Removing Individual Health Risk From Health Insurance? Incremental Regulation Versus Market Choices

Removing Individual Health Risk From Health Insurance? Incremental Regulation Versus Market Choices

February 29, 1996


Comprehensive health care reform, with universal coverage, was the centerpiece of the Clinton administration's domestic policy agenda in 1993 and 1994. The abstract concept of a complete overhaul of the U.S. health care system was initially popular with many Americans. However, once the details and consequences of the Clinton health care plan were better understood, public support vanished for further direct attempts by the federal government to centralize and politicize decision making in private health care markets.

Over the last year, congressional debate regarding health care issues has focused on Republican efforts to overhaul the two largest publicly financed health care programs, Medicare and Medicaid. At the same time, however, several key members of congressional committees with jurisdiction over health care issues have offered legislation to enact "incremental" reform of the private health insurance market. Such incremental reform is seen as a politically desirable way of expanding coverage to the uninsured while avoiding the undesirable features and difficult tradeoffs of more comprehensive schemes to overhaul the entire health care system.

The principle elements of federal incremental reform proposals are generally referred to as portability of coverage, modified community rating in the form of rating bands, guaranteed issue through limits on preexisting conditions, guaranteed renewal, and risk-adjustment. Various combinations of these reforms in a number of proposed bills focus on making insurance coverage more accessible and affordable. Such legislation would impose new rules and regulations for health insurance markets aimed at doing some or all of the following:

* Improving the portability of coverage for insured people who switch jobs,

* Restricting the amount of variation in premiums,

* Requiring insurers to have open enrollment,

* Restricting insurance exclusions for people with preexisting medical conditions,

* Guaranteeing the renewal of insurance coverage,

* Requiring insurers to offer at least one standard benefits package,

* Removing legal barriers to allow small businesses to form health purchasing cooperatives with other small employers, and

* Limiting states' ability to mandate health benefits.

Since 1990, nearly every state has instituted some health insurance reforms similar to those currently being advanced in Congress. The recent experience with state reform, largely focused on the small employer group market and, to a lesser extent, the individual market, provides at least some empirical basis for testing the claims made by congressional leaders that incremental changes can significantly expand coverage. The scope of state reform initiatives, however, has been limited by the Employee Retirement Income Security Act (ERISA), which effectively bars states from requiring any employer to offer or pay for health benefits or insurance to employers and, in most cases, from regulating the terms and conditions of employee health benefit plans provided by self-insured companies. Employers who self-insure are also immune from the regulations and premium taxes that states impose on insurance companies (McGinley, 1994; Rich, 1994).

With the drive for sweeping reform on the state level largely stymied or slowed by the combination of ERISA and a change in the political climate (Republican takeovers of many governorships and state legislatures in the 1994 elections), advocates of further health insurance reform have turned their attention to incremental efforts at the federal level. However, they appear to have overlooked the likelihood that many of the political objections that short-circuited the Clinton effort to achieve comprehensive health care reform and universal coverage will also apply to this latest round of incremental health insurance reform efforts at the federal level. Those political barriers to enactment of proposed legislation include:

* Resistance to additional financing of expanded coverage through either new employer mandates, higher taxes, or broader consumer cross-subsidies;

* Uneasiness over further centralized, bureaucratic control of health care decision making;

* Discomfort over restrictions on choices in health care coverage that might be imposed via standardized benefits packages, limits on rate variation, and one-size-fits-all regulatory schemes; and

* Concerns that many existing forms of insurance coverage for the currently insured population will be destabilized and placed in jeopardy;

In analyzing whether the current debate over incremental health care reform at the federal level will provide a rerun on a smaller scale of the health policy stalemate of 1994, this paper will examine the political and economic claims made by incremental reform proponents, evaluate the efficacy of pending congressional proposals, review recent experience at the state level, and outline more genuine market-oriented alternatives for health insurance reform.