Fundamentals of Health Insurance Regulation

1. Fundamentals of Health Insurance Regulation Guenther Ruch Wisconsin Office of the Commissioner of Insurance

2. Overview • Risk Pooling • Adverse Selection • Health Insurance Markets • Rating Rules • Licensure • Solvency • Consumer Protection • Market Conduct Regulation

3. Risk Pooling • Pooling spreads the cost of high cost individuals among a larger group of people, so that healthy individuals subsidize the cost of sicker individuals. • Larger pools are more likely to have predictable incidence of health conditions, and thus more predictable risk.

4. Adverse Selection • Groups and individuals make decisions to get the best deal for themselves based upon their knowledge of future health care needs. • Pools with rules that benefit the healthy by limiting pooling or strict access rules will attract healthy individuals. • Pools with rules that benefit the sick by increasing pooling or lenient access rules will attract sick individuals.

5. Adverse Selection “Death Spiral”

6. Health Insurance Markets • Large Group Market: Businesses with more than 50 employees • Stable, predictable risk • Low risk of adverse selection • Low administrative costs • Relatively light regulation • Small Group Market: Small businesses, typically 2-50, though states vary • Higher risk of adverse selection • More volatility of risk • Higher administrative costs • Laws and regulations to improve pooling and access • Individual (Nongroup) Market: Individuals and dependants • Most often includes sole proprietors • Highest risk of adverse selection • Highly volatile risk • Highest administrative costs • Typically lightly regulated

7. Rate Regulation • Large Group Market • Competition among carriers self-regulates rates. • Small Group Market • Rates regulated in nearly all states. • Individual (Nongroup) Market • Rates regulated in 18 states.

8. Understanding Rating Rules • Community Rating • No adjustments for health or any other factors • Adjusted Community Rating • No health status variation • Typically allow variation for age and geography • Rating Bands • Limits total variation in rates or variation due to health, age, or other factors or combinations of factors • Actuarially Justified Rating • Insurers must justify use of rating factors • Common in nongroup market

9. ME MN WI PA IA OH MD NE WV VA MO KY KS TN GA SC AR MS LA Small Group Market Premium Variation NH VT WA MT ND MA NY OR RI SD ID MI CT WY NJ DE IN IL NV UT CO CA DC NC OK AZ NM AL HI TX FL AK Rating Band Variability: Community Rating 13:1 or less Adjusted Community Rating 13.1:1 – 19:1 No Rating Structure 19.1:1 – 25:1 *Note: Michigan HMOs and Blue Cross/Blue Shield are restricted to 3.12:1 maximum variation. All others may use 3.96 maximum variation 25.1:1 or greater

10. ME VT NH MN NY WI MI PA IA OH MD NE IN IL WV VA MO KY KS NC TN GA AL SC AR MS LA FL Individual Market Rating Rules WA MT ND MA OR ID SD RI CT WY NJ DE NV UT CO CA DC OK AZ NM HI TX AK No Rating Structure Community Rating Adjusted Community Rating Rating Bands Hybrid Michigan Blue Cross/Blue Shield must use community rating. There is no rating structure for other carriers.

11. Licensure • Licensure is the key of all insurance regulation. • All enforcement actions are based upon the company’s licensure. • Doing business as an insurer or a producer (broker or agent) without a license is a criminal offense. • Uniform Certificate of Authority Application • Single application for licensing of insurers • 50 states and DC participate • Some require additional information • New or redomesticating companies file Primary Application • Existing companies file Expansion Application

12. Solvency Regulation • Protects policyholders against the risk that insurers will not be able to meet their financial obligations (Pay Claims) • Risk-Based Capital (RBC) requirements adjust minimum capital and surplus requirements to reflect a company’s risk exposure. • Quarterly and annual financial statements • Financial Analysis • Regular Examinations every 3-5 years • Targeted Examinations

13. Consumer Protections • Key Federal Protections • HIPAA • COBRA • Coverage Mandates • Federal and State • State Protections • Access to care • Provider protections • Utilization review • Appeals • Balance billing restrictions • Consumer complaints • Marketing review • Independent Review

14. Market Conduct • Detects and deters inappropriate behavior and ensures that business is conducted on a level playing field. • Market Analysis • Review of data submitted to states and NAIC by carriers • Market Conduct Initiatives • Investigations-Detailed inquiry into business practices • Interrogatories-Formal written questions about business practices • Examinations-Typically onsite comprehensive targeted reviews • Complaints • Assist consumers with their insurance problems • Detect inappropriate insurance company/agent behavior

15. Summary • The regulatory oversight of health insurance depends on the nature of the coverage • There are some characteristics of health insurance that apply to all forms of the product • Although health insurance is regulated by the individual states, there are certain regulatory standards for health insurance and health insurance companies that are uniform • The cost of health insurance is directly related to the cost of the services covered