States Need to Protect Constituents, Take Control of Health Reform

07/09/2010

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By ED HAISLMAIER Federal health reform will reduce coverage options for individuals and employers and result in greater concentration in insurance markets. The broad effects of health reform legislation, if implemented as enacted, will be to impose significant new Medicaid costs on state taxpayers, disrupt state health insurance markets and the current coverage of tens of millions of Americans, and usurp state authority. The new federal insurance regulations, particularly the provisions setting new, uniform federal benefit requirements, will reduce coverage options for individuals and employers and will likely drive up health insurance premiums. They are also likely to result in greater concentration in health insurance markets, leaving only a few large insurers operating as public utilities with a regulated low rate of return selling undifferentiated products to customers with no other options. State lawmakers now face the task of finding ways to protect their constituents—including state taxpayers, health insurance policyholders, and individuals who depend on public health care programs—from the adverse effects of health reform. Governors and state legislators need to start planning their responses now and begin drafting any applicable legislation for consideration in their next legislative session. The wisest approach is to move reform measures that better position their states under either of two possible scenarios: a new Congress that repeals health reform, or a protracted, multi-year political and legal battle conducted against the backdrop of an Administration attempting to implement the legislation as enacted. Specifically, state lawmakers should immediately and aggressively pursue the following strategies. Shift non-elderly Medicaid and CHIP enrollees into premium support. The most effective tool for states to control their Medicaid and CHIP spending is to shift their programs from directly paying providers to subsidizing private coverage for enrollees. Not only will this “premium support” approach help states control spending; in many states it will also increase beneficiary access to physicians.[1] States should immediately begin designing and implementing Medicaid and CHIP premium support initiatives for non-institutionalized beneficiaries. In doing so they should take advantage of the flexibility remaining in federal law by adopting all “benchmark plan” designs, providing for maximum allowable enrollee cost-sharing, and replacing the individual cost-effectiveness test with an average cost-effectiveness test. States should also pursue contracting with one or more private insurers to create supplemental policies that cover required “wrap-around” benefits for Medicaid beneficiaries enrolled thorough premium support in less comprehensive private plans. Then the state can simply pay the premiums for those supplemental policies as well. The advantages of premium support for enrollees are that they will likely get better access to physicians and more appropriate medical care. In addition, subsidized private coverage is free of the “welfare stigma” associated with traditional Medicaid, or even Medicaid managed-care plans, since providers will only see the private coverage—not the subsidies behind it. Premium support will also help expand and strengthen a state’s private insurance market—particularly its small-employer coverage market—by adding a large number of mainly healthy and younger individuals to the market . From a state budget perspective, cost savings from premium support are likely to come in four forms: savings from increased enrollee cost-sharing efficiency savings from covering under a single policy all members of a family currently covered separately by different combinations of public or private plans, administrative savings achieved by significantly reducing the need for the state’s Medicaid and CHIP programs to operate systems that directly reimburse providers and verify claims, and likely the biggest source of savings will come from more appropriate use of medical care. While private plans pay doctors higher rates, if Medicare and CHIP beneficiaries with premium support get earlier and more coordinated physician care, their historic practice of over-using expensive hospital emergency room services should decline—thus, offsetting the increased spending on physician care while also addressing the problem of emergency room over-crowding. Finally, states should craft their “premium support” initiatives as state-plan amendments to their programs, rather than submitting waiver requests to HHS. Unlike the waiver process, over which the Secretary of Health and Human Services is granted broad discretionary authority, Medicaid and CHIP state plan amendments can only be disallowed if the Secretary finds that they would violate statutory federal requirements for how states operate their programs. Refuse to administer the new federal high-risk pools. To date, 18 governors have wisely refused to let their state governments administer the new federal high-risk pool.[2] There are sound reasons for their decisions, as the new high-risk pools are poorly designed. Any U.S. citizen or lawful resident with a pre-existing medical condition who has been uninsured for at least six months will be eligible for coverage. Congress gave the Secretary of Health and Human Services complete discretion in determining which pre-existing medical conditions will qualify—no matter how minor. Thus, unless the Secretary decides to limit eligibility only to those individuals with expensive conditions, it is certain that demand will quickly outstrip the available funding. Furthermore, the law stipulates that an enrollee in a new high-risk pool cannot be charged a premium higher than the applicable standard rate for the same coverage in the general market. In contrast, all of the 34 states with existing state high-risk pools follow the long-standing guidance of the National Association of Insurance Commissioners (“NAIC”) to charge high-risk pool enrollees premiums that are at least 125 percent of standard rates.[3] Specifying that premiums charged to enrollees in the new pools not exceed standard rates means that, relative to existing state high-risk pools, the new pools will provide more generous subsidies (at a higher cost) and will likely attract many more applicants, particularly individuals with relatively minor pre-existing medical conditions. Finally, another major concern with state governments administering the program is that when the federal funding runs out, state lawmakers will be faced with either terminating the coverage of enrollees or continuing to fund the program with state tax dollars. From the perspective of state officials, they are better off letting the Department of Health and Human Services administer the program, either directly or through private-sector contractors. That way, federal officials will be the ones who are unambiguously responsible for any adverse funding or enrollment decisions. Decline federal “premium review” grants. The provisions instructing the Department of Health and Human Services to conduct health insurance premium reviews also authorizes HHS to distribute up to $250 million in grants to states to assist HHS in implementing those provisions. In exchange, however, state insurance departments must provide HHS with insurer data and collaborate with HHS in administering rate regulations. To preserve the integrity and independence of their own insurance departments and insurance laws, state officials would be well advised to decline this offer of federal funding. The rate review provisions are not only poorly drafted, but were politically motivated additions to the legislation. Statements by Administration officials since the enactment indicate that implementation of the provisions by the Obama Administration is likely to also be driven more by political considerations than by sound policy or genuine consumer protection. For example, both the statute and subsequent comments by Administration officials refer to “unreasonable premium increases.” What is missing is any recognition that another key aspect of proper insurance regulation is to prevent the problems that occur if insurers under-price their products. If an insurer fails to charge enough in premiums to cover its expected claims costs, then it is at risk of being unable to make good on the promises made to its customers. As any state insurance regulator understands, ensuring that carriers have sufficient premium income to cover future claims costs is an important consumer protection. Also missing from the new federal law is any recognition of the equity issues involved in setting rules for insurers that cross-subsidize different lines of coverage. For example, is it “fair” if regulators require an insurer to limit premium increases on its individual market policies, but as a result the carrier then has to further increase rates for group policies to make up the difference, or vice-versa? Of course, there is no single “correct” set of answers to these kinds of questions, but state lawmakers and state insurance regulators at least have the benefit of decades of experience addressing such issues, while the federal government has none whatsoever. To be sure, insurance companies (including non-profit ones) are not altruistic enterprises, and state insurance regulation is no more immune to political considerations than is federal regulation. However, given the demonstrated propensity of congressional leaders and Obama Administration officials to blame insurers for the adverse consequences of their own legislation, the vast disparity between the state and federal governments in experience and expertise in insurance regulation, and the inherent conflicts that will arise between the new federal rate regulations and existing state insurer solvency regulations, it is important that state lawmakers preserve the independence of their own insurance laws and state insurance departments. That means states should not accept federal funding with strings attached that compromise their independence or make their insurance departments mere branch offices of HHS. Implement state health insurance market reforms and exchanges based on state, not federal, designs. Health reform will drive up health insurance costs with new coverage mandates while simultaneously trying to hold down premiums with politicized rate regulation. The federal standardization of coverage will also limit the ability of insurers to differentiate themselves in the market or offer their customers lower-cost benefit designs, while the minimum loss ratio regulations will reduce incentives for insurers to be more efficient in managing or paying for care—as insurers will be able to retain little, if any, of the savings that might result. Faced with this impending regulatory “squeeze play,” insurers are already evaluating their options and can be expected to act in some predictable ways: Insurers with other lines of business (such as property or life insurance) will likely discontinue or sell their health insurance book of business to a competitor and exit the market. Carriers that offer only health coverage will look to mergers and acquisitions as the path to becoming “too big to fail.” Their logic will be that if the federal government is going to turn private health insurance into a regulated utility with a low rate of return, then the way to survive is to be one of the remaining few large insurers that the federal government needs to keep in business in order to administer the system. Thus, absent initiatives by state governments to counter these effects by expanding choice and competition, state health insurance markets will begin to see fewer carriers and plan options—most likely starting next year. The best response for state lawmakers is to immediately move in the opposite direction of the new federal legislation by first determining their state’s needs and priorities, and then enacting their own reforms that increase health insurance choice, competition, and coverage while also reducing costs. Lawmakers in each state can select from the following broad strategies the elements that offer the best approach for addressing their state’s particular needs and circumstances: increase consumer choice by creating a "defined contribution" option for employer-sponsored health insurance coverage, reduce coverage costs and allow more variety in plan design by repealing unnecessary state-mandated health insurance benefit requirements, encourage insurer participation by lowering barriers to market entry through statewide risk adjustment mechanisms collectively designed and administered by the carriers selling health insurance in the state, expand coverage options by creating a “premium aggregation” mechanism that enables individuals to buy coverage using contributions from multiple employers (such as when a family has two earners or an individual has two part-time jobs), and, in the case of low-income families, Medicaid or CHIP premium support payments from the state, and provide consumers with greater price and quality transparency with respect to insurance coverage and physician and hospital services.[4] The fact that the federal legislation perverts the intent of a health insurance exchange—replacing its original purpose as a state tool for increasing consumer choice and encouraging greater variety and competition in health insurance with the new purpose of administering federal coverage uniformity, and supplanting state insurance regulators—should not dissuade state lawmakers from pursuing their own designs for exchanges (consistent with the original intent of the concept) or other administrative mechanisms as tools for implementing their own reforms to promote consumer choice and enhanced health plan competition. For example, Utah officials and stakeholders determined in their assessment process that their state’s small businesses coverage offer rate was well below the national average and that Utah has a significant number of workers with two or more part-time jobs who do not qualify for employer group coverage offered to full-time employees. Thus, they decided to make defined contribution and premium aggregation using a state health insurance exchange key elements of Utah’s reform strategy. They also devised an implementation strategy that relies on existing private vendors to provide the necessary administrative services at a negligible cost to the state’s budget.[5] Other states can also use private vendors to quickly design and implement similar solutions customized to their own particular needs and circumstances. By enacting their own insurance market reforms and creating their own exchanges, or similar administrative mechanisms, based on their own designs now, states can make it politically more difficult for federal officials to implement provisions of the new federal legislation (such as minimum federal benefit standards) that will drive up premiums and reduce coverage choices. State-designed exchanges can also serve as the administrative platform for implementing Medicaid and CHIP premium support initiatives and, if the legislation is not repealed by then, for organizing alternative coverage arrangements for individuals and employers who refuse to comply with the new federal mandates that also take effect in 2014. Insist that federal officials explain publicly how they will administer health reform. State legislators should convene public hearings and summon the federal Secretary of Health and Human Services, members of their state’s congressional delegation, and other federal officials to explain how they intend to implement the numerous provisions of the legislation that will affect their state’s Medicaid and CHIP programs and the private health insurance plans of individuals and employers. If federal officials refuse to testify before state legislatures, their refusals will themselves be public testimony. Conduct and publicize “benchmark” analyses. States should immediately conduct “benchmark” analyses to provide “baseline” projections for at least the next five years for key metrics, and then use the results to measure the effects of various provisions of health reform. The results can also serve as a baseline for estimating the effects of any alternative state reform proposals. Key metrics include: Projected annual enrollment and per capita spending for Medicaid and CHIP, by elgibility category under current law; Projected growth in average premiums in the state’s individual, small, and large group health insurance markets under current law; Projected average premiums by age in the state’s individual and small group markets under current law; and Current and projected health insurance coverage status of the state’s residents by source of coverage under current law. Developing a state-specific baseline is the essential precursor to constructing state-specific estimates of the effects of the new federal law. State officials will want to construct their own estimates because, if for no other reason, national level estimates will not be sufficiently precise for state planning purposes. Variations among the states in the composition of their populations, economies, health systems, public programs and insurance rules mean that, in any given state, the actual effects of a particular provision of the new law may differ significantly from the projected national effects estimated by federal officials. Indeed, significant disparities in the effects among states are likely to arise with respect to even minor provisions of the new law. With their own, state-specific benchmark analyses in place, states will be able to more precisely estimate the effects of the new federal law and state lawmakers will be able to demonstrate to their constituents what portion of a particular result—such as an increase in insurance premiums—is attributable to the federal health care legislation and what portion is attributable to other factors. State officials should recognize one simple fact: States are not mere agents of federal authority. They are not powerless. They have a duty to represent their citizens. [1] For a more detailed discussion of Medicaid premium support, see Dennis G. Smith, “State Health Reform: Converting Medicaid Dollars into Premium Assistance,” Heritage Foundation Backgrounder No. 2169, September 16, 2008, read here. [2] The National Association of Insurance Commissioners has compiled lists of: the 30 states (plus the District of Columbia) that have initially indicated that they intend to contract with HHS to administer the federal risk pools; the 18 states that have told HHS that they will not apply to be a risk-pool contractor; and the two states that have yet to reach a final decision, read here. (June 18, 2010). [3] Three states cap high-risk pool premiums at 125 percent of standard rates. Most have caps set at 150 percent to 200 percent of standard rates and only one sets its cap at a higher level (Florida, at 250 percent). See Kaiser Family Foundation, “State High-Risk Pool Rating Rules, January 2010,” StateHealthFacts.org, read here (June 18, 2010). [4] For a more detailed discussion of risk-adjustment design, see Edmund F. Haislmaier, “State Health Care Reform: A Brief Guide to Risk Adjustment in Consumer-Driven Health Insurance Markets,” Heritage Foundation Backgrounder No. 2166, August 1, 2008, read here. [5] Edmund F. Haislmaier, “State Health Care Reform: An Update on Utah’s Reform,” Heritage Foundation Backgrounder No. 2399, April 9, 2010 (read here) and Haislmaier, “State Health Reform: The Significance of Utah Health Insurance Reforms,” Heritage Foundation WebMemo No. 2569, July 29, 2009, read here.   This article is excerpted from “Obamacare: Impact on States”, published July 1, 2010 by the Heritage Foundation. Read here. ☆ ☆ ☆   Ed Haislmaier is a Senior Research Fellow at the Heritage Foundation in Washington DC.     © Lyceum Associates, Inc. All rights reserved.

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