Use of a Simulation Model to Inform State Policy:

The Case of New Jersey’s Non-Group Health Coverage Market

Alan C. Monheit, Ph.D.Joel C. Cantor, Sc.D.Piu Banerjee, Ph.D.

Academy Health Annual Research MeetingJune 4, 2007

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Acknowledgements

Rutgers Center for State Health Policy contributors: Margaret Koller, Senior Associate Director Carl Schneider, Senior Research Analyst

Funded by the Robert Wood Johnson Foundation and the Commonwealth Fund

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Key Features of NJ’s 1992 Non-Group Market Reforms

Response to troubled market Carrier of last resort (BCBS) losses Repeal of all-payer rate hospital setting

Replaced carrier of last resort with… Guaranteed issue, renewal, portability for all carriers Pure community rating (modified CR in small-group market)

Other features Encourage carrier participation Standardization of policies Minimum loss ratio (75%) Subsidies for moderate income participants (phased out by

1997)

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NJ Non-Group Enrollment

Source: NJ Individual Health Coverage Program & Monheit, et al. Health Affairs, July/ August 2004.

50

100

150

200

250

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Four

th Q

uart

er E

nrol

lmen

t

(in

thou

sand

s)

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Non-Group Policy Debate Today

Policy debate under way Some committed to community rating & guaranteed

issue Others support reform, but little consensus on strategy

Policy options… Modified community rating Reinsurance Merge non-group with small-group market Replace non-group market with new state-run plan Individual mandate

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Simulate move from pure to modified community rating Age-sex based rates 3.5:1 and 5:1 rate bands Sensitivity analysis

Simplifying assumptions Non-elderly adults (21-64) Single coverage Affordability limit, no person pays >10% of family income

Model the decision to participate or withdraw Compare projected reservation price to projected

premiums

Simulation of Modified Community Rating

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Decision to Enroll

Projected “Reservation Price” > Projected “Premium”

Reservation Price (Ri)

Ri = [0.5 * ri * V($)j ] + E($)i, where:ri = risk aversion parameter for individual i

V($)j = variance of expected plan payout for rating group j

E($)i = expected plan payout for individual i

Projected Premium

Average of E($)i * 1.25 for each rating group (j)

Simulation Details

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Data Needed Expected health plan spending for…

NJ non-group enrollees NJ uninsured

Data not available for NJ

Data Used MEPS two-part model predicting plan payout, as function of

age, gender, region, health, and coverage type Apply model to state non-group and uninsured survey data

500 uninsured persons from RDD NJ Family Health Survey 701 non-group subscribers sampled from subscriber lists of 4

of five largest non-group carriers (representing 95% of enrollment)

Estimating Expected Plan Payout

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Data Needed Reservation price: [0.5 * ri * V($)j ] + E($)i

Risk aversion parameter (ri) not observable

Data Used Baseline, risk aversion parameter (ri) calibrated to actual

behavior… For insured, ri = minimum required for Ri > actual

premium For uninsured, ri = maximum value for Ri < actual

premium

Predict change in enrollment due to premium changes: Apply elasticity from published literature to each rating

cell Iteratively change ri to obtain predicted change in

enrollment

Estimating the Risk Aversion Parameter

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0

0.5

1

1.5

2

Age 21-24

25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64

Rat

io to

Pur

e C

omm

unit

y R

ate

*Monthly premium for the lowest cost HMO in the NJ non-group market ($15 copay plan in October, 2004).

$461*

$523$523$523$511

$415$349

$320

$243

$159

Change in Monthly Non-Group Single Premium

Simulation of Age Rating with 3.5 to 1 Rate Bands

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$525 $523 $534

$107$159$150

$461*

$0

$100

$200

$300

$400

$500

$600

PCR MCR Age/Gender3.5:1

MCR Age-Only3.5:1

MCR Age/Gender5:1

Mon

thly

Pre

miu

m

Lowest Highest rating category

*Monthly premium for the lowest cost HMO product in the NJ non-group market ($15 copay plan in October, 2004). PCR is pure community rating and MCR is modified community rating

Monthly Non-Group Single Premiums Baseline and Alternative Policy Scenarios

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62.6

135.3

109.0

194.9

0.0

50.0

100.0

150.0

200.0

250.0

PCR MCR Age/ Gender 3.5:1 MCR Age-Only 3.5:1 MCR Age/ Gender 5:1

Enr

ollm

ent (x

1,000)

Non-Group Enrollment Actual and Alternative Policy Scenarios

Notes: Enrollment in four of the five largest carriers, representing 95% of total covered lives. PCR is pure community rating and MCR is modified community rating.

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Reallocate top 10% of predicted expenditures for top decile of individuals in the expenditure distribution

Mandatory for all carriers Fund within non-group market versus external financing

Reinsurance Simulation

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$525 $523

$446

$127$150$150

$461*

$0

$100

$200

$300

$400

$500

$600

PCR MCR Age/Gender3.5:1

MCR Age/Gender3.5:1 - Internally

FundedReinsurance

MCR Age/Gender3.5:1 - Externally

FundedReinsurance

Mon

thly

Pre

miu

m

Lowest Highest rating category

Monthly Non-Group Single Premiums Baseline and Alternative Reinsurance Scenarios

*Monthly premium for the lowest cost HMO product in the NJ non-group market ($15 copay plan in October, 2004). PCR is pure community rating and MCR is modified community rating.

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62.6

135.3 135.9148.4

0.0

50.0

100.0

150.0

200.0

250.0

PCR MCR Age/ Gender 3.5:1 MCR Age/ Gender 3.5:1- Internal Reinsurance

MCR Age/ Gender 3.5:1- External Reinsurance

Enr

ollm

ent (x

1,000)

Non-Group Enrollment Actual and Alternative Policy Scenarios

Notes: Enrollment in four of the five largest carriers, representing 95% of total covered lives. PCR is pure community rating and MCR is modified community rating.

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Implications

Modified community rating in non-group market Reduce uninsured by 46,000 - 132,000 with no state

dollars Modestly higher premiums for near-elderly, but few

drop out Reinsurance

Holds older non-group enrollees “harmless” if externally financed

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Discussion

Simulation model has informed policy development Using NJ data important to stakeholders Creatively blended state-based survey data with

MEPS Extensive briefings for stakeholders and policymakers

Vigorous policy debate under way

Full report at www.cshp.rutgers.edu