State Health Care Reform: Key Questions and Answers

Policy Reports | Health

No. 311
Monday, April 21, 2008
by Linda Gorman and R. Allan Jensen

Are Guaranteed Issue and Community Rating the Answer?

A common belief is that having government pay for everyone with expensive medical conditions will lower insurance costs for everyone else.  In 2004, presidential candidate Sen. John Kerry called for the federal government to pay for all medical expenses in excess of $50,000.  In the Colorado reform recommendations, this took the form of requiring all high-cost patients with certain pre-existing conditions to enroll in Cover Colorado, the state’s guaranteed issue high-risk pool for the uninsurable, at rates equal to prevailing rates for people without severe illnesses.  At present, the pool is funded by state tax funds and assessments on private insurers.  Premiums are higher than those in the standard market to discourage people from forgoing health insurance until they are sick and then buying into Cover Colorado.

The Commission’s plan would extend guaranteed issue to the individual insurance market.  To make guaranteed issue more palatable, the Commission would shuffle high-cost individuals into a revamped Cover Colorado.  The idea is that having government pay for high-cost individuals will offset the increased cost of guaranteed issue and will create premium stability.

"High-risk insurance pools with subsidized premiums are already available for patients with pre-existing conditions."

These plans will not reduce insurer costs.  Individual insurance underwriters currently have three options:  Accept an individual application as written, decline the application, or accept it with conditions, such as waivers and ratings.  In most states, insurers already charge higher prices for higher risks.  People with specified pre-existing conditions who are “uninsurable” are already allowed to enroll in state-sponsored risk pools or to purchase a policy from the guaranteed issue provider at higher than standard rates with some subsidies for those with lower incomes.  This means that guaranteed issue products are already available for many of those who need them, at rates that are already subsidized.  As they are already out of the individual insurance market, promising to take them out will have little effect and there is no particular reason to believe that coupling government catastrophic insurance with guaranteed issue and community rating will create premium stability.  There is every reason, based on experience in other states, to believe that premiums will rise significantly.

Massachusetts is a real-world example of extending guaranteed issue and community rating to the individual insurance market.  The Massachusetts plan penalizes the parents of healthy children and people who purchase health insurance before they get sick by increasing their premiums in order to offer lower premiums to others.  This is inefficient and unfair.  It raises the rates paid by the vast majority of people.  In doing so, it discourages the purchase of private insurance coverage, especially in lower-income brackets where people are especially sensitive to premium price increases.

"'Guaranteed issue' requires insurers to sell policies to the sick at the same premiums charged to the healthy."

In contrast, Colorado achieves guaranteed issue for all by directly subsidizing insurance for the uninsurable and by letting those who act responsibly save by purchasing medically underwritten insurance in a market with far more flexible pricing.  Rather than supporting a bureaucracy to control all health insurers, Colorado efficiently uses taxes to support a far more limited bureaucracy that focuses on providing coverage to thousands of residents who cannot purchase health insurance due to pre-existing conditions.  In short, it achieves the Massachusetts result of making insurance available for everyone, and does so at a lower cost.  The Massachusetts Connector Authority is now quoting individual insurance prices that are higher than those currently prevailing in Colorado.  This is illustrated by the representative premiums given in Table I.

The academic literature on this is clear:  Guaranteed issue and community rating increase costs and decrease coverage.  Examples of statements from the literature include:  “States limiting risk rating in individual insurance display lower premiums for high risks than other states, but such rate regulation leads to an increase in the total number of uninsured people;”32 “Community rating and guaranteed issue regulations produce only small changes in risk pooling because the extent of pooling in the absence of regulation is substantial;”33 community rating and guaranteed issue “have succeeded only in making individual health insurance coverage more expensive and less available than it otherwise would have been;”34 “individual health insurance markets deteriorated after the introduction of GI and CR reforms…premium rates tended to increase, sometimes dramatically.  We did not observe any significant decreases in the level of uninsured persons.”35

"Guaranteed issue and community-rated premiums raise the cost of insurance."

Furthermore, if the experiences in New York, Maine, New Jersey, Tennessee and Massachusetts are any guide, guaranteed issue and community rating will severely damage the individual insurance market, stop the consumer-directed insurance market in its tracks, stifle important health care innovations and lessen competition among insurers.  This could expand the number of people who are uninsured or depend on government for health coverage.

Expanding the number of people on government programs could be costly if they are removed from innovative private programs designed to manage chronic health conditions.  Among these successful programs:

  • In Colorado, Aetna’s migraine headache management program reduced MRI use, increased the use of appropriate medications and improved the quality of life for migraine sufferers.
  • The oncology management program of Great-West Healthcare, a group health insurer, reduced the rate of hospital readmissions by 17 percent by hiring nurse managers to help patients cope with treatment.
  • Rocky Mountain Health Plans developed a diabetes management program that combined pay-for-performance measures with case management fees.  It improved the percentage of diabetic members with good blood pressure control and increased the number of members with acceptable LDL-cholesterol levels.
  • Pharmacists call all members of the Kaiser Permanente ALL program who have diabetes or coronary artery disease to ensure they are taking all of their medications.
  • Humana analyzes monthly data on claims to ascertain whether people might benefit from its personal nurse coaching service.36

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