Madam Speaker, it is my opinion that H.R. 660 will hurt the ability of small employers to access insurance coverage. Contrary to creating larger pools of small employers, H.R. 660 will fragment the small group insurance market into a…
Madam Speaker, it is my opinion that H.R. 660 will hurt the ability of small employers to access insurance coverage. Contrary to creating larger pools of small employers, H.R. 660 will fragment the small group insurance market into a myriad of smaller and smaller pools with healthy small firms separated from those firms with sick employees. The basic fabric of small employer insurance--that healthy and sick must be pooled together to create cross-subsidies--will be irreparably torn to the detriment of all small firms. Small firms will be returned to the unstable and erratic marketplace of the 1980's-- before states imposed small group reform protections. Specifically, the dissenting Members of the Committee find that H.R. 660 will lead to:
(1) Higher Premiums for Most Small Firms and Rampant Discrimination
(II) Widespread AHP Failure and Millions of Dollars in Unpaid Claims
(III) More Uninsured--Particularly Among the Most Vulnerable
(IV) Consumers Stripped of Their State Protections
(V) No Administrative Cost Savings
(1) Higher Premiums for Most Small Firms and Rampant Discrimination
H.R. 660 would allow insured Association Health Plans (AHPs) to avoid covering the oldest and sickest smallest employers by charging them unaffordable rates that would not be allowed if the AHP was subject to state law. As a result, the Congressional Budget Office (CBO) found that 80 percent of small employers would see their premiums increased as a result of the passage of H.R. 660. A June 2003 Mercer study predicts health insurance premiums will increase by 23 percent for small employers that continue to purchase state regulated insurance.
Under H.R. 660, insured AHPs could ``forum-shop'' for the state with the weakest rating rules (a handful of states lack any formal premium restrictions). Once the AHP's policy is approved in a weekly regulated state, the AHP may sell the coverage across the country without regard to the rating rules in the remaining 49 states.
For instance, New York is normally a community rating state that does not allow variation of rates between small employers because of differences in the health status of their employees. But an insured AHP could sell coverage in New York that charges much higher premiums to small employers with sick employees. This will allow the AHP to attract low-risk employers from the state regulated pool--a practice known as ``cherry-picking''. Employers with sick employees would remain in the state regulated pool because they would be effectively barred from the AHP through the quotation of exorbitant rates. The Small Business Administration 2003 study on Association Health Plans describes it as follows:
``Thus AHPs located in states with the less stringent state
laws could offer insurance to the lower cost groups that are
now forced to subsidize higher cost groups in those states
that require community rating or narrow rate ``bands.''
The American Academy of Actuaries warns against this exemption of AHPs from state rating rules:
``The result would be that small employers whose employees
are greater health risks are more likely to obtain coverage
from the private health insurance market, where rates are
limited, than through AHPs, who may not have the same
limitations. State small group legislation sought to
eliminate this sort of selection in the market by requiring
health insurers to put all their small groups in one pool and
to limit the premium charged to one employer relative to
another. Introducing AHPs that are not required to adhere to
the same rating rules brings selection back into the market.
The consequence will be that the rates for the two pools will
diverge, causing further instability in an already fragile
marketplace.''
The Committee had an opportunity to clarify this critical point during the Committee mark-up. Representative Majette (D-GA) offered an amendment that would have prohibited AHPs from varying the rates of small employers beyond the variance allowed under state law. The Committee rejected this amendment.
Indeed, it appears that proponents of AHP passage have long held evasion of state rating rules as a key objective. In ``Insuring the Uninsured through Association Health Plans,'' the AHP proponent National Center for Policy Analysis argues against premium rating restrictions in the small group market because they ``keep premiums artificially low for the sickest groups and artificially high for the healthiest.'' NCPA argues that ``in a competitive market, every new person in a plan will tend to be charged a premium that reflects the expected costs of that person's health care at the time of entry into the plan. . . . However, in health insurance the tradition is to scorn new entrants for `cherry picking.' Yet cherry picking is nothing more than trying to satisfy consumer needs better than a rival.''
It is also important to recognize that H.R. 660 would allow discrimination against small firms with sick employees before and after enrollment with an AHP. In this cruel ``bait and switch'' game, a small firm believes it has secure health insurance coverage only to find it placed in jeopardy when an employee falls ill. The Small Business Administration 2003 study describes the post-enrollment discrimination process:
The House legislation, however, would also permit some of
the abuses of the insurance principle that led states to
adopt the rate reform legislation in the early 1990's. Some
states still permit insurers to use forms of durational tier
rating based on claims experience or ``reunderwriting'', the
practice of processing claims information in a manner similar
to the initial underwriting process, typically using
diagnosis-based or other risk adjustment to determine like
future claims experience and appropriate rerating action. The
association's insurer could offer very low rates as long as
all of a group's members are in good health, but increase the
premium to reflect the fully anticipated cost when one or
more group members develop expensive health conditions. AHPs
would be mainly regulated by DOL which does not have the
resources and experience of state insurance departments. \7\
The ability of AHP's to forum shop for the most lenient state means that a small firm enrolled in an AHP who has an employee contract cancer, or another dread disease, could
face an immediate--and unlimited--premium increase. The AHP would not necessarily have to wait until renewal to impose this premium increase and the premium increase could be of such a magnitude that the small firm would have no choice but to drop coverage. Although the firm could return to the state regulated market on a guaranteed issue basis, the premiums offered by regulated carriers would be very high because of the fact that AHPs had ``cherry picked'' the low-risk firms away from the state regulated pool. Ultimately, this dramatic adverse selection will drive carriers from the unsustainable state regulated small group market leaving high-risk small firms with no access to coverage within a short period following AHP passage.
With regard to self-funded AHPs, H.R. 660 allows them to differentiate the premiums of small firms based on health status to the extent state law allows. This is contrary to the Committee's stated objective of furthering the ability of AHPs to play the same role that large employers play under ERISA. Section 702 (b) of ERISA--added by the Health Insurance Portability and Accountability Act--clearly prohibits large employers from charging similarly situated employees different premiums based on their health status:
A group health plan, and a health insurance issuer offering
health insurance coverage in connection with a group health
plan, may not require any individual (as a condition of
enrollment or continued enrollment under the plan) to pay a
premium or contribution which is greater than such premium or
contribution for a similarly situated individual enrolled in
the plan on the basis of any health status-related factor in
relation to the individual or to an individual enrolled under
the plan as a dependent of the individual.
This means that two computer engineers working in Seattle for Microsoft can expect to pay the same premium for their employer group health plan--even though one is very sick with cancer and the other perfectly healthy. Under H.R. 660 however, a sick computer engineer's firm could be charged a much higher premium than a healthy computer engineer's firm even though both firms are members of the same Association--perhaps a Seattle Association dedicated to technology start-ups.
Clearly H.R. 660 is not furthering the ability of small employers to access the stability of large employer coverage; instead it is retracting the stabilizing protections small employers enjoy under current state law. Furthermore, limiting a self-funded AHP's ability to rate based upon health status to state law will not limit an AHP's ability to ``cherry-pick'' from the state regulated market. Ample opportunity for risk selection remains, including:
Rating based upon age and gender: H.R. 660 would exempt AHPs from state rules that limit the ability to increase a firm's premiums based on the age and gender of employees. Older individuals typically generate claims costs nearly seven times those of younger individuals. In fact, actuaries consider age as a very close proxy for health status. Young females typically generate significantly higher claims than those of their male counterparts. With the unlimited age/gender rating flexibility granted under H.R. 660, AHPs could offer very low rates to firms with low-cost younger workers, draining the state regulated pool of the types of firms needed to keep premiums stable for firms dominated by older individuals or women in their childbearing years.
Geographic ``Redlining'': H.R. 660 allows AHPs flexibility to determine their geographic service area. AHPs would be free to avoid geographic locations with high health care costs. They could choose to avoid certain parts of a city with populations with a high prevalence of expensive illnesses. For instance, Hispanic Americans have a disproportionately high rate of diabetes, and the African American community has been particularly hard hit by AIDS. AHPs could avoid selling coverage in minority neighborhoods--or charge a much higher premium to firms located in those areas--as a proxy for rating for health status. AHPs also could avoid geographic locations where significant portions of residents engage in high-risk occupations--they could avoid lumberjacking towns or farming communities. The League of United Latin American Citizens and the National Council of La Raza recognize these risks and have opposed H.R. 660.
Exclusion of Very Small Firms: So-called ``baby groups''--firms with fewer than 5 employees--are actuarially very expensive to insure. Their claims expenses generally are much higher than those of firms with more employees. HIPAA requires insurers to accept these very small groups and states require insurers to pool these very small firms with the rest of the small group pool. H.R. 660 would allow AHPs to exclude very small firms from their membership altogether (e.g. establish a ``mid-sized'' business association) or accept the small firms as members but charge them much higher premiums than their larger counterparts.
The use of age, gender, geography and firm size in rating practices provide the flexibility necessary for self-funded AHPs to limit their covered lives to low-risk, low-cost firms. Opponents to this legislation recognize that the rampant cherry picking H.R. 660 will foster will hurt all small firms in the long run. That is why the American Academy of Actuaries and the National Association of Insurance Commissioners are joined in their opposition to H.R. 660 by the following business organizations:
National Small Business United
28 Chambers of Commerce
Four Farm Bureaus
10 Local Small Business Associations (e.g. New Hampshire High Tech Council)
17 Labor Organizations
(II) Widespread AHP Failure and Millions of Dollars in Unpaid Claims
The General Accounting Office (GAO) reported that a previous 1974 preemption of state law for Multiple Employer Welfare Arrangements (note: all AHPs are MEWAs) left nearly 400,000 consumers with over $123 million in unpaid bills. H.R. 660 will force this sad history to repeat itself--but the unfortunate results will be magnified since the growth of the internet and other communications channels will allow unsound AHPs to attract vulnerable members at a much more rapid rate.
Former Chief Counsel for the Senate Permanent Subcommittee on Investigations and Inspector General for the Department of Defense Eleanor Hill warns:
AHPs are fundamentally the same types of organizations as
many MEWAs that have, in the past, been sponsored through
associations. If exempted from state regulation, AHPs would
pose the same kinds of unacceptable risks to consumers. . . .
Nothing in this legislation would prevent the same
proliferation of plan failures and consumers losses that
occurred when these types of organizations were last clearly
exempt from state regulation.\8\
Former FDIC and Resolution Trust Corporation Chairman Bill Seidman also has issued warnings regarding the exemption of AHPs from state oversight: ``I am concerned that it places consumers at risk and could set the stage for a taxpayer bailout similar to the one necessitated by the savings and loan failures of the 1980's.
AHP failures will be driven by three fundamental weaknesses in H.R. 660:
1. DOL Lacks Resources and Expertise to Takeover State Regulation of Self-funded AHPs
2. Insured AHPs will Exist in a Regulatory Vacuum, with Neither the States or DOL Able to Regulate
3. Solvency Standards are Inadequate
DOL Lacks Resources and Expertise to Takeover State Regulation of Self-
funded AHPs
Transferring regulatory authority of self-funded AHPs to DOL will represent a monumental change in the scope of DOL's regulatory responsibilities. Although it is often quoted that DOL currently administers ERISA for current group health plans--DOL's role is very limited. They are not responsible for reviewing reserve levels or assuring that actuarially fair premiums are charged and they are not in constant monitoring mode as state insurance commissioners are. DOL has admitted that its enforcement efforts under ERISA are:
. . . considerably different from and often more limited than
the remedies generally available to the states under their
insurance laws. In this regard, it is important to note that,
in many instances, states may be able to take immediate
action with respect to a MEWA upon determining that the MEWA
has failed to comply with licensing, contribution or reserve
requirements under State insurance laws whereas investigating
and substantiating a fiduciary breach under ERISA may take
considerably longer.
In fact, H.R. 660 does not even authorize the Secretary to immediately terminate a failing AHP's operations. Instead, it directs the Secretary to apply to the appropriate United States district court for appointment as trustee to administer the termination of the plan.
A 2002 General Accounting Office (GAO) report found that DOL's Office of Pension and Welfare Benefits Administration (PWBA) is understaffed for its current responsibilities. With regard to pension responsibilities, the report found that DOL faces an ``overabundance of work'' as well as ``limited investigative resources'' and ``staff shortages.'' It found that a review to determine pension plan noncompliance with ERISA would ``require PWBA's full investigative staff 90 years to fully and accurately complete.
Similarly in 1997, Assistant Secretary of Labor Olena Berg testified: ``An infrastructure adequate to handle the new responsibilities [for Association Health Plans] replicating the functions of 50 state insurance commissioners, simply does not exist.'' Berg noted that the current staff would be able to review each health plan once every 300 years.
H.R. 660 includes no provisions that would address this problem. No additional resources or retraining dollars for DOL are included.
Insured AHPs will Exist in a Regulatory Vacuum, with Neither the States
nor DOL able to Regulate
H.R. 660 includes very broad preemption language that appears to authorize an insured
AHPO to sell insurance coverage nationwide and disregard the laws of 49 states once its policy is approved in one state. Thus once an AHP has an approved filing in Michigan, it could sell insurance coverage to New Yorkers. But who would protect the interests of New York policyholders? The New York state insurance commissioner will not know which consumer protection laws are or are not included in Michigan statute. And even if the New York commissioner was an expert regarding Michigan law, it is unlikely he would be authorized to enforce such protections. The enforcement authority of insurance commissioners is generally limited to the enforcement of their state's laws--not the laws of other states. Conversely, it is unlikely the Michigan insurance commissioner is authorized to take action against an insurer for behavior against a resident of another state. His role is to protect the interests of his residents.
Thus, the insured AHP would exist in a regulatory vacuum. State insurance commissioners' hands would be tied by the Federal preemption provisions, and the Department of Labor's oversight authority is quite limited with regard to insured AHPs--the focus being on the initial certification of meeting the Board and other requirements to be considered a ``bona fide'' association. This regulatory vacuum will allow fraudulent and sham operations to flourish. Premium dollars will have disappeared into personal off-shore bank accounts before any action by regulators can be taken, leaving consumers uninsured and providers with large unpaid medical bills.
Solvency Standards are Inadequate
The National Association of Insurance commissioners, the American Academy of Actuaries and others have all criticized H.R. 660 for inadequate solvency standards. H.R. 660 allows AHPs to maintain as little as $500,000 in surplus and caps even the largest AHPs at a $2,000,000 requirement--an amount equivalent to just two premature million dollar babies in a neo-natal intensive care unit. This is contrary to typical state solvency regimes which use open-ended rules, recognizing that the larger an AHP grows the larger a capital base is necessary. The American Academy of Actuaries notes:
The proposed rules governing the minimum surplus
requirements for AHPs do not account for the growth of the
AHP. Historically, there have been many examples of AHP-like
organizations becoming insolvent. Following such events, most
states enacted solvency standards. To maintain the benefit of
these standards to consumers, the surplus standards should be
similar to the minimum requirements for Heath Risk-Based
Capital (RBC) developed by the National Association of
Insurance Commissioners (NAIC). Also the bills at issue rely
on affordable reinsurance vehicles that do not currently
exist in today's marketplace.
Former Resolution Trust Chairman Bill Seidman warns that ``The Savings and Loan experience teaches us that a lack of adequate solvency standards or investment guidelines can quickly lead to financial failures.'' The NAIC also criticizes H.R. 660 as including ``woefully inadequate capital reserve requirements'' and further cautions:
The most troubling aspect of the NFIB plan is it lacks
sufficient oversight to ensure that financial struggles do
not result in failures. Under the NFIB legislation, the AHP
would work with an actuary chosen by the company to set
reserve levels with little or no government oversight to
ensure the levels are sufficient or maintained. Also, that
AHP is required to ``self-report'' any financial problems. As
we have seen in recent months, relying on a company-picked
accountant or actuary to alert the government of any problems
can have dire consequences for the consumers who expect to
have protection under their health plan.
The combination of a regulatory vacuum for insured AHPs, an understaffed and inexperienced DOL and inadequate solvency standards lay the seeds for a large crop of devastating AHP failures and frauds across the country that injures thousands of consumers. Organizations with vast experience in health care fraud--such as the National Association of Attorneys General--recognize that opposition to H.R. 660 is imperative because ``State oversight and regulation is the best way to insure that plans remain solvent and that consumers are protected against fraud.
(III) More Uninsured, Particularly Among the Most Vulnerable
A June 2003 Mercer study performed for National Small Business United indicates that an additional one million individuals would lose coverage and become uninsured if H.R. 660 became law. A 1999 Urban Institute study predicted the uninsured would increase by 250,000 if AHPs were exempt from state law and the Congressional Budget Office (CBO) indicated that as many as 100,000 of the sickest individuals could lose coverage.
While these reports differ in nagnitude, they all predict that AHPs will worsen the uninsured problem, not solve it as proponents contend.
(IV) Consumers Stripped of Their State Protections
States have enacted a broad pantheon of state consumer protections in the last decade. A sampling of these protections include:
44 states ensure access to independent review;
48 states limit how much insurers can charge sicker groups;
50 states impose detailed requirements to assure fair marketing;
50 states require mammography screening coverage; and
47 states require diabetic supplies and education.
Self-funded AHPs would be exempt from state consumer protection laws under H.R. 660. Insured AHPs could forum shop for the state with the least consumer protection laws and only use those limited protections when selling in the remaining 49 states. The Committee accepted an amendment by Rep. Van Hollen (D-MD) that would apply state prompt payment laws to insured AHPs. This amendment did not apply any other state consumer protection laws to insured AHPs, nor did it apply state prompt payment laws to self-funded AHPs. With one stroke, passage of H.R. 660 would eliminate thousands of state consumer protections across the country.
(V) No Administrative Cost Savings
Numerous research reports have reviewed Association Health Plans and all found that lower premiums offered by AHPs would stem from ``cherry- picking''--because the AHP limits its coverage to the healthiest small employers--and the avoidance of state mandated benefits. The 2003 Small Business Administration Study found:
From an objective standpoint, AHPs are likely to lead to
moderately lower insurance premiums from a combination of
lower direct and indirect taxes, avoiding anti-selection and
other cross subsidies, avoiding some mandated benefits and
avoiding the cost to comply with multiple state regulations.
The Congressional Budget Office assumed no administrative savings from AHPs and predicted that nearly two-thirds of any cost savings from AHPs would result from attracting healthier members from the existing insurance pool, with virtually all of the remaining savings stemming from reduced benefits.
A June 2003 Mercer study estimates that AHPs would gain a pricing advantage through risk selection, not greater administrative efficiency. The modeling estimates that the average morbidity (a measure of whether a firm is ``sick'' or ``healthy'') of firms enrolling in AHPs would be 21 percent lower than the average morbidity of small employers in the market today.
These reports found no administrative savings for AHPs because AHPs would need to perform the same functions as insurers today--enrollment, billing, claims administration. Providing health insurance to small firms is resource intensive because the insurer is often providing the types of services that a large employer receives internally from a dedicated employee benefits department. Research report after research report indicates that AHPs cannot avoid those costly functions and that their prime avenue for costs savings is ``cherry picking'' and benefit reduction.
Conclusion
Exemptions from state law for Association Health Plans have been tried and failed before. Far from being a solution to the plight of the small employer, H.R. 660 would exacerbate the cost and stability problems in the small employer market. Consumers will find themselves uninsured just when they need coverage the most--when they fall ill. And providers will be left with millions in unpaid medical bills. Furthermore, H.R. 660 will undo the small group reforms woven together by states over the last decade to respond to the damage and pain that rampant cherry picking imposed on the small employer community in the late 80's.