The Alan Katz Health Care Reform Blog

Health Care Reform From One Person's Perspective

AB 8 and Unintended Consequences: Increasing Small Group Premiums

Posted by Alan on August 22, 2007

On Tuesday I participated in a conference call with over 550 agents. After describing Assembly Bill 8 (Nunez)) and the California Association of Health Underwriter’s response to it, we took questions. One question in particular reminded me how some of the less discussed elements of the bill can be just as dangerous as those getting all the attention.

The changes to the individual market AB 8 imposes has received a lot of attention — as they should since the bill will increase rates and reduce consumer choice. The 15 percent cap on administrative expenses has gotten a lot of attention, as has the underfunded purchasing pool the bill creates.

But few folks are talking about a seemingly modest change made by AB 8 to California’s small group market (the rules governing the marketing of small group coverage in the state is sometimes referred to as “AB 1672” after the bill which created them back in 1992).

AB 8 seeks to extend the AB 1672 protections enjoyed by groups with 50 or fewer workers to companies with up to 250 workers. Personally I support this reform. Unfortunately, AB 8 doesn’t stop there. It then calls for the elimination of “Risk Adjustment Factors” on January 1, 2010.

What are Risk Adjustment Factors (RAFs)? AB 1672 requires carriers marketing small group coverage to accept virtually all legitimate groups applying for coverage. The authors of AB 1672 knew this could lead to higher prices for some groups, so they gave carriers the ability to modify their standard rates. Today this rate modification allows insurers to lower their standard rates for low risk groups by 10 percent and to increase them for high risk groups by 10 percent. Subject to the other rating rules created by AB 1672, the premiums charged small groups all fall within this rating band.

The ability to make relatively small adjustments to rates provides just enough flexibility to help lower premiums for all small groups. If AB 8 takes the ability to apply an RAF away, however, tens of thousands of groups will see their rates increase. Granted, tens of thousands of other companies may see their premiums decrease, but over the long run rates will be higher than they would have been if the RAFs continued.

So the interesting question is, why make the change? In the 14 years since AB 1672’s rules went into effect I’ve never heard one complaint about the risk adjustments. Is this then a solution in search of a problem?

Maybe, but it’s just as likely to be a way to help out the purchasing pool created by AB 8 (the California Cooperative Helath Insurance Purchasing Program or “Cal-CHIPP”). Historically, purchasing pools don’t fare well against competing health plans, neither gaining substantial membership nor reducing rates. (The California Health Care Foundation has an insightful study on the challenges faced by state-sponsored pools).  So states have a tendency to tilt the playing field to help them out. One way is to require certain populations to enroll in the pool.  After all, if a pool can’t win the business of consumers, compelling them to participate works almost as well. This is the approach Govenor Arnold Schwarzenegger takes in his health care reform plan.

Another way to help purchasing pools compete is to hamstring the competition. This is the path AB 8 seems be taking. State-run purchasing pools have both administrative and political problems in applying an RAF. As a result they tend to be more attractive to high-risk groups (which might face a surcharge in the open market) and less attractive to low-risk groups (which could receive a discount of up to 10 percent outside the pool). The result: the pool’s membership incurs higher than average claims, the pool raises rates to meet the higher cost, and it becomes even less competitive against the private marktplace. This is one factor in the demise of the state-run purchasing pool created by AB 1672.

There are two ways to deal with this challenge: 1) come up with creative ways for the purchasing pool to apply RAFs; or 2) do away with RAFs altogether. The proponents of AB 8 have apparently chosen the latter course of action —  stacking the deck in the favor of Cal-CHIPP to the detriment of tens of thousands of small employers.

The reality is, when the umpire steps up to the plate he’s rarely called out on strikes. That’s what happens when the state dives into the comercial health insurance marketplace. In ways big and small, the government tilts the playing field in its own favor. It’s human nature. Bad public policy, but typical human nature.


3 Responses to “AB 8 and Unintended Consequences: Increasing Small Group Premiums”

  1. Alan, check out a banner add on the Sacramento Bee web site, with a UTUBE Video entitled “Sick of Blue Cross” — this is an example of how the internet/web can disseminate half truths, partial truths, distortions and lies to affect public opinion. My background is Army, and of course Intelligence, Threat Analysis is critical: Know Thy Enemy. I would submit that the authors of this piece, along with the Michael Moore’s of the world are the enemy, not just well intended people interested in reforming the system.

  2. Cal-CHIPP will become COW-CHIPP just as all state run health has. The RAF issue is interesting. Carriers have been discounting or “dealing” RAF mods the last couple of years to obtain new business. I found this practice disturbing.

    I am wondering if the CMA is working against AB8 as diligently as CAHU since the state used MEDI-CAL reimbursement rates to cost the CHIP plan out. I would think the halls would be shaking in Sacramento if the docs know what they will (or wont) be paid.

  3. Byron Johnson said

    You are correct, the RAF must be done away with to allow enforcement of the AB 8 rules against distinct pricing of similar plans outside the pool.

    On a separate note, do you read the same inference as I do in the bill that an employer’s benefit waiting period goes away?

    Also, did you catch the 24-month lock-in feature for employers electing the fee?

    Last comment (for this post). I note that individual coverage is considered a valid waiver. My friends in the P&C world tell me there are a great number of people who purchase an auto policy with one or two month’s premium to enable them to register the car with DMV and then non-pay the remainder of the year. Do you suppose we will experience the same with IFP sales to enable a waiver of the employer’s group plan of the Cal-CHIPP plan?

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