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before the
COMMITTEE ON LABOR AND HUMAN RESOURCES
UNITED STATES SENATE
March 19, 1998
Thank you for inviting Consumers Union to testify today on the implementation of the Health Insurance Portability and Accountability Act (HIPAA). Now that about a year and half have passed since HIPAA was signed into law, it is an appropriate time to assess the difference it is making in the marketplace. Consumers Union's testimony - like the recently released General Accounting Office Report Health Insurance Standards focuses on the part of HIPAA that involves group to individual market "portability" of health insurance. Our comments today are based on our review of this GAO report, with the context that is provided by a recent Consumers Union report, Hidden from View: The Growing Burden of Health Care Costs. A copy of the Executive Summary of our report is attached to our testimony. Our report concludes that despite the healthy economic times in which we live, the health care marketplace is not solving our nation's health care affordability problem. The implication of the GAO report is that, unfortunately, we can not count on HIPAA to solve the affordability challenge either.
Despite the hopes of this Committee -- indeed the hopes of the entire nation -- we now believe that the group to individual market provisions in HIPAA will not meet consumers' expectations. In my statement, I will comment on the recent GAO report and its implications.
When Consumers Union testified on HIPAA implementation issues a year ago, we were hopeful that many consumers would benefit from HIPAA's portability provisions, yet we voiced the following concerns :
It is with a good deal of regret that we now learn our concerns were on target. Consumers' hopes for "portability" of health insurance when they leave their job are not being met; insurance remains unaffordable to many who lose their group coverage; state flexibility has resulted in "portability" options that do not meet consumers' needs; consumers are not getting the assistance that they need to navigate the alphabet soup legislation and regulations, that leave too many not knowing where to turn for assistance. In my testimony, I will elaborate on these points.
1. Despite HIPAA, health insurance coverage remains unaffordable for families who leave group coverage.
Despite the good intentions that led to the enactment of HIPAA, this law has not succeeded in making health insurance affordable to people who leave the group market for the individual market. These are the very people who probably need "portability" protection the most -- they do not have employers helping to pay their health insurance premiums; they may have lost their jobs; they may be facing reduced incomes. The figures in the GAO report are dramatic: in states with the federal fallback regulatory scheme, premiums for policies available because of HIPAA ranged from 140 to 600 percent of the standard market rate.How does this translate into dollars for consumers? If you assume that the average family health insurance premium is $3,000 , and that the those in the individual market must pay the full premium, this translates to an expected premium of $4,200 (at best) and $18,000 (at worst). In other words, families in the HIPAA insurance pool would be paying $1,200 to $15,000 more than the "standard" family. With median family income around $35,000, it is clear that health insurance will remain unaffordable for many consumers who lose group coverage and need individual policies.
2. Consumers' expectations were far out of line with reality.
When HIPAA was signed into law in August 1996, reports in the press -- fueled by a GAO report that was titled "Health Insurance Portability: Reform Could Ensure continued coverage for Up to 25 Million Americans" -- gave consumers the impression that it would dramatically change the nature of the health insurance market. The 25 million American figure was repeated over and over. People were told that there would be accessibility, affordability, and accountability in health insurance. An impression was given to consumers that when they left their job, they could "take their health insurance with them." People took the bill's name literally -- and looked forward to true portability and accountability in the market.The recent GAO report provides a sad reality check for consumers. Instead of portability, access and affordability, consumers are running into loophole after loophole that limit their ability to achieve health care security. Consumers must face the hurdles spelled out in the bill: (1) they must have had 18 months of continuous coverage: (2) they must have exhausted any residual employer coverage and COBRA coverage; (3) they must have applied for an individual policy within 63 days of group coverage termination. Then they must understand that different provisions of HIPAA have different implementation dates. They must deal with the fact that each state has its own way of implementing the statute. On top of this state flexibility, insurance carriers have choices of how to comply with the state and federal requirements. The GAO report clearly shows that for those consumers fortunate enough to get through all of the preliminary hurdles, there remains one obstacle that few will be able to conquer: affordability. Because of the failure of HIPAA to require a risk spreading mechanism, few families will be able to pay the premium differential -- up to 6 times the standard market rate -- to cover their families.
3. Insurance companies have undermined the spirit of the law by their pricing practices, their marketing practices, and their product design.
Insurance companies have a long history of resisting both federal and state legislation and regulations that would spread risks more broadly. Unfortunately, HIPAA gave insurance companies the flexibility to undermine the goals of portability and access, as detailed by the GAO. Some industry practices that most effectively sabotage the intent of HIPAA are:
- discouraging consumers from applying for a policy (GAO, p. 7);
- refusing to pay commissions, or reducing commissions, for the individual policies (GAO, p. 8);
- pricing the policies at 140 to 600% the standard rate (GAO, p. 8); and
- restructuring benefits so that instead of pre-existing condition exclusions (which were restricted) consumers face lengthy waiting periods which have the same effect: denying people health care coverage they need (GAO, p. 16).
4. Due to the complexity of the law and the flexibility provided states and insurers, federal and state regulatory efforts have not been sufficient to provide consumers with the information and assistance they need to navigate the health insurance market.
When it comes to health insurance, consumers who are not eligible for an employment-based policy face a tremendous burden -- a veritable alphabet soup of laws and regulators. Consumers with a problem can get bounced back and forth between state insurance departments, other state departments, the federal Department of Labor, and the federal Department of Health and Human Services, and even the Internal Revenue Service. They need to get immersed in details of ERISA, HIPAA, COBRA, and the details of the very complicated interaction between state and federal laws and regulations. And they must do this without the help of anyone to guide them through the system.I appreciate the fact that three federal agencies, state insurance departments, and the National Association of Insurance Commissioners have worked diligently to implement the law. However, consumers need more help. Consumers Union believes that consumers need the type of assistance that is currently available (though grossly underfunded) through the successful Insurance Counseling and Assistance (ICA) program. They need to have access to experts who understand what all of these acronyms mean for them. They need objective counseling. We urge you to establish the equivalent of the ICA program for consumers who are under age 65, and provide adequate funding to enable it to help people who need assistance navigating this marketplace.
5. Variation in health risk is substantial, and public policy makers needs to come to terms with the variation whenever they develop policy solutions.
Variation in risk is at the heart of the business of the insurance industry, yet the variation is often hidden from public view. Attached to this testimony is Chart 7 from our report Hidden from View. This chart shows very dramatically the extent of variation in risk. In any one year, most people are healthy. We found that insurance status and income level have less of a relationship to total health care spending than whether one is in the top tenth of health spending. The sickest 10 percent have total health care spending about seven times the average, and out-of-pocket costs that are about four times the average.The insurance industry knows this. And they have spent decades refining ways of making sure that they avoid the sickest consumers, or at least find a way to make sure that sick people pay at least enough to cover their extra risk. Insurance companies profit by segregating risks into similar-risk groups, and then charging premiums to the risk. This works well for young, healthy consumers -- but not well for the sick. The GAO report dramatically shows how this risk segregation (i.e., adverse selection) -- and the fear of adverse selection -- translates directly into premium differentials. Anyone who is a high risk -- or might be a high risk -- is offered a higher price insurance policy. This is the nature of the insurance business in an unfettered, or inadequately regulated market.
There are important implications for Congress. First, in monitoring the implementation of HIPAA and planning follow-up legislation, Congress must take great care to come up with mechanisms that allow for greater sharing of risk. Pooling high risks into their own health insurance policy, and then requiring them to pay the full premium with no subsidy, is a prescription for disaster. Not only are many priced out of coverage, but because of adverse selection, people who are relatively healthy will search for lower priced policies elsewhere, thus leaving a less-healthy risk pool behind, and the premium differential will grow even larger. The other important lesson is that in order to mitigate the problem of adverse selection, Congress needs to find ways to spread risks more broadly by bringing more people into insurance coverage. The ideal goal is universal coverage. In the meantime, Congress should consider targeted subsidies that would help discrete populations -- children, the working poor, for example -- get covered. If we were able to achieve 100% coverage of targeted populations (e.g., all children, 62 - 64 year-olds) in a health insurance market that spread the risk broadly, then we would not be reading about price differentials in the marketplace of 600 percent.
6. Congress should take another look at consumers' health care needs, and consider how to best approach the issue of affordability of coverage in the individual market and how to soften the blow that falls on families when someone gets sick.
The issue of affordability of health care goes beyond the question of whether HIPAA is working well. In our recent report, we found that the burden of paying for health care does not fall evenly across the population. 11 million families under 65 and 12 million families 65 or older are paying more than 10 percent of their income out-of-their own pockets on health care, even though nearly all of these families already have health insurance. We found that the question is no longer merely: do you have health insurance? There is a continuum of risk, so that the question now has become: do you have health insurance that protects your family against out-of-pocket health care costs?Now that both the marketplace and HIPAA have had several years to try to "solve" the affordability problem, and have failed, it is a good time for Congress to take another look at how we pay for health care. Should the burden fall disproportionately on people when they get sick? Should the burden fall disproportionately on families with moderate incomes?
RECOMMENDATIONS
The new report from the General Accounting Office should be a wake-up call to the nation regarding the need to shape policy so as to assure that health insurance coverage is both available and affordable to American families. This issue was ducked in 1996, and the GAO report shows clearly that the results are catastrophic. One of the strongest virtues from employment-based insurance policies is that they enable a spreading of risks among people of different ages and health status. Congress needs to find a mechanism that will assure that policies sold in the individual market will also successfully spread risks so that individual coverage will be affordable to older people and higher risk people. In addition fostering greater risk spreading in the individual market, we urge you to:
Thank you for considering our views.
