Alan C. Monheit, Ph.D. Joel C. Cantor, Sc.D. Piu Banerjee, Ph.D.

1. Use of a Simulation Model to Inform State Policy: The Case of New Jersey’s Non-Group Health Coverage Market Alan C. Monheit, Ph.D. Joel C. Cantor, Sc.D. Piu Banerjee, Ph.D. Academy Health Annual Research Meeting June 4, 2007

2. Acknowledgements • Rutgers Center for State Health Policy contributors: • Margaret Koller, Senior Associate Director • Carl Schneider, Senior Research Analyst • Funded by the Robert Wood Johnson Foundation and the Commonwealth Fund

3. Key Features of NJ’s 1992 Non-Group Market Reforms • Response to troubled market • Carrier of last resort (BCBS) losses • Repeal of all-payer rate hospital setting • Replaced carrier of last resort with… • Guaranteed issue, renewal, portability for all carriers • Pure community rating (modified CR in small-group market) • Other features • Encourage carrier participation • Standardization of policies • Minimum loss ratio (75%) • Subsidies for moderate income participants (phased out by 1997)

4. NJ Non-Group Enrollment

5. Non-Group Policy Debate Today Policy debate under way Some committed to community rating & guaranteed issue Others support reform, but little consensus on strategy Policy options… Modified community rating Reinsurance Merge non-group with small-group market Replace non-group market with new state-run plan Individual mandate

6. Simulate move from pure to modified community rating Age-sex based rates 3.5:1 and 5:1 rate bands Sensitivity analysis Simplifying assumptions Non-elderly adults (21-64) Single coverage Affordability limit, no person pays >10% of family income Model the decision to participate or withdraw Compare projectedreservation price to projected premiums Simulation of Modified Community Rating

7. Decision to Enroll Projected “Reservation Price”> Projected “Premium” Reservation Price (Ri) Ri = [0.5 * ri * V($)j ] + E($)i, where: ri = risk aversion parameter for individual i V($)j = variance of expected plan payout for rating group j E($)i = expected plan payout for individual i Projected Premium Average of E($)i * 1.25 for each rating group (j) Simulation Details

8. Data Needed Expected health plan spending for… NJ non-group enrollees NJ uninsured Data not available for NJ Data Used MEPS two-part model predicting plan payout, as function of age, gender, region, health, and coverage type Apply model to state non-group and uninsured survey data 500 uninsured persons from RDD NJ Family Health Survey 701 non-group subscribers sampled from subscriber lists of 4 of five largest non-group carriers (representing 95% of enrollment) Estimating Expected Plan Payout

9. Data Needed Reservation price: [0.5 * ri * V($)j ] + E($)i Risk aversion parameter (ri) not observable Data Used Baseline, risk aversion parameter (ri) calibrated to actual behavior… For insured, ri = minimum required for Ri> actual premium For uninsured, ri = maximum value for Ri < actual premium Predict change in enrollment due to premium changes: Apply elasticity from published literature to each rating cell Iteratively change ri to obtain predicted change in enrollment Estimating the Risk Aversion Parameter

10. Change in Monthly Non-Group Single PremiumSimulation of Age Rating with 3.5 to 1 Rate Bands $523 $523 $523 $511 $461* $415 $349 $320 $243 $159 *Monthly premium for the lowest cost HMO in the NJ non-group market ($15 copay plan in October, 2004).

11. Monthly Non-Group Single Premiums Baseline and Alternative Policy Scenarios *Monthly premium for the lowest cost HMO product in the NJ non-group market ($15 copay plan in October, 2004). PCR is pure community rating and MCR is modified community rating

12. Non-Group Enrollment Actual and Alternative Policy Scenarios Notes: Enrollment in four of the five largest carriers, representing 95% of total covered lives. PCR is pure community rating and MCR is modified community rating.

13. Reallocate top 10% of predicted expenditures for top decile of individuals in the expenditure distribution Mandatory for all carriers Fund within non-group market versus external financing Reinsurance Simulation

14. Monthly Non-Group Single PremiumsBaseline and Alternative Reinsurance Scenarios *Monthly premium for the lowest cost HMO product in the NJ non-group market ($15 copay plan in October, 2004). PCR is pure community rating and MCR is modified community rating.

15. Non-Group Enrollment Actual and Alternative Policy Scenarios Notes: Enrollment in four of the five largest carriers, representing 95% of total covered lives. PCR is pure community rating and MCR is modified community rating.

16. Implications Modified community rating in non-group market Reduce uninsured by 46,000 - 132,000 with no state dollars Modestly higher premiums for near-elderly, but few drop out Reinsurance Holds older non-group enrollees “harmless” if externally financed

17. Discussion Simulation model has informed policy development Using NJ data important to stakeholders Creatively blended state-based survey data with MEPS Extensive briefings for stakeholders and policymakers Vigorous policy debate under way Full report at www.cshp.rutgers.edu