Making Guarantee Issue Work

Yesterday’s post discussed how requiring individual health insurance carriers to issue coverage to all applicants (called “guarantee issue”) was so dangerous if done wrong.  So how can it be done right?

CAHU’s Healthy Solutions health care reform plan has a common sense approach (full disclosure: I helped write it). To oversimplify the proposal, it puts the horse before the cart: before the state creates a mandate to sell, it first must demonstrate it can enforce a mandate to buy.

CAHU calls for guarantee issue in the individual insurance marketplace once 90% of the state’s population has obtained basic health care coverage either through state programs, from their employer, or on their own. CAHU would expand the existing the state’s Major Risk Medical Insurance Program (“MRMIP”) to serve as an insurer of last resort until the threshold is reached. But once the state demonstrates its ability to enforce the mandate to buy, carriers would be obliged to accept everyone applying for coverage.

This doesn’t completely inoculate the system from adverse selection (people waiting until after they need insurance to obtain it). After all, 10% of the state — roughly 3.5 million consumers — would still be uninsured. CAHU’s Healthy Solutions plan is one of the few, if not the only proposal which mitigates the negative impact this population could have on the overall premiums. CAHU enables carriers to increase the rates and exclude preexisting conditions for these late-applicants. The amount of increase and the duration of the exclusion varies with how long the applicant has been uninsured.

Previously Uninsured for:                      Rating Band                  Preexisting Exclusion Period:

More than 24 months:                         +/- 30% for 3 years                36 months
19-to-24 months:                                +/- 25% for 3 years                24 months
13-18 months:                                    +/- 20% for 3 years                18 months   
12 months or less:                               +/- 20% for 2 years                Equal to number of months uninsured

An interesting aspect of the CAHU Healthy Solution health care reform plan is the “right of return” it provides late-applicants. It doesn’t punish people who stayed outside the system until they needed the coverage forever. Just for a time commensurate with their dereliction. Once they’ve done their time, their premiums are reduced and preexisting conditions are covered. The result is a guarantee issue system which can actually work.  

2 thoughts on “Making Guarantee Issue Work

  1. David, a very valid question. The primary reason why guarantee issue can work in the small group health insurance market without a mandate to buy, but it won’t in the individual marketplace without such a mandate, is because of the nature of the buying decision.

    In the individual market, the insured makes the decision to buy a medical plan. If the consumer can wait to buy health coverage until after the need for it arrives point, it is in her economic interest to wait.

    When a small group buys medical coverage, however, the decision is made by the owner(s) on behalf of all employees. Some will be healthy and some may not be. This mix of risks mitigates against adverse selection. Also, the company’s motivation for buying health coverage is different than that of individuals. A small business ma buy a group medical plan to attract and retain employees or to increase morale. It’s very rare for a small business to buy coverage because an employee is headed for the emergency room.

    Where we see these factors at play most clearly is with micro-groups (companies of 2-5 employees). They invariably have higher loss ratios than larger companies from their first day of coverage, in large part because their buying decision can more closely mimic, to a limited degree, that of individuals.

    When Colorado implemented small group reforms that included businesses of one person, the result was a disaster. Many carriers left the market and those that remained dramatically increased premiums. All the small groups in the market couldn’t offset the adverse selection of the one person groups.

    Hope this answers your question. And thanks for visiting.

  2. Alan – you mentioned you’d been involved in the negotiating over AB1672 (The California Small Group Reform Act). AB1672 mandated guarantee issue, but did not include a mandate to buy. AB1672 is widely considered a success, and adverse selection has not run out of control in small group. What makes the individual market so different?

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