Health Insurance Regulation: An Introduction Presentation for the Alliance for Health Reform by Beth C. Fuchs, Ph.D. Health Policy Alternatives, Inc. October.

Health Insurance Regulation: An Introduction

Presentation for the

Alliance for Health Reformby

Beth C. Fuchs, Ph.D.Health Policy Alternatives, Inc.

October 17, 2008

Sources of Regulation• States & their departments of insurance

– “business of insurance” – McCarran Ferguson Act of 1945

• Federal government– Employee Retirement Income Security Act of 1974 (ERISA)

• Group health plans (employers & unions)

– Consolidated Omnibus Budget Reconciliation Act (COBRA, 1986)

• Group health plans

– Health Insurance Portability and Accountability Act (HIPAA, 1996) & amendments (e.g. mental health parity, genetic non-discrimination)

• Group health plans• Insured plans (via states or federal fallback)

State Departments of Insurance• 51 different jurisdictions with different rules• National Association of Insurance

Commissioners (NAIC): model regulations– States may adopt “as is” or modify

• States do NOT generally regulate employer plans– ERISA preemption

Federal Regulation: ERISA• Uniform requirements applicable to employers doing business

anywhere in U.S.– Department of Labor

• Regulates private sector pension programs and, to limited extent, employee welfare benefit plans, including health coverage– Framers expected national health insurance would provide more

national standards• Applies to all plans offered by private sector employers or

unions (except churches) whether offered through insurance or self-insured– Both types of plans are “ERISA plans”

• Preempts state regulation of employer-sponsored group plans (except Hawaii)

ERISA Affects Health Benefits of 133 Million Americans*

• About 162 million people < age 65 covered under employer-sponsored plans

• 132.8 million (82% of ESI) covered by ERISA (private sector employer/union plans)– Workers (“participants”) & dependents (“beneficiaries”)

• Of the 132.8 million, 55% in self-insured & 45% in fully-insured plans

• Larger the firm, more likely self-insured

* Estimate for 2006 by EBRI based on March 2007 CPS. Overstates total because it includes people covered by church-related plans, which are not ERISA plans

Self-Insured Health Plan• Same as “self-funded” health plan• For ERISA purposes→

– A single employer-sponsored or union-sponsored benefit plan is self-insured even if some risk is ceded to another entity

• Sponsors can purchase stop-loss coverage

• Why does this matter?– Because of ERISA preemption! States generally can’t

regulate.– Limits application of state health reforms

States: Regulated Areas and Activities

• Financial solvency• Promoting the spreading of risk

– Access to insurance, premium rating, covered benefits

• Protecting consumers against fraud– Marketing, claims processing, reimbursement

• Ensuring consumers are paid benefits that they are promised – Prompt payment; other fair claims handling

• Various “patient protections” – External review, rights to specialists, etc.

Insurance Imperative: Spread the Risk

Jonathan Cohn: Presentation 2007

8

1930s: Broad-Based, Community-Rated Pools Helped Provide Accessible, Affordable Coverage

One insurer dominated market; less health care to insure

California Speaks, A Statewide Conversation on Healthcare, Participant Guide, America Speaks, August 11, 2007, www.

Blue Cross & Blue Shield

9

Health Insurance Today Those most in need of coverage increasingly priced out or

excluded by highly fragmented market

AcmeTrucking

Grocery Chain

Joe’s Widgets

Big Auto

Experience-rated insurers

Self-insuredSelf-insured

Self-insured associationplans

Association Plans

Small group policies

A B C D

Individual Policies

Beth Fuchs, Presentations to the American Cancer Society, 2005-2006 10

In a Voluntary Insurance Market…• Insurers use risk selection to limit adverse selection

– Medical underwriting• Pre-existing exclusions

– Risk-based rating– Benefit design– Renewal practices

• Segmented risk pools – Make coverage more affordable for some but less available

for others – Make coverage less secure: availability & affordability can

change over time with changes in enrollee’s health status

12

Beth C. Fuchs, Expanding the individual health insurance market: Lessons from the state reforms ofthe 1990s, RWJF Synthesis Project, June 2004, www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no4_synthesisreport.pdf

Major Types of Health Insurance Reforms

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Beth C. Fuchs, Expanding the individual health insurance market: Lessons from the state reforms ofthe 1990s, RWJF Synthesis Project, June 2004, www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no4_synthesisreport.pdf

Continuum of Insurance Reforms

14

Small-Group Insurance ReformsAs of September 2008

No. of States (+ D.C.)

Requirements for issue of policies

Guaranteed issue of all products (required by HIPAA)

51

Guaranteed renewability (required by HIPAA) 51

Rating

Community rating or modified community rating 11

Rating bands or other constraint on some rating factors

36

No rating restrictions 4

National Association of Insurance Commissioners, Personal Communication, October 2008

Individual Market Reformsas of Feb. 2006

No. of States

Requirements for issue of policies

Guaranteed issue of all or most products 11

Guaranteed issue only for HIPAA eligible of all or most products

12

No guaranteed issue 27

Guaranteed renewability – required by HIPAA 50

Rating

Community rating or modified community rating 7 + 1 (BCBS only)

Rating bands or other constraint on some rating factors

10

No rating restrictions 32

National Association of Health Underwriters, State-Level Individual and Small-Group Health Insurance Reforms, February 2006

State Oversight & Enforcement Tools• Form and rate filing• Market conduct and financial examinations• Corrective actions

– Monetary fines, “cease & desist” orders, revocation of licenses

– If financial: state can take over (e.g. receivorship); pay claims via guarantee fund

• General prohibition on unfair practices• Due to ERISA preemption, scope is restricted

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Key Issues in Reforming Insurance Regulation

• Rules of issue: Is insurance available? Will it always be so? Are risks spread broadly? Is risk spreading stable over time?

• Rating rules: Is insurance affordable? At what price today? Tomorrow?

• Covered benefits: Is coverage adequate? • Administered fairly, reliably, efficiently: Are the rules

transparent & understandable; provide for reasonable return on the premium, etc.?

• Accountable: under whose & what rules?

For Those Who Want More….

McCarran-Ferguson Act of 1945• Historically, insurance not considered interstate commerce

and thus not subject to federal regulation• Act was reaction to confusion caused by Supreme Court

decision that business of insurance was interstate commerce and thus subject to Federal anti-trust laws

• Reaffirmed and continued traditional power of states to tax and regulate the business of insurance to extent that Federal laws did not deal specifically with insurance– Except in case where agreements boycott, coerce or intimidate

• Therefore, the law did not prevent the federal government from regulating insurance; it merely affirmed that the government had so far abstained from doing so

Major Federal Laws Affecting Regulation of Private Health Insurance (under-65)*

1945 – McCarran-Ferguson Act1973 – Health Maintenance Organization Act1974 – Employee Retirement Income Security Act (ERISA)1986 – Consolidated Omnibus Budget Reconciliation Act

(COBRA)1996 – Health Insurance Portability and Accountability Act

(HIPAA)1996 - Maternity, Mental Health Parity Amendments to

HIPAA2008 – Genetic Information Non-Discrimination Act2008 – Mental Health & Addiction Equity Act (Emergency

Economic Stabilization Act)

Does not include IRC requirements on employer-sponsored plans, such as section 105(h) relating to non-discrimination,or pregnancy and age non-discrimination under Civil Rights and Age Discrimination in Employment Acts

ERISA Requirements on Health Plans are Limited

• Title I (as enacted)– Fiduciary standards

• Act in sole interest of participants & beneficiaries

– Reporting and disclosure – Nondiscrimination– Claims review (recover improperly denied benefits & attorney’s fees)

• Post – 1974 amendments– MEWAs– COBRA– HIPAA (including mandatory registration with Labor Dep’t of MEWAs)

• Mental health parity; maternity length of stay; reconstructive surgery; genetic non-discrimination

ERISA Does Not→

• Require employers to offer a health plan, or prevent plans from changing, reducing, or terminating coverage (unless to do so would violate HIPAA)

• Regulate the design or content of a plan, with specific exceptions (e.g. COBRA)

• Prescribe funding or vesting requirements, as it does for pensions

• Specify any requirements for maintaining plan solvency• Impose any quality assurance standards or standards for

utilization review• Provide for punitive or compensatory damages in claims

disputes

ERISA Preemption • Preempts state laws that “relate to” employee benefit plans

(including health plans) even if they do not conflict with federal law

• Exception to preemption:– State regulation of the business of insurance (McCarran-Ferguson)

• “savings clause”

• But, states cannot deem private employer or union plans to be insurers – States cannot regulate ERISA plans directly but by regulating health

insurers, states can affect insured ERISA plans• Federal courts interpret meaning of preemption

– Varying interpretations have left something of a muddle for some ERISA-related issues

Source: Patricia A. Butler, ERISA Implications for State Health Care Access InitiativesPresentation to State Coverage Initiatives, January 26, 2007

Court Interpretations of ERISA’s Preemption Clause

• Does state law “relate to” private union or employer-sponsored health plan?– Does it refer to such plans?– Does it have a connection with such plans by:

• Regulating areas ERISA addresses?• Regulating plan benefits, structure or administration?• Imposing substantial costs on plans?

Source: Patricia A. Butler, ERISA Implications for State Health Care Access InitiativesPresentation to State Coverage Initiatives, January 26, 2007

Evolution of Court Decisions and “Savings Clause”

• Increasingly broad interpretation from 1974 to 1994– Narrowed in 1995 Travelers Case (NY State Conference of

BC & BS Plans v. Travelers Insurance)• Upheld NY hospital rate-setting law that could raise

ERISA plan cost to some extent• Basic tests for preemption remain:

– State cannot refer to or have a connection with ERISA plans

– Laws must be aimed at insurers and insurance practices (not just any insurer activities)

– Laws must “substantially affect risk pooling arrangements” between insurer and insured

Source: Patricia A. Butler, ERISA Implications for State Health Care Access InitiativesPresentation to State Coverage Initiatives, January 26, 2007

The Case of MEWAs*: Or just when you think you understand ERISA preemption…

• Multiple employer welfare arrangements – Labor Dep’t: group purchasing arrangements are not ERISA plans– Arrangements claimed ERISA exemption– States said huh? – Insolvencies and fraud led to loss of coverage by a lot of people

• 1983 amendments – Not withstanding the ERISA preemption of state laws relating to group

health plans, states can regulate these arrangements (MEWAS) with limited exception

• Subsequent Labor Dep’t guidance – Sought to clarify extent of state regulation

*A MEWA is not a multi-employer plan. A multi-employer (Taft-Hartley) plan is regulated by ERISA.

SourcesClaxton, Gary, How Private Insurance Works: A Primer, Kaiser Family Foundation, 2008, www.kff.org/insurance/7766.cfm

Fuchs, Beth C., Expanding the individual health insurance market: Lessons from the state reforms of the 1990s, RWJF Synthesis Project, June 2004, www.rwjf.org/pr/synthesis/reports_and_briefs/pdf/no4_synthesisreport.pdf

Hall, Mark A., Reforming Private Health Insurance, AEI Press, 1994. Mark Hall , he Regulation of Health Insurance …..

Mila Kofman and Karen Pollitz, Health Insurance Regulation by States and the Federal Government: A Review of Current Approaches and Proposals for Change, Georgetown University, April 2006, www.pbs.org/now/politics/Healthinsurancereportfinalkofmanpollitz.pdf

Merlis, Mark, Fundamentals of Underwriting in the Non-group Health Insurance Market: Access to Coverage and Options for Reform, National Health Policy Forum, April 13, 2005, www.nhpf.org/pdfs_bp/BP_Underwriting_04-13-05.pdf