State Laws Can Cripple Market for Health Insurance: CAHI

Published January 1, 2007

In 2006, individuals and employers faced yet another year of health insurance premiums increasing faster than the rate of inflation. Not coincidentally, that fall the U.S. Census Bureau reported another increase in the uninsured rate.

Those two problems have prompted a call for action, and over the past few months legislatures in California, Massachusetts, Tennessee, and Vermont passed major health reforms. However, public policy experts have done little to measure truly successful and thriving health insurance markets against those that are failing their citizens.

To help guide policy action, the Council for Affordable Health Insurance (CAHI) published in October its “State Health Insurance Index 2006,” identifying various factors affecting the state health insurance environment.

CAHI Index

The 2006 State Health Insurance Index gives a snapshot of the health insurance environment in each state, providing states with tools to evaluate their health insurance markets.

CAHI’s index identifies states that have created markets that are both accessible and affordable, and those that have not. For example, 32 states received points for forming a high-risk pool instead of applying price controls on the health insurance market.

Conversely, states that have imposed both guaranteed issue and community rating policies in the individual market ensure that health insurance is neither accessible nor affordable.

For example, when Kentucky passed guaranteed issue and community rating legislation in the 1990s, more than 30 health insurers left the state, leaving only three. Insurance premiums quickly rose to unaffordable levels.

Numerous Regulations

The general public and the media are largely unaware that state legislatures have a significant impact on the cost and accessibility of health insurance in the small group (i.e., two to 50 employees) and individual health insurance markets.

States have adopted numerous policies and regulations–some good, some bad–that have a significant impact on health insurance’s cost and availability, and yet there has been little or no attempt to assess those efforts. The CAHI report aims to change that.

Poor Decisions

In the 1990s, state legislatures largely focused on accessibility of health insurance. Many reforms were passed in an effort to increase access for groups perceived to be shut out of the existing health insurance market. While the 1996 federal Health Insurance Portability and Accountability Act (HIPAA) standardized many approaches, states remained free to keep existing laws and to continue to experiment.

Unfortunately, their reform efforts have led to numerous problems.

For example, several state legislatures have implemented a type of price control, known as “community rating” or “modified community rating,” that severely limits premium variation. The result is that the young and healthy–typically those with lower incomes and little need for insurance–are forced to subsidize the rates of older and generally wealthier individuals who have more health problems.

States also passed other damaging reforms, such as guaranteed issue and so-called “groups of one” (treating an individual as though he is a “group” for insurance purposes).

But they also passed positive reforms such as high-risk pools–a state-created health insurance plan that provides health insurance to uninsurable individuals in the state. High-risk pools provide a safety net for the uninsurable while allowing the health insurance market to function for the vast majority of people.

Critical Areas

The CAHI Index measured several key areas critical to a well-functioning health insurance market:

  • Regulatory Environment. Do state laws allow insurers to develop and offer affordable policies? Do they require community rating or guarantee issue? Do they provide individuals covered under HIPAA with affordable options?
  • Uninsured Rate. What percentage of the non-elderly are uninsured?
  • Mandated Benefits. Has the state passed a large number of mandates that add to the cost of health insurance and to the cost of administering plans?
  • Small Group Premiums. Are insurance premiums in the state’s small group market, on average, higher or lower than in the rest of the nation?
  • Individual Premiums. Are premiums in the state’s individual health insurance market, on average, higher or lower than in the rest of the country?
  • High-Risk Pool. Does the state have a high-risk pool? If so, how well does it function?

State Action

The good news is it is never too late to reform. Over the past few years, Kentucky and South Carolina have passed reforms aimed at un-doing changes made in the late 1990s that had devastated their health insurance markets. Insurers are returning to both states, with more options at affordable prices, and more people are getting coverage once again.

In other states, high underlying health care costs may contribute to high health insurance premiums. For example, states such as Arizona and Texas have immigrant populations that may be difficult to insure. More than 30 percent of Hispanics nationwide are uninsured.

Positive Policies

What can states do to make health insurance more accessible and affordable?

  • Eliminate guaranteed issue. Guaranteed issue laws require insurers to accept all applicants regardless of pre-existing medical conditions. A decade of experience has taught that guaranteed issue may provide access to health insurance in the short term, but these laws eventually drive the cost of health insurance out of reach for all but the richest Americans.
  • Establish a high-risk pool. Every state that does not have a high-risk pool should start one. High-risk pools provide a cost-effective way for those with chronic medical conditions to obtain insurance.
  • Eliminate community rating. States with community rating should eliminate that requirement. In addition, narrow rate bands, which severely limit premium variations, should be relaxed in favor of rate bands that balance affordability with the needs of those with medical conditions.
  • Create laws that streamline the regulatory requirements. Health insurers face a complicated patchwork of state regulations, which are difficult to navigate. Some states have further complicated that environment by using subjective standards, or by taking months to review rate and form filings, or by creating impossible standards for certain kinds of products.
  • Stop passing laws that increase the cost of health insurance. Health insurance mandates and minimum coverage levels continue to be popular in a number of states. These regulations may satisfy narrow special interests, but they dramatically raise the cost of health insurance for most consumers.

J.P. Wieske ([email protected]) is director of state affairs for the Council for Affordable Health Insurance.

For more information …

“State Health Insurance Index 2006: A 50-State Comparison of the Nation’s Health Insurance Market,” Revised Version, Council for Affordable Health Insurance, October 26, 2006,