Overview of the Proposed Market Reform Bill H 7892, An Act Relating to Insurance - Accident and Sickness Policies Introduced

by Rep. Kennedy and others
March 21, 2012 The Governor and Lt. Governor, in consultation with the Office of the Health Insurance Commissioner (OHIC), have proposed a Market Reform Bill - House Bill 7892: AN ACT RELATING TO INSURANCE - Accident and Sickness Insurance Policies - to be considered by the Rhode Island General Assembly. This act would amend Rhode Island laws so as to be consistent with health insurance market reforms established in the Patient Protection and Affordable Care Act of 2010 (the ACA). The following is a description of the seven core elements of the bill, five of which are required changes to insurance law in order to conform with Federal health insurance rating requirements as specified in the ACA. Additional details are provided for the last two elements – which are optional elements of the ACA and are recommended by OHIC for consideration here in Rhode Island1:

1. Prohibits Gender as a Rating Factor (ACA required)
Rhode Island law currently permits carriers serving small groups and individuals to underwrite, or determine insurance rates, based on the age and gender of the group or individual. As required by the ACA, this bill prohibits gender-based underwriting in these markets.

2. Limits Allowable Variation in Community Rates to 3:1 (ACA required)
RI law currently permits small group and individual health insurance premiums to vary from the community rate by up to a 4:1 ratio. That is, the highest rate offered can be no more than four times the lowest rate offered to any Rhode Island small employer for the same insurance policy. As required by the ACA, this bill limits allowable variation based on age to a 3:1 ratio. The current law's 4:1 ratio will continue to apply as an aggregate premium variation maximum.

3. Prohibits Pre-Existing Condition Limitations (ACA required)
RI law currently prohibits carriers from imposing pre-existing condition limitations on coverage for subscribers who have had continuous coverage, meaning that services covered by a plan cannot be denied because they relate to pre-existing conditions. Current law permits the use of pre-existing condition limitations for new subscribers, or those who have had a significant break in coverage, resulting in the denial of claims. As required by the ACA, this bill prohibits the use of pre-

1

The ACA also allows (but does not require) states to include tobacco as an allowable rating factor. OHIC does not recommend implementing such a factor, and as such has not included this in H7892.

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existing condition limitations in the large and small group markets.2

4. Limit on Waiting Periods for Coverage (ACA required)
RI's small group law currently prescribes a maximum waiting period, limited to 60 days. That is, Rhode Island small group carriers can only impose a waiting period of up to 60 days, for any new/transitioning employee, before the employee must become eligible for coverage. As required under the ACA, the Market Reform Bill establishes a maximum waiting period in the small group and large group markets. The 60 day period in the legislation is proposed for all group markets as a continuation of Rhode Island’s policy choice in the small employer market.

5. Exemption for Grandfathered Plans (ACA required)
Under the ACA, some existing health insurance coverage plans that remain unchanged are considered “grandfathered plans” and therefore will be exempt from certain market reforms summarized above. The Market Reform Bill is intended to carry forward into RI law the exemptions established for grandfathered plans under the ACA.

6. Merge Individual and Small Group Markets (ACA optional)
As permitted by the ACA, this bill proposes to merge the individual and small group markets in January 2014, when the Health Benefits Exchange begins to cover Rhode Island residents. As examples, the Healthy New York program and the state of Massachusetts3 have already merged individual and small group risk pools. Specifically, Rhode Island would propose to merge the rating pools for individuals and small employers into one adjusted community rated pool. The concept of merging markets is based on pooling the risks under the currently separate markets. There is pending federal guidance that will hopefully clarify whether premium rates in a merged market must be identical for individual and small group policies that contain the same characteristics such as age and geography, or if individual and small employer group policies may differ based on temporary reinsurance adjustments and variation in administrative expenses. Regardless of that clarification, merging markets involves combining the projected claim costs and risk attributes of individual and small employer group policies when developing premium rates, as if they are one block of business. An essential component of merging markets, therefore, is that carriers offering small group policies would need to also offer individual policies, and vice versa. However, under the merger model being considered, carriers could continue to offer different plan designs for individuals vs. small employers RI regulators and policy-makers are continuing to discuss the market merger issue with a health insurance carrier work group; implementation details under consideration include:
2

A technical amendment will be needed to accomplish the intent of this portion of the legislation. Massachusetts merged the individual and small group markets as part of their reform efforts. Specifically, they merged both rates and products (with the exception of the young adult plan). MA small group rates are subject to 2:1 compression, and allow the following rate adjustment factors: age, industry, rate basis type, group size, geography, wellness program usage and tobacco usage.
3

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• Whether a transition process should be designed to mitigate any significant rate impacts at the individual policyholder or small employer level. • Whether any administrative cost components should remain separate, such as broker fees allocated to small group policies. • Whether rates in a merged market should vary based on the different administrative costs of individuals and small groups. • Whether rates in a merged market should vary based on reinsurance revenue available to individual policyholders. • If rates are allowed to vary, how should such variations apply to sole proprietors in the current small group market. For Rhode Island, the primary considerations driving this recommendation are: o Increased Choice for Individuals: BCBSRI is the only carrier offering coverage in the individual market; whereas in the small group market, coverage is offered by BCBSRI, United, and Tufts. Combining the markets would therefore likely offer additional choice of carriers for Rhode Islanders without access to affordable employer-based coverage. o Stability of Rating Pool: We estimate that, post 2014, there will be a sizeable increase in the individual market – increasing from 14,000 to ~ 69,000 individuals seeking coverage without access to employer-based coverage.4 Absent a market merger, this sizeable swing in enrollment could result in significant rate volatility.5 Combining the individual market segment with the ~85,000 covered lives in the small group market should serve to stabilize the individual market, minimizing annual rate fluctuations due to changes in participation rates, enrollee characteristics. o Consistency: Post 2014, with the advent of the Exchange and the availability of individual tax credits, individuals will be encouraged to “shop” amongst their health insurance options. Combining the pools would ensure consistency of options for individuals and small groups – particularly among groups of one -- thereby limiting the opportunity for adverse selection between the two pools. • Impact on Rates: Analysis performed by actuaries with the State’s contractor, Wakely, suggests different rate impacts depending upon the assumptions used to analyze a merged market. Using some assumptions, individuals would see an overall, average 40% (Pool 1) or 8% (Pool 2) decrease in rates in a merged market in 2014, and small employers would see an overall, average 2% decrease in rates in a merged market in 2014. Using other assumptions, in 2014 individual rates would decrease by 41% or 10%, pending
4

Who Goes Where Under Federal Healthcare Reform: RI Population Insurance Status Projections, 2014 & Beyond, OHIC, Oct 24, 2011. 5 The ACA anticipated this volatility and includes some protective measures – risk adjustment and reinsurance . Merging the market would provide an added protection.

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upon the pool, and small group rates would remain unchanged. Further discussions with RI health insurance carriers are needed to develop the set of assumptions for a merged market that is in the best interests of Rhode Island.

7. Product Consistency Inside/Outside the Exchange (ACA optional)
Markets inside and outside the Exchange for an insurer will share a common risk pool for rating, but careful thought is needed to prevent financial incentives for consumers, carriers, or employers to prefer transactions outside rather than inside the Exchange. Some refinements of commercial market rules are needed to minimize adverse selection – that is, the Exchange having a sicker and therefore higher-cost pool - and ensure a vibrant insurance market. Toward this end, the ACA requires that the same rating rules apply inside and outside the Exchange – and OHIC recommends two added refinements to this protection:  Same Products Outside as Inside: Would require carriers offering qualified products inside the Health Benefits Exchange to offer those same products outside the Exchange, if the carrier elects to offer any plans outside the Exchange. This would protect against variations in product offerings that might disproportionately attract high risk individuals/groups to enroll through the Exchange. It will also help to ensure that carriers apply consistent rating rules inside and outside the Exchange.  Catastrophic Products offered Outside must be Offered Inside (not in bill as introduced): Would require carriers offering plans that qualify as “catastrophic coverage” outside the Exchange to offer that same option inside the Exchange6. If catastrophic plans are available outside the Exchange and not inside the Exchange, the healthiest and therefore lowest-cost consumers may select against the Exchange.

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Individuals under age 30, or who are exempt from the individual mandate because of hardship or lack of affordable coverage may enroll in catastrophic plans. Catastrophic plans are allowed to be less than the 60% Bronze actuarial value requirement, although they must provide essential health benefits.

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