch such pools, and New York policymakers ought to accept that offer.
Mandated insurance benefits, which needlessly raise the price of insurance, should also be rolled back, and the legislature should consider–as other states have done, and as President George W. Bush has proposed–giving individuals who buy insurance the same tax breaks as those whose employers provide insurance.
Next month: Kentucky
Conrad F. Meier is managing editor of Health Care News. His email address is [email protected].