RWJF Report Reaches Wrong Conclusion on Insurance Market Reform

Published October 1, 2004

In June 2004, The Robert Wood Johnson Foundation (RWJF) issued “Expanding the Individual Health Insurance Market: Lessons from the State Reforms of the 1990s,” written by Beth C. Fuchs of the consulting firm Health Policy Alternatives, Inc.

The report, part of RWJF’s “Synthesis Project,” reviewed studies documenting the experience of what Fuchs calls “comprehensive reform states”–interestingly, the same eight that have been featured in the Health Care News series launched in February 2004: Kentucky, Maine (see pages 10-11), Massachusetts, New Hampshire, New Jersey, New York, Vermont, and Washington.

Fuchs reaches a conclusion dramatically different than ours. While we documented rising premiums, falling competition and consumer choice, and often rising rates of uninsurance caused by community rating and guaranteed issue mandates, Fuchs claims nearly the opposite, that “individual insurance became more widely available” in these states.

Where Fuchs’ research comes closest to confirming our findings–for example, “comprehensive underwriting reforms generally resulted in carrier departures from individual insurance markets and less choice of insurance products” and “states with more comprehensive reforms experienced a decrease in overall coverage rates”–she quickly changes her focus to possible beneficial effects on small subsets of consumers or blames “methodological shortcomings” and time frames too short for the full impact of reforms to be realized. The result is more of a polemic than a balanced study, and not a very persuasive one at that.

What follows is a point-by-point critique of other aspects of the RWJF report.

Fuchs: “Comprehensive underwriting reforms generally resulted in carrier departures from individual insurance markets and less choice of insurance products. Guaranteed issue is thought by many to reduce the availability of insurance options in the individual insurance market because many insurers will not sell in states with that requirement. The picture emerging from the research on this issue is mixed. In states that enacted both guaranteed issue and guaranteed renewability, the choices of insurers tended to decline or remain about the same. A significant decline in insurers, however, was more likely in states that also imposed community rating or tight rating bands. In Kentucky and Washington, states that initially imposed guaranteed issue, community rating, and very tight limits on the use of pre-existing condition exclusions, only one or two insurers remained in the market. A major exception is New Jersey, where the reforms led to a significant increase in the number of insurers offering individual coverage, a result attributed to the state’s pay or play requirement (37).”

Comment: Research on this issue is not “mixed.” Insurers left every state that adopted guaranteed issue and community rating mandates except those in which they were required to remain. No carriers served the Washington individual market in the mid- and late 1990s, and 41 insurers left Kentucky. Even Blue Cross, the main proponent of “reform” in New Hampshire, abandoned the state’s individual market and terminated all its individual business in January 1998. In Vermont, Blue Cross became the only choice. In Maine, Blue Cross has 97 percent market share in the individual market and just became the monopoly insurer under the state’s new Dirigo Health Plan.

There is no available evidence documenting a significant increase in the number of carriers serving New Jersey’s individual market post “reform,” because no one knows how many carriers were in this market prior to 1992. There is evidence the number of insurance companies dropped from 28 in 1995 to 16 in 2003.

Fuchs: “Guaranteed issue reforms may have promoted faster HMO penetration in individual markets. In New York and Massachusetts (15, 20, 21), for example, HMO coverage became more widely available and indemnity coverage less available or entirely unavailable.”

Comment: New York requires its HMOs to serve the individual market, while in Massachusetts any insurer with a meaningful stake in the group market has an obligation to serve the individual market. Given such mandates and the exodus of individual indemnity carriers, it is not surprising the HMO penetration would increase.

Fuchs: “Average premiums did generally increase in states with community rating although the evidence is largely qualitative and not quantitative. In states that adopted rate bands (which allow greater premium variation based on risk factors), the literature mostly fails to find significant effects on average premiums.”

Comment: The available data contradict these statements. Data from the New Jersey Individual Health Coverage Program reveal the number of people with individual coverage dropped from 156,565 in 1993 to 78,298 in 2004. This significant drop has been accompanied by a catastrophic run-up in premium costs. The same policy that cost $769/month from Aetna in 1994 cost $5,855/month in 2003. Blue Cross’s plan jumped from $695/month to $5,319/month.

Blue Cross Blue Shield of Vermont is the only indemnity carrier serving that state. The only other carrier serving the state’s non-group market, MVP, is an HMO. BCBS offers individual insurance purchasers the “Vermont Freedom Plan.” Deductible options are $3,000, $5,000, $7,500, and $10,000 for singles and twice that amount for families. There are no low-deductible options.

On top of the deductible, the insured pays another 20 percent coinsurance for all services delivered by “preferred providers,” other than office visits, which cost $25. Maximum annual out-of-pocket costs start at $9,000 for a single insured in the $3,000 deductible plan, $11,000 for the $5,000 plan, $13,500 for the $7,500 plan, and $17,000 for the $10,000 plan. Double that for families, and the amounts go up if you use non-preferred providers. A family with the $10,000 deductible plan using non-preferred providers could face $47,000 in out-of-pocket costs!

Even with such limited coverage, premiums for the Vermont plans are high, as shown in the accompanying table.

Monthly Premiums for “Vermont Freedom Plan”
  $3,000 deductible $5,000 deductible $7,500 deductible $10,000 deductible
Single $374.99 $281.24 $238.38 $208.07
Two-Person $749.98 $562.36 $476.76 $416.14
Family $1,012.47 $759.36 $643.61 $561.79

Other states offer plans that are much more reasonably priced and more generous in their coverage.

In Indiana, for example, Golden Rule Insurance Company’s Plan 100 with a $5,000 deductible would cover a family–51-year-old male, his 30-year-old wife, and two boys aged 12–for a monthly premium of $273.62, a savings of $485.74 every month, or $5,828.88 per year. There is no coinsurance after the family meets its deductible (maximum two deductibles per family per year).

The family’s out-of pocket exposure is clearly much lower with the Golden Rule plan. Even if the wife has a medical condition that makes her uninsurable, the family fares better in Indiana. The husband and boys can be insured with Golden Rule at a monthly premium of just $242.46. The wife would pay $315.75 in the state’s high-risk pool, getting a $1,500 deductible, 80/20 plan with maximum out-of-pocket of $4,000. The monthly total is $558.21, still considerably less than the cost in Vermont.

Fuchs: “In summary, community rating resulted in higher premiums on average, lower premiums for higher-risk individuals, and higher premiums for lower-risk enrollees. More modest reforms, such as rating bands, had no clear effect on average premiums or on the premiums paid by higher or lower-risk enrollees. If the goal of community rating was to spread the costs of the sick across a wider pool of insured persons, then they succeeded, at least over the short run. But by reducing the cost of individual insurance for those most in need while raising it for lower-cost enrollees, they discouraged younger and healthier people from buying individual insurance …”

Comment: This statement is half right–community rating discourages some people from buying health insurance, shrinking the pool of insured and raising rates for those in the pool–but it ignores the thousands of people who bought insurance prior to the “reforms” and became very ill or injured subsequently. When the premium rates were adjusted to comply with the new laws, rates went up. And if the carrier left the market, those previously insured persons were forced to replace their coverage at greatly inflated prices.

This is a reality often missed by advocates of community rating and guaranteed issue mandates: There are many people who buy insurance coverage when they are healthy, subsequently become very sick, and generate enormous claims. They purchased health insurance for the right reason, and now the insurance is there to keep them from becoming destitute. “Reformers” are concerned only with the uninsured. They are willing to disrupt 99 percent of the population on behalf of 1 percent.

Fuchs: “In states that adopted the most comprehensive underwriting reforms–guaranteed issue often combined with other reforms such as guaranteed renewability and strict limits on exclusions for pre-existing conditions–individual insurance became more widely available. That is, policies were available for people to purchase. The case studies indicate that access to individual insurance policies for people at high-risk clearly increased in the comprehensive reform states of New Hampshire, New York, New Jersey, Vermont, and Washington. The effect on availability in the other comprehensive reform states was unclear (20, 23).”

Comment: Policies were already available on a guaranteed issue basis in every one of the states cited, so it is unlikely that individual insurance became “more widely available.” Blue Cross was required to guarantee-issue policies in these and many other states and was given significant tax and regulatory advantages for doing so.

Access to affordable insurance dried up in these states for persons who were at least moderately healthy. Premium rates soared and insurers left the regulated states, leaving consumers with few choices. The data clearly contradict the impression Fuchs means to convey, that consumers benefit from the regulations.

Availability and affordability would have been guaranteed for everyone–including uninsurable persons–if these states would have established a high-risk health insurance pool and then left the insurance market itself alone. “Comprehensive reform” was unnecessary as well as a failure. By delaying adoption of superior alternative reforms and destroying a system that was providing access to affordable insurance to everyone, it caused real harm to many consumers.


Advocates of imposing community rating and guaranteed issue requirements on the individual health insurance market are not above ignoring plain evidence and compelling logic when defending their agenda. Beth Fuchs’ report for RWJF is clear evidence of that.

Community rating and guaranteed issue are regulations aimed at crippling and destabilizing private insurance markets, advocated primarily by opponents of private insurance and advocates of expanding government-run programs. They turn the logic of buying health insurance on its head, encouraging people to postpone the purchase of insurance until medical services are needed and punishing those who buy insurance while they are still healthy.

The experiments with community rating and guarantee issue by eight states during the past decade have demonstrated how unworkable and counterproductive these regulations are. Apologists for this failed agenda need to let go of a failed paradigm and look at true reforms–such as tax credits, high-risk pools, and health savings accounts–that are actually working in states across the country.

Conrad F. Meier ([email protected]) is a senior fellow in health policy for The Heartland Institute.

For more information …

The June 2004 Robert Wood Johnson Foundation report, “Expanding the Individual Health Insurance Market: Lessons from the State Reforms of the 1990s,” is available online at