Onesies, Twosies and More

1. Onesies, Twosies and More Considerations in Rhode Island for merging existing Small Group and Direct Pay markets Presentation Christopher F. Koller Health Insurance Commissioner, State of RI January, 2007 SmGdirectpay_SCI

2. Agenda • Background: Market Overview • Small Group Market Conduct Study Overview • Small Group & Direct Pay Intersection: Groups of One • Small Group & Direct Pay Intersection: Options to Consider • Where we are: Next Steps

3. I. Background: Rhode Island by the numbers

4. I. Background: Small Group Market Overview • Statutory Group size: 1-50 employees • Insurance Market: Two Players (UHP & BCBSRI)BCBSRI accounts for ~80 percent of small group covered lives • Distribution: Broker, intermediary dominatedRoughly two-thirds of small group accounts are sold through brokers/intermediaries • Regulatory Controls-- you betcha

5. I. Background: Small Group Market Overview Policy Goal of SmG Reform 2000: Treat SmG as one large pool. Allow rates to be adjusted by only four key factors, within a specified range Small Employer Health Insurance Availability ActRIGL 27-50… • Pre-2000 • Class of business (e.g., assoc) • “Case characteristics” (e.g., demog, size) • Industry • Claims exp., health status, duration • Etc… • Rate review? • None • No • Yes • Yes • Post-2000 • Adjusted Community Rating. Demographics – specifically age, sex, family size • Health status (+/- 10%) • Rate review: Annual actuary letter plus periodic examination • 4:1 • Yes • No • Only if no prior coverage • Limited to those with claims up to 6 mos prior • Exclusion limited to 6 mos Allowable rate factors Maximum rate band Guaranteed Issue Association rating Preex allowed?

6. I. Background: Direct Pay Market Overview • Guaranteed Issue – open enrollment period • Single CarrierOnly BCBSRI, as carrier of last resort, is required by law to participate in Direct Pay. Other carriers may choose to participate (but have not done so to date) • Medical Underwriting: Two pools, heavily cross-subsidizedThose that pass medical underwriting are given age/sex adjusted rates. Those that do not pass medical underwriting are given one unadjusted rate. • Regulated Line of BusinessState rate approval authority, public rate hearing process • Relatively Well-Functioning Direct Pay Market • 15,000 enrollees (or 0.15% of population; vs 65,000 or 0.10% in Mass) • Relatively affordable rates for young, healthy individuals: A 21 year old male who passes medical underwriting can buy comprehensive coverage (HM400) for $185 per month • Reasonably subsidized rates for comprehensive coverage for older, sicker individuals: Individuals who do not pass medical underwriting can buy comprehensive coverage (HM400) for $618 per month

7. I. Background: Market Trends Market trends are troubling, both in small group and direct pay markets Small Group Direct Pay • Low and declining employer offer ratedecrease in employer offer rate from 91% to 84% over last 6 years for employers with 10-50 employees – vs. steady 98% for large employers • High premiumsAverage commercial small group premium rate of $420 vs. large group average of $374 – a twelve percent gap • Declining membershipTotal RI small group membership has declined from 136,000 in 2003 to 117,000 in 2005 – a fourteen percent decrease over two years • Declining MembershipDown about 5 percent since last year, long term trend is down • High and rising premiums Proposed increases for 2007 are 9% (pool 1) and 5% (pool 2) • Low take up in higher deductible products – Eligibles choosing to go bare.

8. 1. Background: Small Group Innovation The Wellness Health Benefit Plan Description Insurers are required to offer the Wellness Health Benefit Plan, a publicly defined affordable health insurance product for small group and direct pay participants • State bargains with insurers to design a product ~ 20% cheaper than standard small business offerings • State sets a price – 10% of average wages in RI ($314/month) and works with Advisory Committee to develop requirements • Product offered as a Commercial choice alongside existing options Why it Works • Small businesses finally get large business deals and purchasing savvy. • State role creates savings for small businesses: • Benefit design based on Principles of Affordability – take costs out of system. • Cut administration – facilitate RFP process. • Stronger role for rate oversight.

9. II. Market Conduct Study Overview This question was considered as part of a broader Market Conduct Study performed this year in Rhode Island • Study Objectives: • Describe the overall state of the small group health insurance market in RI • Assess the effectiveness of 2000 reforms • Make recommendations for policy changes to assist in achieving the purposes of the Act • Assess insurer compliance with SmG Law, RIGL 27-50 (not discussed here) • First study performed in June, 2002 based on 2000 data. Preliminary findings: • Effectiveness of 2000 Reforms: Too early to tell • 2000 Reforms DID NOT contribute to the large rate increases experienced by some groups • State mandated low cost plan designs were NOT available due to non-compliance by the plans • Latest study was performed by Hinckley Allen & Tringale LP (HAT), and DeWeese Consulting, Inc (DCI), under contract with the Office of the Health Insurance Commissioner (OHIC) • Provides information about small employer health insurance in RI from 2003 to 2005

10. II. Summary of Key Recommendations • Rate Regulation (“Adjusted Community Rating”) • Maintain status quo. Require more transparent rating, underwriting practices, with vigilant oversight • Standardize medical history collection tool • Future considerations: rate review authority, reinsurance/risk adjustors • Managing groups by size • Do not further segment the small group market by group size • Maintain existing treatment of groups of one. Perform detailed assessment of SmG/direct pay merger impact • Take steps to better align direct pay with small group rate structure • Further investigate differences in claims experience for very small groups between UHC and BCBSRI • Product Portfolio • Permit carriers to discontinue unpopular products and streamline their product portfolios • Enable carriers to provide information about selected products to prospects at renewal • Encourage joint OHIC/insurer educational effort re: trade-offs involved in choosing a product with more cost-sharing than they are currently purchasing • Distribution system • Require producers to disclose to their clients the monthly and projected annual commission he/she will receive as a result of placing the client’s business • Require that all carriers file their small employer commission schedules with OHIC. BCBSRI is required to do this as a result of its enabling legislation, but other carriers are not • Require that each carrier itemize the external distribution costs in its proposals and renewals to all employers • Prohibit volume and/or persistency-based bonuses in the small employer market • Longer term, work with the producer community to consider the following options: Make the external marketing costs a rating variable that is not subject to compression; Have producers bill clients directly for their services

11. III. Small Group & Direct Pay Intersection: Groups of One Where these two markets intersect: Sole Proprietors – may choose to buy direct pay or as a group of one Total Members 13,500 14,500 28,000 Total Subscribers 6,000 9,500 15,500 Employees enrolled as groups of one in SmG Direct Pay enrollees Total Note: Groups of one account for over 30% of groups & ~10% of SmG subscribers • Key Challenge: Adverse Selection in a Voluntary Market • In a voluntary market, only those who anticipate needing coverage will pay for it • Exacerbated in Groups of 1. Buyers can shop between direct pay and small group – but pricing is disconnected. Healthy ones go bare.

12. III. Small Group & Direct Pay Intersection: Groups of One Key Question: How best to improve options, affordability, take up for this “bleeding edge” population, given two very different starting points Groups of One in SmG Individuals in Direct Pay Medical Underwriting: Two pools, heavily cross subsidized Single Carrier Limited set of products offered Regulated line of business Distribution: Direct purchase from BCBSRI Adjusted community rated Two Carriers Wide range of products offered Modest regulatory oversight Distribution: Heavily broker, intermediary

13. IV. Small Group & Direct Pay Intersection: Options to Consider Move toward a Direct Pay model for small group Segment into Multiple, Smaller Rating Pools by Size Eliminate Sole Proprietors from Small Group(require all to buy Direct Pay) Merge Direct Pay and Small Group Markets

14. IV. Small Group & Direct Pay Intersection: Options to Consider (1) Option 1: Move toward a direct pay model for small group Less Insurer Competition More Insurer Competition • Community rating • Aggressive price regulation (à la Direct Pay) • Guaranteed issue • Key Risks: • Participation: Healthy people may exit the pool • Lack of insurer participation, benefit innovation • Loose underwriting rules • No guaranteed issue • High risk pool • Key Risks: • Access: High risk consumers may be excluded or priced out • Insurer success is a function of risk identification – not changing underlying medical trend Rhode Island: Current SmG Status Recommendation: Do not pursue Small Group reform efforts must strike a delicate balance between protecting high risk consumers and maintaining participation of low risk individuals

15. IV. Small Group & Direct Pay Intersection: Options to Consider (2) Option 2: Segment into multiple smaller rating pools by size Small Employer Loss Ratio by Group Size • Are cross subsidies by group size appropriate? • Is United’s experience of policy concern? Employer Group Size Segment • BCBSRI: 7% of groups and 39% of subscribers were in groups of 11 or more • United: 14% of groups and 52% of subscribers were in groups of 11 or more Source: Market Conduct Study data and analysis, 2005. United total also includes another category of accounts, “other”, which includes groups with premium and claims during the experience period but not active on Dec 31, 2004. BCBSRI data is based on July 2004 through June 2005 Incurred claims paid through August 2005. United data based on 2005 renewal summary.

16. IV. Small Group & Direct Pay Intersection: Options to Consider (2) Option 2: Should we segment into multiple smaller rating pools by size? • Estimated Impact: 3% increase for smaller groups and a 2% decrease for larger groups • Factors to Consider: • Would better align premium to cost, as group rate would more directly reflect its experience • Could help to attract younger, healthier groups • Counter to expressed purposes of SmG law – to prevent segmentation of health insurance based on risk; and to spread health insurance risk more broadly • Hurts very small groups -- those most at risk of dropping coverage Recommendation: Do Not Pursue

17. IV. Small Group & Direct Pay Intersection: Options to Consider (2) Option 3: Eliminate Sole Proprietors: Require all to buy direct pay • Would reduce SmG rates by an estimated ~ 2.2%Could help to attract younger, healthier groups • Reduced choice (of carriers and products) for sole proprietorsSignificant cost increase for most groups of one Dislocation related to change in ratestructureRisk increase in the uninsured • Politically unpopular Recommendation: Do Not Pursue

18. IV. Small Group & Direct Pay Intersection: Options to Consider (2) Option 4: Merge Direct Pay and Small Group Markets • Estimate modest impact: 1.5% to 2.5% increase in SmG rates • Could provide more choice for direct pay purchasers – choice of carriers and products • Consistent with stated objectives Small Group Law: Spread health insurance risk more broadly • Likely impact is complicated by the following:-- Single vs. multiple carriers-- Differences in rate structure between two pools-- Commissions paid in SmG market, not direct pay-- Differences in benefit plans offered • Recommendation: Maintain status quo, but study merger • Currently reasonable balance between direct pay and small group coverage • Perform detailed assessment of SmG/direct pay merger impact • Take steps to better align direct pay with SmG rate structure

19. Probable Impact of Merger

20. V. Next Steps • Develop legislative proposal: Study commission to evaluate possible direct pay/small group merger • Part of Broader Initiative targeting Affordable Health Insurance for All Rhode Islanders