NCPA - National Center for Policy Analysis

Regulating Insurance Portability

September 20, 2002

The Health Insurance Portability and Accessibility Act (HIPAA) included provisions regulating access to health insurance by small employers (those with 2 to 50 workers). Assessments of HIPAA's guaranteed issue and related access and portability provisions generally conclude that they have achieved their limited aims and have done no immediate economic harm.

However, analysts say there have been hidden costs arising from the necessarily complex regulatory scheme needed to make HIPAA's insurance reforms functional.

  • HIPPA requires insurance companies to sell group policies to all applicants ("guaranteed issue"), which means that market boundaries must be drawn to avoid imposing the requirement on other segments of the insurance market and to avoid encouraging more employers to opt out of regulation by self-funding their health plans.
  • After regulators draw those boundaries, they must then be policed, which entails greater direct regulatory costs and indirect costs because innovation is forestalled.
  • The other major regulatory impact of guaranteed issue is the accompanying need, for the states to regulate insurance companies' rating practices.

Regardless of how much flexibility insurers are allowed to retain, observers say, various features of the regulated insurance market might be used strategically to achieve risk selection objectives not intended by reforms. Regulators can attempt to minimize these side effects, but doing so requires vigilance and expertise.

Source: Mark A. Hall, "HIPAA's Small-Group Access Laws: Win, Loss, or Draw?" Cato Journal, Spring/Summer 2002, Cato Institute.

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