Insurers
Prepare for Major Market Reforms

After last-minute negotiations lasting until late on a
Saturday night, the US House of Representatives narrowly passed HR 3962, the
Affordable Health Care for America Act, by a vote of 220 to 215 on November 8.
Industry groups that have consistently supported the concept of healthcare reform
as well as their specific policy preferences responded with mixed reviews of
the 1990-page House bill, and the process of getting the Senate to agree on
reform legislation still faced serious challenges. While debate over the
creation of a government-run health plan continues, health insurers are
preparing for market reforms contained in both House and Senate proposals while
pushing for a strong individual mandate.

Although there are potentially substantial differences
between the healthcare reforms that passed the House and what will be supported
in the Senate, there are some proposals that seem to have universal support. In
an interview with Managed Care – First
Report (MC-FR), Greg Scandlen,
senior fellow and director, Consumers for Health Care Choices, said that
underwriting and rating restrictions, such as guaranteed issue and community
rating, as well as requirements for participation in insurance exchanges are
things insurance providers need to plan for. “They are going to have to spend a
lot of time figuring out how to cope with that,” Mr. Scandlen said.

If enacted as passed by the House, HR 3962 would establish a
mandate for most legal residents of the United States to obtain health
insurance and set up insurance exchanges through which certain individuals and
families could receive federal subsidies to purchase that coverage. The House
bill includes creation of a public, government-run health plan that would be
administered by the Secretary of the Department of Health and Human Services
(HHS). Eligibility for Medicaid would be expanded, and growth of Medicare
payment rates for most services would be reduced. The bill would impose an
income tax surcharge on individuals with high income, and both the House and
Senate have voted on drafts that would reduce funding for Medicare by more than
$400 billion.

Following the House passage of HR 3962, Karen Ignagni,
president and CEO of America’s Health Insurance Plans (AHIP), criticized the
lack of provisions that promote coverage choice and savings. “The current House
legislation fails to bend the healthcare cost curve and breaks the promise that
those who like their current coverage can keep it. A new government-run plan
will cause millions to lose their existing coverage and draconian Medicare
Advantage cuts will force millions of seniors out of the program entirely,” Ms.
Ignagni said.

“Many of these reforms begin in 2010 after employees have
already chosen their plans and contracts have been negotiated,” she continued.
“The result will be increased costs and massive disruptions in the quality
coverage individuals and families rely on today.”

HR 3962 was endorsed by the American Medical Association
(AMA), but some physician groups objected to the bill as well as the AMA’s
endorsement. On the night the bill was signed, J. James Rohack, MD, AMA
president, called the bill “a big step forward as we work for comprehensive
health reform this year.” Dr. Rohack said the AMA will continue its work with
Congress to strengthen and improve health reform legislation as the process
continues.

Before the vote, Joseph Reichman, MD, president of the
Medical Society of New Jersey (MSNJ), lamented AMA’s support of the House bill.
“Despite the recent endorsement of HR 3962 by our American Medical Association,
physicians in New Jersey cannot support this legislation,” Dr. Reichman said.
An MSNJ delegation, along with a small group of medical societies from the AMA
House of Delegates, cosponsored a resolution to remove the AMA endorsement of
HR 3962 on the day before the House vote.

At the same time House Democrats were preparing for the vote
on HR 3962, House Republicans prepared a 230-page draft reform bill of their
own. The bill would have allowed insurers to sell across state lines and
included malpractice reform that would cap awards and incentivize the use of
health savings accounts. At press time the Republican proposal had received
little attention or debate, and it was rejected in the House by a vote of 176
to 258.

The Democrats’ proposed healthcare reforms are expected to
cost about $1 trillion, and according to a report issued on November 6 by the
Congressional Budget Office (CBO), the most costly mandates contained in HR
3962 are requirements regarding private sector health insurance. Individuals
would be required to obtain acceptable health insurance coverage, defined in
the bill as qualified plans. Employers would need to either offer qualified
health insurance plans to their employees or pay an excise tax to the federal
government. The bill includes additional mandates, including requirements on
issuers of health insurance, new standards governing health information,
nutrition labeling requirements, and limits on certain agreements between drug
manufacturers for settling patent infringement claims.

According to the CBO, the lowest cost family nongroup plan
under the House bill would cost $15,000 in 2016. The individual mandate in HR
3962 provides that an individual who does not, at any time during the taxable
year, maintain qualified health insurance coverage is subject to an additional
tax equal to the lesser amount of either 2.5% of income or the national average
premium cost of coverage. The tax would not apply to individuals if their
income falls below the threshold for filing a federal income tax return.

Although AHIP objects to the creation of a government-run
health plan, which may not have enough support to clear the Senate, the insurer
trade group has been advocating consumer-friendly market reforms coupled with
an individual mandate for some time. “The big thing that we know that is in
both bills are the market reforms, and things that we support—guaranteed
coverage, elimination of preexisting condition exclusions, no longer basing
premiums on a person’s health status or gender,” said Robert Zirkelbach, AHIP spokesman.
“But what experience in the states has shown is that there needs to be an
effective personal coverage requirement for those reforms to work. Otherwise,
costs are going to skyrocket for families and employers.”

Mr. Zirkelbach expressed AHIP’s frustration with the
individual mandate provisions in current reform proposals. “What we saw,
particularly in the Senate bill, is that the coverage requirement has been
dramatically weakened, making it much more likely that people will wait until
they are sick to purchase health insurance. And that is something that is not
sustainable,” he told MC-FR.

In October AHIP released a report prepared by
PricewaterhouseCoopers that examined the impact of 4 insurance market reforms
and consumer protections: market reforms, an excise tax on employer-sponsored
high-value health plans, cuts in payment rates in public programs that could
increase cost shifting to the private sector, and new taxes on health sector
entities that are likely to be passed through to consumers. The authors
concluded that the average cost of private health insurance coverage will
increase 26% between 2009 and 2013 under the current system and by 40% during
the same period if these 4 provisions are implemented. They projected a 73%
increase by 2016 and a 111% increase by 2019 if the 4 provisions are
implemented.

In addition to creating individual and employer insurance
mandates, Mr. Scandlen told MC-FR
that HR 3962 contains a requirement for minimum medical loss ratios that will
pose major challenges for insurers by setting a percentage of health insurance
premiums that must be used to provide healthcare to customers. HR 3962 gives
the HHS Secretary authority to specify medical loss ratios at no less than 85%,
and insurers would need to provide rebates to enrollees if their medical loss
ratio is less than specified.

The medical loss requirement has the potential to make the
individual and small-group health insurance markets very unattractive, Mr.
Scandlen said. “That is going to be a big problem for carriers because they
will not be able to provide the kind of administrative scrutiny that they have
been on fraud prevention and that kind of thing,” he said. “And one of the
things I find kind of curious is that the agents and brokers have not been more
agitated about this, particularly NAHU [National Association of Health
Underwriters], because it is going to essentially be the end of their
profession.”

Mr. Scandlen explained that commissions to brokers and
agents are one of the easiest administrative costs for insurers to cut. “And at
an 85% loss ratio requirement, there will be no commissions,” he said, adding
that medical loss ratios are higher for individual and small group coverage
because of the marketing expense paid out in the form of commissions.

As the reform process continues, one of the biggest
remaining unknowns facing the insurance industry is the timing of reforms. “In
the House bill they have several changes that are going into effect next year,”
Mr. Zirkelbach said. “Contracts have already been negotiated, open-enrollment
season is already under way, and people have enrolled in policies. So that’s
going to cause significant disruptions for policy holders right now.”—Charles Boersig