Small Group Health Insurance

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Small Group Health InsuranceSudha Xirasagar MBBS, PhD a , Michael E. SamuelsDrPH b b b , Carleen H. Stoskopf ScD c , William R.Shrader FSA, MAAA d , James R. Hussey PhD e , RuthP. Saunders PhD f & Danielle T. Smith PhD ga University of South Carolina, Arnold School ofPublic Health, Department of Health Services Policy& Management , Columbia, SC, USAb University of Kentucky College of Medicine, A-315Kentucky Clinic , Lexington, KY, 40536, USAc University of South Carolina , Arnold School ofPublic Health, Department of Health Services Policy& Management , Columbia, SC, 29208, USAd BlueCross BlueShield of South Carolina , I-20 atAlpine Road, Columbia, SC, 29219, USAe University of South Carolina, Arnold School ofPublic Health, Department of Epidemiology & Bio-statistics , Columbia, SC, 29208, USAf University of South Carolina, Arnold School ofPublic Health, Department of Health Education &Behavior , Columbia, SC, 29208, USAg Rochester Institute of Technology, Department ofSociology & Anthropology , Rochester, NY, 14623,USAPublished online: 21 Oct 2008.

To cite this article: Sudha Xirasagar MBBS, PhD , Michael E. Samuels DrPH , CarleenH. Stoskopf ScD , William R. Shrader FSA, MAAA , James R. Hussey PhD , Ruth P.Saunders PhD & Danielle T. Smith PhD (2004) Small Group Health Insurance, Journal ofHealth & Social Policy, 19:1, 1-35, DOI: 10.1300/J045v19n01_01

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Small Group Health Insurance:Ranking the States on the Depth

of Reform, 1999

Sudha Xirasagar, MBBS, PhDMichael E. Samuels, DrPHCarleen H. Stoskopf, ScD

William R. Shrader, FSA, MAAAJames R. Hussey, PhDRuth P. Saunders, PhDDanielle T. Smith, PhD

Sudha Xirasagar is Research Assistant Professor, University of South Carolina, Ar-nold School of Public Health, Department of Health Services Policy & Management,Columbia, SC.

Michael E. Samuels is Endowed Chair, Distinguished Scholar in Rural Health Pol-icy, and Professor of Family Practice, University of Kentucky College of Medicine,A-315 Kentucky Clinic, Lexington, KY 40536 (E-mail: [email protected]).

Carleen H. Stoskopf is Professor and Chair, University of South Carolina, ArnoldSchool of Public Health, Department of Health Services Policy & Management, Co-lumbia, SC 29208 (E-mail: [email protected]).

William R. Shrader is Vice President and Chief Actuary, BlueCross BlueShield ofSouth Carolina, I-20 at Alpine Road, Columbia, SC 29219 (E-mail: [email protected]).

James R. Hussey is Research Associate Professor, University of South Carolina,Arnold School of Public Health, Department of Epidemiology & Bio-statistics, Co-lumbia, SC 29208 (E-mail: [email protected]).

Ruth P. Saunders is Associate Professor, University of South Carolina, ArnoldSchool of Public Health, Department of Health Education & Behavior, Columbia, SC29208 (E-mail: [email protected]).

Danielle T. Smith is Assistant Professor, Rochester Institute of Technology, Depart-ment of Sociology & Anthropology, Rochester, NY 14623 (E-mail: [email protected]).

Address correspondence to: Sudha Xirasagar, MBBS, PhD, University of SouthCarolina, Arnold School of Public Health, Department of Health Services Policy &Management, Columbia, SC 29208 (E-mail: [email protected]).

Journal of Health & Social Policy, Vol. 19(1) 2004http://www.haworthpress.com/web/JHSP

2004 by The Haworth Press, Inc. All rights reserved.Digital Object Identifier: 10.1300/J045v19n01_01 1

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ABSTRACT. States are ranked based on the potential of their smallgroup health insurance reforms to enhance health insurance uptake. Re-forms were quantified based on their market impact potential. Five di-mensions of reforms were identified, Access Improvement, PremiumReduction, Premium Differential Reduction, Continuity of Coverage,and Enhancing Valued Plan Features. The reform indices representingthese dimensions were developed based on document review of statestatutes, combined with actuarial judgment to identify and assign scoresto market-relevant regulations in line with their impact potential. Thedistribution of the states’ reform scores and rankings show wide varia-tion in the depth and focus of their reforms. Only seven of the top tenstates on the Total Reform index had consistently higher scores on twoor more reform dimensions. The conceptual linkages between specificregulations and the documented small group market problems lead tonormative expectations of an association between the depth of state re-forms and the prevalence of uninsurance. [Article copies available for a feefrom The Haworth Document Delivery Service: 1-800-HAWORTH. E-mail ad-dress: <[email protected]> Website: <http://www.HaworthPress.com>© 2004 by The Haworth Press, Inc. All rights reserved.]

KEYWORDS. Small group health insurance, small group market reform,ranking state policy environments, reform indices

This paper presents a ranking of the states on the depth of their smallgroup health insurance reforms measured in terms of market potential toimpact health insurance uptake. The ranking is based on a systematic re-view of states’ small group health insurance statutes, combined with ac-tuarial judgment to identify market-relevant provisions and allot scoresto each item based on its market impact potential. This ranking presentsfor the first time an overview of the relative regulatory status of states’small group markets taking into account the totality of their reform pro-visions.

As evident from the listing of reforms in Exhibit 1, the states have en-acted a considerable variety of reform provisions in various combina-tions going far beyond the widely known base reforms documented inthe literature. These supplementary provisions have considerable po-tential to strengthen or weaken the effect of the documented reforms.Each state has enacted reforms in different combinations. Scoring eachstate’s regulations based on market impact potential enables a quantita-

2 JOURNAL OF HEALTH & SOCIAL POLICY

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tive representation and ranking of states on the regulatory status of theirsmall group markets. Such quantitative representations enable state-wise comparisons of the net market influence potential of reforms, andwould pave the way for impact studies driven by a comprehensive ac-counting of almost all market-relevant reforms, unlike earlier impactstudies.

Xirasagar et al. 3

EXHIBIT 1. Regulatory Items Feeding into Each Reform Index, and Correspond-ing Scores

The general principles of allotting weights to each regulation are indicated under thesection on study methodology. To summarize, regulations judged to have significant mar-ket relevance were scored on a 0 to1 scale (0 to positive or negative 1). Other regulationswere allotted weights based on the market relevance of each item as judged by actuarialexperience, relative to these significant regulations in the group. Items for which relevantpast literature is available is also presented.

Under selected items, if the absence of stipulation on the issue in some states influ-ences the situation, the default situation is also rated with a suitable score relative to theother levels of the item. For example, community rating figures in the scoring scheme ofmost rating band items since it implies a rating band of 1:1, although it is not explicitlystated in the state’s statute as a 1:1 band on each rating characteristic. Thus it gets fac-tored into the state’s score on that item relative to other states with explicitly stated ratingbands. Similarly, while some states explicitly prohibit insurers from collecting claims infor-mation from previous insurers, the default situation (implicitly allowing the same by virtueof not being mentioned on the statute) also qualifies for a suitable score relative to statesthat prohibit it.

A: Access

1. Definition of a small employer (SE):(a) Less than or up to 50 (Guaranteed by HIPAA) = 0(b) Up to 99/100 = 0.25

(Rationale: Expanding the size of a small business under the statutory definition could in-fluence carriers to stay in the small group (SG) market despite having to take on the reallysmall employers [under guaranteed issue mandates], to keep the business of largergroups included under the state’s definition of a small business. The broader the range ofemployees included under the state’s definition, potentially, the more players in the smallgroup market, and therefore better access for the smallest groups.)

2. Carrier that opts out of SG market shall be barred from the small group market for 5years = 1

3. Shall actively market each plan to all SEs = 1(Note: HIPAA requires insurers to offer all plans to all SEs. This state regulation requiresthem to actively market each plan to all SEs.)

4. Forbids any purchasing alliance of SEs from discriminatory exclusion of a SE fromplans = 1

(Note: HIPAA prohibits multi-employer plans and multiple employer welfare arrangements[MEWA] from discriminatory access. MEWAs refer to associations fielding plan productsexclusively designed for multi-employer coverage of members of a trade or interest grouprepresented. The above state regulation, A-4, goes beyond HIPAA to explicitly prohibitany purchasing alliance from discriminatory exclusion of SEs from any small group planon offer.)

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EXHIBIT 1 (continued)

5. Maintain toll-free telephone number(s) to provide plan information to SEs = 0.25

6. Mandatory price quote on plan(s) within a reasonable period = 0.5

7. Cannot impose preconditions on SE (such as membership of any group or associationor buying any other product or service) to be accepted for enrollment = 0.25(Past literature: Morrisey, Jensen and Morlock [1994] reported that 52% of SEs cited ad-ministrative hassles among the reasons for not offering insurance. Items 5, 6, and 7should help in this regard.)

8. Require detailed filings by insurers on new issues, voluntary and involuntary termina-tions in all their small group plans = 0.25

9. Compulsory filings by insurers on the net premium revenues from small group healthinsurance = 0.25

10. (a) Shall not require more than 75% employee participation after excluding employeesand dependents with other qualifying coverage = 0.25

(b) Shall not apply any participation rates = 1.5(Note: Item 10(b) will also cause premiums to rise in the small group market [Hall, 2000a].Therefore it is also included under Price Reducing Regulations with negative scores.)

11. Shall apply minimum participation requirements equally to all SEs except by groupsize = 1(Past literature: According to Morrisey, Jensen and Morlock [1994], 54% of SEs cited in-

ability to qualify for group rates among the reasons for not offering insurance.)

12. May include employees and dependents with other qualifying coverage in applyingminimum participation clauses or apply other restrictions for SEs with < 10 employees =�0.5

13. Insurer can stipulate a minimum of 2-3 employee participation to offer a plan = �0.5(Rationale: The smaller the group, the greater the potential for adverse selection due toselective enrollment of unhealthy individuals. Items 12 and 13 enable insurers to minimizethis possibility.Note: This regulation will also tend to reduce premiums in the marketplace. Therefore it isincluded under Price Reducing Regulations with a positive score. But the price reducingeffect will be higher relative to its access worsening effect. Therefore it carries a higher nu-merical score under the Pricing construct relative to its numeric score under Access.)

14. May stop accepting SEs if high numbers of high-risk SEs are enrolled in a plan = 0.25(Rationale: This provision eventually protects a plan from becoming insolvent, thereforeaccess for those already enrolled in the plan is retained.Past literature: Christianson, Liu and Schroeder [1994] reported that insurer going out ofbusiness was the cause of uninsurance for 6.5% of small businesses.)

15. Late enrollees to be allowed into a plan albeit with premium increases/pre-existingcondition (PEC) exclusions/waiting period restrictions = 0.5

16. Pressuring individual employees out of plans disqualifies a SE from a plan, and alsothe carrier shall obtain documentation of small employers making fair offers to allemployees = 0.25

17. A carrier cannot vicariously violate risk selection regulations through selectivecommercial arrangements with agents in favor of or against specific types of groups = 0.5(Past literature: Conwell [2002] described how insurers use variable commissionarrangements with brokers/agents to steer their marketing efforts in the desired direction.)

18. Pre-existing condition (PEC) exclusions absolutely forbidden regardless of previouscoverage = 0.25

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Xirasagar et al. 5

19. The duration of PEC exclusion from coverage or waiting period in lieu of PEC shall notbe:

(a) > 3 months = 0.2(b) > 6 months for regular enrollees = 0.15(c) > 9 months = 0.1(d) > 12 months for all enrollees = 0.05(e) > 12 months for regular, and 18 for late enrollees = 0 (HIPAA-guaranteed)(f) PEC exclusion or waiting period forbidden = 0.25

(Past literature: According to Morrisey, Jensen and Morlock [1994], PEC exclusions werealready well within the HIPAA-defined limit with many insurers. Almost 35% of small groupworkers had a six- to 12-month wait on their pre-existing health conditions. But 53% hadeither no PEC or a 0-3 month wait. Any additional access generated by mandating lowerPEC periods by some states does not amount to much market impact potential. Thescoring scheme for this regulation relative to other items, based on actuarial judgment, is inline with the research literature quoted above.)

Add extra 0.5 point for: Emergency services shall be covered during the waitingperiod/PEC exclusion period.(Rationale: Emergency services coverage during waiting period/PEC exclusion period isincluded under this item because this ensures emergency care even for PECs to becovered during the PEC exclusion period.)

20. Duration for defining PEC shall be any medical condition requiring medical attention inthe last: (a) 3 months = 0.25 (b) 6 months = 0 (HIPAA-guaranteed)

21. Period of PEC exclusion/waiting period to be reduced by the duration of coverage inthe last one year with a break of coverage of:

(a) 63 days = 0 (HIPAA-guaranteed) (b) 3 months = 0.25

22. SE premium increases to be distributed across all employees of the SE (cannot becharged against individuals) = 0.5(Note: This item belongs primarily under B(a), but also tends to improve access forindividuals with higher than average claims experience by spreading the premiumincrease across the entire group. Therefore it is repeated under Access with a positivescore.)

B: Pricing and Rating ReformsB(a): Reforms That Tend to Reduce Premium Rates in the Marketplace

B(b): Reforms That Tend to Reduce Premium Differentials AcrossGroups/Individuals

B(a): Pricing Reforms Tending to Reduce Premium Rates in the Marketplace(Positive score implies an effect of reducing premiums and negative score implies an

effect of raising premiums)

1. (a) Health status as a rating factor is permitted for new entrants without prior creditablecoverage, but risk load on this account to be spread across the group = 0.25

(b) Community rating = �2(Note: This item tends to reduce average prices in the marketplace for current enrollees.But it also tends to increase premium differentials. Therefore it is repeated under B(b) withreversed signs.)(Rationale: This provision will protect the average plan premiums of current enrollees fromincreases due to opportunistic new entrants who are likely to be buying coverage in antici-pation of specific health care costs. However, the effect of this provision on an individualnew entrant is mitigated by spreading risk across the entire group to which the new en-trant belongs. This puts the onus of avoiding the moral hazard described above on theentire group.Past literature: Hall (2000b) described the precipitous impact of community rating on aver-age premiums. In New York state, young single males aged 30 (one of the lowest riskgroups) experienced a rate shock of 170% in the year that community rating took effect.The scoring scheme for rating bands reflects the powerful influence of community ratingpolicies or their antitheses on prices and therefore market dynamics.)

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2. (a) Permits claims experience information to be used from the carrier’s ownrecords but not from previous insurance = �0.25

(b) Community rating = �2(c) The law, by default, permits insurers to seek claims experience from another

insurer = 0.25(Note: Claims experience information from previous insurer records potentially permitsgreater market segmentation by risk, and therefore lower average prices for low-riskindividuals, the bulk of insured population. But it is not common actuarial practice for asmall group insurer to seek group claims information from another insurer. Therefore thisregulation is expected to have minimal market impact.)

3. Annual premium increase to the individual SE will be limited to:(a) risk load changes + 25% = 1 (b) risk load changes + 20% = 0.5(c) risk load changes + 15% = 0 (d) risk load changes + 10% = �0.25(e) a flat rate of 15% = �0.75 (f) a flat rate of 10% = �1

(Rationale: The greater the limitation on annual premium increases for specific smallemployers, the higher will be the average price for the marketplace.)

4. Premium changes permitted no earlier than: (a) six-monthly = 0.25 (b) annually = 0(Past literature: Research by Morrisey, Jensen and Morlock [1994] showed that about12% of covered small employers gave up insurance due to substantial premium hikes,and of those that did not offer health insurance, 75% indicated uncertainty about premiumincreases as an important factor. Items 3 and 4 should help in this regard.)

5. Mandated minimum loss ratio is:(a) 50% = 0 (b) 60% = 0 (c) 65% = 0(d) 73-75% = 0.5 (e) 80% = 0.5(f) Loss ratio to go by NAIC recommendations from time to time = 0(g) Excess premium collected beyond minimum loss ratio to be refunded =

additional 0.5 point on B(a)5.(Rationale: Hall 2000a, based on key informant interviews, reported that loss ratios in thesmall group market typically run between 75-85%. Mandates for higher loss ratioscompel insurers to operate with the maximum efficiency, thus reducing premiums for themarketplace. Lower loss ratios are not meaningful for the marketplace, since insurers willnot remain competitive at those levels.)

6. Dependents cannot be covered unless employee is also covered = 0.5(Rationale: Protects against the moral hazard of including sick dependents withoutincluding the primary employee that may increase the average risk levels of plans in thegroup/small group market. This item should therefore help reduce average premiums.Past literature: Christianson, Liu and Schroder [1994] reported that 55% of small busi-nesses shopping for insurance did so because a family member needed medical care.)

7. (a) Premium charged to a SE shall not include separate discriminatory fees such asapplication fees, etc. = 0.5

(b) Any separate fee should be limited, at a standard rate, and applied to all SEsin the plan equally = 0.5

(c) Law is silent on this issue = 0

8. All carriers to offer a HMO version of the basic and standard plan = 0.25

9. (a) Mandatory participation of SG carriers in reinsurance managed by a statutory,nonprofit, mutually funded reinsurance pool = �0.25

(b) Voluntary participation of SG carriers in reinsurance managed by a statutory,nonprofit, mutually funded reinsurance pool = 0

(c) Law is silent on reinsurance = 0(Rationale: Mandatory reinsurance adds to administrative costs on account of doublebilling involved. The provider raises claims to the insurer who in turn raises claims to thereinsuring company.)

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Xirasagar et al. 7

10. (a) Compulsory carve-out of the medically uninsurable/very high-risk individualsunder a cooperative plan = �0.25

(b) State-sponsored plan for coverage of the medically uninsurable/very high-riskindividuals on a voluntary basis = 0

(Rationale: This is because of the double billing and claims administration costs involvedwith 10(a), similar to reinsurance described above.)

11. Statutory purchasing group/alliance formed to negotiate group purchasing = �0.5(Rationale: Purchasing alliance mechanism does nothing to reduce prices [Wicks &Hall, 2000]. Insurers will underwrite each group individually anyway [if permitted bylaw]; billing and claims administration is on individual basis in any case. But adding apurchasing alliance between the insurer and the buyer in fact adds to costs due to theneed for marketing to each customer in addition to marketing to the alliance. Long andMarquis [2001] reported that the vast majority of small employers offering insurance evenin states with well-established purchasing alliances [CA, FL and CT] had used an agent orbroker in selecting their employee health benefits, whether or not they participated in thealliance.)

12. Specific graded penalties for violation of small group regulations = 0.25

13. Detailed cost control mechanisms for health service reimbursements:(a) under all SG plans = 0.25 (b) under basic/standard plan only = 0.1

14. (a) Insurer shall maintain separate rate manuals for each class of business specifyingthe criteria for each class = 0.5

(b) Cannot maintain separate classes of business = 0(Rationale: Class of business is often used by insurers to introduce lower-priced products.Therefore, if a state does not allow maintenance of classes of business, it restrictsinsurers from bringing out lower priced products relative to existing products.)15. (a) The portion of premium determined at the carrier’s discretion will be specified in

the rate manual along with criteria for the same = 0.5(b) Each SE inquiring for rates shall be informed how its premium was arrived at = 0(c) No portion of premium permitted at the carrier’s discretion = �2

(Rationale: 2© makes premiums more expensive for all, because adjusted communityrating causes higher premiums for all, making insurance less worthwhile for healthypeople so that they progressively drop out, making the pool sicker and more expensive.This item is allotted a negative score under this construct, but is repeated under B(b) witha positive score.)16. (a) Premium rates will be calculated in two stages–Base premium and a risk load

factor = 0.5(b) Base rate to be developed on adjusted community rating (or geographic rating)

methodology = �1(Rationale: Calculating premiums in two stages will tend to lower premiums for those withlow risk and keep base prices of plans lower. But premium differentials across groups willbe higher. The opposite mechanism of adjusted community rating will rein in premiumdifferentials due to health status to some extent as noted by Hall 2000-2001. But it willalso tend to increase overall premiums in the marketplace. This item is repeated underB(b) with the score signs flipped and the relative numeric values adjusted for their relativeeffect on differentials relative to other regulations under that construct.)

17. The permitted rating band for the index rates between a carrier’s classes of business(given that the plan benefits are comparable) is:

(a) 1.67:1 = 1 (b) 1.5:1 = 0.5 (c) 1.35:1 = 0 (d) 1.25:1 = �0.25(e) 1.2:1 = �0.5 (f) 1.15:1 = �1 (g) 1:1 = �2 (Community rating = 1:1)

(Rationale: A rating band represents the maximum permitted differential between the high-est and lowest premiums charged on account of the particular characteristic, in this casebetween index rates between classes of business. On the flip side, rating bands increasepremium prices in the marketplace because of their effect of reducing spreads.Past literature: Index rate rating band essentially functions as a health status-rating bandin this market. It is not a powerful moderator of price differentials, since insurers can cir-cumvent this rating band with the use of other rating factors as a proxy for health status,as shown by Hall 2000-2001.)

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18. Experience rating cannot be used for the basic/standard plan (common experiencepool to be used) = �0.5

19. (a) Case characteristics used for rating in each class to be applied uniformly toall SEs in the class = 0.5

(b) Community rating (No case characteristics allowed.) = �2

20. A group’s rating characteristics that are permitted for calculating premiums are:None (community rating) = �2 Group size = 0.25Age = 1 Gender = 1Family composition = 1 Geographic location = 1Industry type = 0.25 Health status = 1Duration of coverage = 0.25 Claims experience = 1Tobacco use and/or lifestyle behaviors = 0.25

The item score for each state = the sum of the individual scores on the permitted factors.(Rationale: Hall 2000-2001 has described how increasing number of rating characteristicsraises premiums for specific individuals or groups and thus increases premiumdifferentials. By the same criteria, increasing number of rating characteristics reducespremiums for the majority of buyers with average risk.)

21. Premium discounts permitted for adherence to health promotion and preventionprograms = 0.1

(Rationale: With the volume of turnover of small business contracts due to variousreasons, any type of discount that presumes long-term enrollment with a given plan hasvery little functional influence on premium rates.)

22. The permitted health status-rating band is:(a) 4:1 = 1.5 (b) 3:1 = 1.5 (c) 2:1 = 1.5 (d) 1.85:1 = 1.25(e) 1.67:1 = 1 (f) 1.5:1 = 0.5 (g) 1.35:1 = 0 (h) 1.2:1 = �0.5(i) 1.1:1 = �1 (j) 1:1 = �2 (Community rating)

23. The permitted total premium-rating band is:(a) 4:1 = �0.25 (b) 2:1 = �0.5 (c) 1.5:1 = �1 (d) 1.35:1 = �1(e) 1.2:1 = �1.5 (f) 1:1 = �2 (Community rating = 1:1)

24. Annual filings with the state insurance commissioner required on rating practices andcertification of compliance with standard actuarial practices = 0.5

25. Annual filings with the state insurance commissioner required on the carrier’s averagegeographic rates for the state = 0.25

(Rationale: Mandatory filings on geographic rates discourage carriers from attempting toprice out high-risk industries/businesses from the market by claiming disproportionatelyhigh rates in those geographic areas. When filings are mandatory they will need to showjustification for the same.)

26. (a) Mandates to document the different classes of business with justification = 0.25(b) Not permitted to classify SEs into classes of business = 0

27. A carrier is permitted to establish no more than:(a) 9 classes of business = 0.5 (b) 4 classes of business = 0.5(c) 3 classes of business = 0.25(d) Forbid establishment of different classes of business but must pool all SEs

in a single experience pool = 0(Rationale: Hall [2000-2001] has explained the utility of limiting the number of classes ofbusiness in this market. Insurers have frequently segregated small groups by risk levels bymaintaining different blocks and herding specific business types into each block. Thus rat-ing limitations by states without limitations on number of blocks can result in substantialpremium differentials despite compliance with rating limitations. High premium differentialswould price many businesses out of the market. However, too much limitation restricts in-surer flexibility to come out with new innovative products with lower prices in line with thechanging marketplace.)

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Xirasagar et al. 9

28. (a) A SE shall not be involuntarily moved into or out of a class of business unlessall SEs in the class are being so moved = 0.5

(b) Classes of business permitted but law is silent on moving groups betweenclasses of business = �0.5

(c) Not permitted to classify SEs into classes of business = 0

29. SE premium increases to be distributed across all employees of the SE (cannot becharged against individuals) = �0.5

(Rationale: This item tends to increase prices for other employees in a group and thusmay price out those who were at the margins of affordability. However, it enables thosewith higher than average claims in the recent past to stay in the pool because theirpremiums are relatively protected from sudden large increases. Therefore this item is alsorepeated under Access regulations with a positive score.)

30. The permitted age variation-rating band is(a) 4:1 = 0 (b) 3:1 = �0.25 (c) 2:1 = �0.5

(Rationale: 4:1 ratio is not competitive enough to be meaningful for the marketplace.)

31. Plan premiums derived from the SG market are exempt from premium taxes = 0.5

32. Carrier shall not apply any minimum participation rates = �2(Rationale: This is a repetition of item A-10 sub-item (b), from the Access regulations. Thissub-item will cause premiums to rise in the small group market. Therefore it is repeatedhere with a negative score. Further the price increasing effect of this regulation is morepowerful relative to its access improving effect. Therefore the item has a numericallyhigher but negative score under this construct relative to the numeric value of the positivescore on the Access construct.Past literature: Selected internal audits by insurers have shown that in the absence ofeligibility screening for minimum participation rates and minimum contributionrequirements, the resulting risk profile caused small group rates to go up by as muchas 7%, as documented by Hall, 2000a.)

33. May include employees and dependents with other qualifying coverage in applyingminimum participation clauses or apply other restrictions for SEs with < 10 employees =+0.75(Rationale: This regulation is repeated from among the items under Access. It also tendsto reduce premiums in the marketplace. Therefore it is repeated here with a positivescore.Past literature: Past literature emphasizes the importance of adverse selection in verysmall groups. This regulation provides some hedge to insurers to avoid the situation of un-duly high-risk individuals being herded into their small group plans and thus helps reduceclaims ratios and premium rates. Christianson, Liu and Schroeder [1994] reported that thesmallest groups [with 6 or less employees] shopping for health insurance were signifi-cantly more likely to be doing so because a family member needed significant medicalcare.)

34. Can stipulate a minimum of 2-3 employee participation to offer a plan = 1

35. Mental health benefit mandates include(a) mental health coverage for biologically based mental illness (schizophrenia

and bipolar disorders) = �1(b) guaranteed treatment of alcoholism and other serious mental illness in all

plans = �1(Rationale: Mental health mandates require higher premiums.)

36. The permitted group size rating band is:(a) 1.67:1 = 0.5 (b) 1.5:1 = 0.4 (c) 1.2:1 = 0.2 (d) 1.1:1 = 0.15

B(b): Pricing Reforms That Reduce Premium Differentials(Positive score implies an effect of reducing differentials and vice versa)

1. No portion of premium permitted at the carrier’s discretion = 1

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2. Experience rating cannot be used for the basic/standard plan (common experiencepool to be used) = 0.5

3. Community rating (No case characteristics allowed.) = 2

4. (a) Premium rates will be calculated in two stages–Base premium and a risk load factor =�1

(b) Base rate to be developed on adjusted community rating (or geographic rating)methodology = +1

5. (a) Health status as a rating factor is permitted for new entrants without prior creditablecoverage but risk load on this account to be spread across the group = �0.25

(b) Community rating = +2

6. (a) Permits claims experience information to be used from the carrier’s own records butnot from previous insurance = 0

(b) Community rating = +2(c) The law, by default, permits insurers to seek claims experience from another

insurer = �0.5

7. Annual premium increase to the individual SE will be limited to:(a) risk load changes + 25% = �1.25 (b) risk load changes + 20% = �1(c) risk load changes + 15% = �0.75 (d) risk load changes + 10% = �0.5(e) flat rate of 15% = �0.5 (f) flat rate of 10% = �0.25

8. The permitted rating band for the index rates between a carrier’s classes of business is:(a) 1.25:1 = �1.2 (b) 1.2:1 = 1 (c) 1.15:1 = 1.5 (d) 1:1 = 2 (Community rating =

1:1)

9. A group’s rating characteristics that are permitted for calculating premiums are:None (community rating) = 2 Group size = 0.25Age = �1 Gender = �1Family composition = �1 Geographic location = �1Industry type = �0.25 Health status = �1Duration of coverage = �0.25 Claims experience = �1Tobacco use and/or lifestyle behaviors = �0.25

Score for each state will be = Total of the score of permitted rating characteristics.(Rationale: Hall 2000-2001 has described how an increasing number of rating characteris-tics raises premiums for specific individuals or groups and thus increases premiumdifferentials.)

10. Premium discounts permitted for adherence to health promotion and preventionprograms = �0.1

11. The permitted health status rating band is:(a) 4:1 = �3 (b) 3:1 = �2 (c) 2:1 = �1.5 (d) 1.85:1 = �1.25 (e) 1.67:1 = �1(f) 1.5:1 = �0.5 (g) 1.35:1 = 0 (h) 1.2:1 = 0.5 (i) 1.1:1 = 1(j) 1:1 = 2 (Community rating)

12. Permitted total premium rating band is:(a) 4:1 = 0.25 (b) 2:1 = 0.5 (c) 1:1 = 2 (Community rating = 1:1)

13. The permitted rating bands for industry type is:(a) 1.35:1 = �1 (b) 1.3:1 = �0.5 (c) 1.2:1 = 0(d) 1.15:1 = 1 (e) 1:1 = 2 (Community rating = 1:1)

14. A carrier is permitted to establish no more than:(a) 9 classes of business = �0.5 (b) 4 classes of business = 0(c) 3 classes of business = 0.5(d) Forbid establishment of different classes of business but must pool all SEs

in a single experience pool = 1

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15. Permitted age variation rating band is(a) 4:1 = 0 (b) 3:1 = 0.5 (c) 2:1 = 1

16. The permitted group size rating band is(a) 1.67:1 = 0.5 (b) 1.5:1 = 0.6 (c) 1.2:1 = 0.8(d) 1.1:1 = 0.9 (e) Community rating (1:1) = 1

C: Stability and Continuity of Coverage

1. Carriers electing not to renew coverage for any SE shall be barred from small groupmarket for 5 years = 1

2. (a) All new entrants to be accepted for coverage without conditions if they hadprior creditable coverage = 1

(b) All new entrants with prior coverage to be accepted but the SE is allowed toimpose a waiting period = 0.5

3. New entrants without prior coverage to be accepted albeit with PEC/waiting periodrestrictions = 0.5

4. For new entrants without prior coverage, additional surcharge up to 150% may belevied in lieu of waiting period = 0.5

5. (a) Method of application of risk load to a group’s premium cannot be changed withaddition of new entrants = 0.5

(b) Community rating = 1 (Risk load cannot be applied at all.)

6. Waiting period for new entrants may not exceed:(a) 0 days = 1 (b) 60 days = 0.25 (c) 90 days = 0.1(d) 180 days = 0 (e) a period beyond the next renewal date for the group = 0

(Rationale: Renewal date could be 1 day away to 365 days away. Mean = 180 days = 1.Past literature: Short and Lesser [2002] found that small employers in some states wereextending the waiting period for new employee eligibility for health insurance.Prohibitions/restrictions on waiting periods will reduce involuntary uninsurance on accountof changing jobs.)

7. Carrier shall offer continuation coverage to employee/dependent on losing theirjob = 1

(Note: This is essentially an extension of the federally mandated COBRA continuationcoverage to employees with 20 plus employees to all small employers. However, unlessstipulated, the price or benefit coverage that an insurer may choose to offer could varyfrom the COBRA mandates (of 102% of the group rate with the same benefits as thegroup). Lambrew [2001] and Gabel et al. [2002] noted that about one-fifth of COBRA-eligibleemployees that lost jobs retained health insurance at their own cost.)

8. (a) Compulsory offer of continuation coverage identical to the group plan at theemployee’s expense = 1

(b) Compulsory offer of continuation coverage at least under the basic/standardplan = 0.5

9. Continuation coverage to be offered at:(a) group rate for 6 months = 0.75 (b) 110-115% of group rate = 0.5(c) 125% of group rate = 0.25 (d) 135% of group rate = 0.1 (e) 200% of group rate = 0

10. Continuation coverage to be offered for:(a) 6 months = 1 (b) > 6 months = 1.5

(Rationale: There is a variation of 6-36 months in the duration for which continuation cov-erage is to be offered. In practice, however, continuation coverage is expensive to pay outof pocket, especially so when unemployed. Lambrew [2001] noted that the average dura-tion of participation in COBRA continuation coverage for those who elected it was 10.5months. For the purposes of this study, it was judged that additional offer beyond 6months would qualify as one category.)

11. If a carrier ceases operation, its enrollees’ benefits to be protected under the planprovided by the carrier that assumes its business = 1

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D: Improving Valued Features of Plans

1. New entrants shall be offered the complete choice of all plans on offer to renewingemployees during the enrollment period = 0.5

2. A carrier cannot deny benefit payments for injuries/damage sustained due to/under theinfluence of alcohol/drugs = 0.1

3. Every employee shall be offered equal choice of plans by a small employer = 0.5

4. Documentation of all enrolled SEs having made a fair offer as above shall bemaintained by carriers = 0.25

5. Mandated benefits in the basic/standard plan include(a) basic health services including immunization(b) basic level of maternity benefit including immunization(c) basic level of maternity benefit and immunization except for SEs with < 15 employees(d) family planning services (contraception and sterilization)(e) well-woman services (including periodic pap smear and mammograms)(f) smoking cessation under physician supervision(g) outpatient services(h) inpatient hospitalization(i) childcare supervision services(j) handicapped children’s services(k) emergency care outside the designated geographic area(l) hospice care(m) prenatal and immunization care only(n) child immunization(o) durable medical equipment(p) eye care(q) home health

Scores: 0.5 point for the first item, 0.2 point for the second item, because they eachrepresent a block of benefits. For the rest, 0.1 point per item mandated. Since basic andstandard plans have poor take rates since HIPAA, this item is given low weight in theoverall scoring scheme.

6. Mental health benefit mandates include(a) basic mental health benefit including substance abuse in all SG plans = 0.25(b) basic mental health benefit including substance abuse in the basic/standard

plan/both = 0.25(c) mental health coverage for biologically based mental illness

(schizophrenia and bipolar disorders) = 0.5(d) treatment of alcoholism and other serious mental illness in all plans = 0.5(e) mental health coverage mandated if the group/employee previously had a

plan that provided such benefit = 0.5(f) not required to cover addictions and related substances due to use of

controlled substances in violation of the law = 0(g) not required to provide mental health benefits for employers with

< 20 employees = �0.25

7. Detailed disclosure to all enrollees on plan provider network, care managementprocedures, etc., to all enrollees and potential enrollees to a plan = 0.5

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PAST STUDIES OF REFORMS RELATIVETO THE PRESENT STUDY

Past literature shows almost all studies of small group reforms limitedto the period before the Health Insurance Portability and AccountabilityAct (HIPAA) of 1996. Hing and Jensen (1999), Buchmueller and Jensen(1999), Jensen and Morrisey (1999), Sloan and Conover (1998), andHall (2000a) reviewed state reforms as of 1995. Ginsburg, Gabel andHunt (1998) reviewed selected reforms as of 1996. Marquis and Long(2001-2002) reviewed selected rating reforms and guaranteed issue reg-ulation as of 1997, and Curtis, Lewis et al. (1999) reviewed selected rat-ing reforms. Hall (2000b,c) presented the perspectives of regulators,insurers, brokers and other stakeholders in relation to individual andsmall group reforms in New York and Vermont. Past studies on reformvariations/impacts across states covered the guaranteed issue of allplans, guaranteed renewal of health plans, portability of insurance, pre-existing condition exclusion, bare-bones plan regulation, prohibitionson the use of health status and/or age as rating factors, high-risk pools,reinsurance, presence of small group purchasing alliances, state experi-ments with subsidized coverage, definition of a small employer, and rat-ing restrictions. The catalogue of market-relevant reforms developed inthis study (Exhibit 1) reflects a far more comprehensive review of re-forms, and also a more updated picture relative to earlier studies.

A major limitation of past studies is that they evaluated the presenceor absence of selected generic provisions such as guaranteed issue,guaranteed renewal, portability of insurance coverage, limits on waitingperiods, bare-bones plan provision, and rating restrictions, without ref-erence to the nature or depth of such restrictions. All previous authorshave concluded that the reforms were ineffective to enhance insuranceuptake in the small group market. However, these findings cannot beconsidered conclusive, since the authors attempted to assess the re-forms’ impact by using categorical representations of selected reforms(each reform used as a binary variable) to explain state-wise changes insmall group insurance take-up rates (Hing and Jensen, 1999; Buchmue-ller and Jensen, 1997; Jensen and Morrisey, 1999; Sloan and Conover,1998). Categorical representation of items brings other liabilities to theanalysis, particularly collinearity issues, when the combined effect ofseveral reforms is to be modeled. Jensen and Morrisey (1999) had to ex-clude some major items such as “Presence of rating reforms” due tocollinearity issues. If univariable impact analysis is used to circumvent

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collinearity, it fails to capture the complex reality (e.g., Sloan andConover, 1998).

To enable decisive conclusions, impact studies need to be based oncomprehensive quantitative indicators of the depth of reforms acrossstates. This study represents a step forward in this direction. It also illus-trates a methodology to quantify the regulatory status in any domain ofstate regulation. The rankings presented in this paper thus add a unique,hitherto unexplored perspective to the comparative study of states’ smallgroup market reforms.

STUDY METHODOLOGY

The study methodology consisted of document review to compile allreform provisions passed by any state. The regulations were classifiedunder reform constructs, and each item was assigned a score dependingon its market impact potential relative to other items under the con-struct. Item scores for each state were allotted based on the presence orabsence of the item in the statute, and each states’ item scores undereach construct were added up to a total score on each index (dimensionof reform). The states were ranked in descending order of the indexscore.

Document Review Methodology

Data Sources

State small group health insurance statutes, as of 1999, were the datasources for this study. Data sources included the computerized legal re-search database Lexis obtained at the Website <web.lexis-nexis.com/universe>, state statutory and administrative codes obtained from the Na-tional Insurance Legislation Service (NILS CD-Rom INSource Insur-ance), WESTLAW Computer Assisted Legal Research’s compilationsof state statutes, and Web pages of the state governments. Regulations ofthe District of Columbia and all states except Michigan and Pennsylva-nia (total 49) were obtained. The states of Michigan and Pennsylvaniahave mature small group markets functioning largely on de facto markettraditions, and do not have specific legislation on small group health in-surance.

Of the 48 states and the District of Columbia, 13 had modified theirsmall group statutes in 1999, 12 in 1998, one each in 1996 and 1993, and


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the remaining 22 in 1997. The statute of New York was last modified in1993 and was more advanced than the federal provisions in terms of so-phistication and fine-tuning the market. The list of statutes reviewed forthe study is indicated in Exhibit 2.

Process of Document Review

The process required comparing the states’ provisions, presented in avariety of formats, with a master list of summary provisions compiledfor the study. This step raised reliability issues due to the potential forsubjective bias, reader errors, inadvertent omission of implied itemsthat may not be explicitly stated in a specific state’s statute, or inadver-tent omission of items due to different wording in a particular state’sstatute. To improve reliability of the ranking process, the document re-view was done in five steps. In the first step, the principal investigatorreviewed the statutes, abstracted statute provisions and catalogued themunder four groupings, Access Improvement Reform, Pricing and RatingReform, Improving Stability of Coverage, and Improving Valued Fea-tures of Plans. The catalogue included provisions adopted by any state(s),and served as the master list against which each state’s statute was sub-sequently evaluated. The master list had a total of 103 items, 32 underAccess, 46 under Pricing and Rating, 14 under Continuity of Coverage,and 11 under Improving Plan Features.

In the second step, the principal investigator again studied each statestatute to mark the item identification number alongside the provision,compared it with the master list, and recorded the score in the data sheet.Another independent reader reviewed each statute, compared eachidentified item with the master list, and recorded her score for the regu-lation. Then the data sheets of the two readers were compared. Any dis-puted item was resolved by jointly reviewing the corresponding para-graph in the statute, together with review of other possibly related itemsthat could have influenced the recording decision. Finally, the two read-ers jointly reviewed the items that had drawn a blank on both readers’data sheets to confirm that these items were indeed not represented inthe state’s statute. The five-step procedure addressed potential reliabil-ity issues in the ranking process.

Inter-Reader Consistency and Reliability Statistics

To evaluate the reliability of document review, statistical assessmentof inter-rater consistency was carried out. Reliability is defined as the

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extent to which a variable is reproducible when observed/measured morethan once or by another observer (Rosner, 2000). By evaluating correla-tions between ratings/measurements of two independent observers, reli-ability statistics provide a quantitative measure of error potential. Therecordings of the initial independent reviews by the principal investiga-tor and the independent reviewer (prior to comparing data sheets and


EXHIBIT 2. Federal and State Statutes Reviewed for the Study

Health Insurance Portability and Accountability Act, 1996: HIPAA

State Statutes:

1. Alabama Title 27, 19973. Arizona Title 20, 19985. California Insurance

Code Division 2, 19977. Connecticut Title 38 A, 19979. DC, Title 35, 1999

11. Georgia Title 33,Chapters 30A, 27, 1997

13. Idaho Title 41, 199815. Indiana Title 27, 199817. Kansas, Article 22, 199719. Louisiana, Title 22, 199921. Maryland Title 15, Subtitle 8, 199723. Minnesota, Chapter 62, 199725. Missouri Title 24, 199727. Nebraska Article 52, 199729. New Hampshire, Title 37, 199731. North Carolina, Article 50, 199833. New York, Title 11, 1993, &

Article 32, Article 9A35. Ohio, Title 29 & 17, 199937. Oregon, Title 56, 199739. South Carolina, Title 38, 199841. Tennessee, Title 56, 199743. Utah, Title 31A & Rule 590, 199945. Virginia, Title 38.2, 199847. Wisconsin, Chapter 635 & Ins 8, 199749. Wyoming, Title 26, 1997

2. Alaska Title 21, 19974. Arkansas Title 23, 19996. Colorado Title 10, Article 8, 19978. Delaware Title 18, 1997

10. Florida Title 37, 199812. Hawaii, Title 24, 199916. Iowa Title 13, 199914. Illinois, Act 5, 199918. Kentucky, Title 25, 199620. Maine, Title 24, 199822. Massachusetts, Title 22, 199824. Mississippi Title 83, 199726. Montana Title 33, 199828. Nevada, Title 57, 199730. North Dakota, Title 26.1, 199732. New Mexico, Articles 23 & 56,

1997; Chapter 59A, 199834. New Jersey, Title 17, 199736. Oklahoma, Titles 36 & 365, 199938. Rhode Island, Title 27, 199740. South Dakota, Title 58, 199942. Texas, Chapter 26, 199844. Vermont, Title 8, 199946. Washington, Title 48, 199948. West Virginia, Chapter 33, 1999

Notes: 1. Year refers to the latest year of amendment of the Title/Chapter/Article reviewed for thisstudy.2. Health care regulations for Virgin Islands and Puerto Rico were not located. Michigan and Penn-sylvania had general health insurance regulation but no regulations specifically targeting the smallgroup market.

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joint document review) were subjected to Kappa statistic analysis. TheKappa statistic compares the observed concordance rate with the ex-pected concordance rate if the responses of the two readers were statisti-cally independent. The higher the observed concordance rate in relationto the concordance rate expected purely by chance, the higher the Kappa,and thus the more reliable the measurement process.

To estimate the Kappa statistic, the item population included onlythose selected for ranking the states. Of the total 103 items in the masterlist, 29 items were excluded since they belonged to one of the followingcategories: (1) state provisions that reiterated provisions of the federalHIPAA of 1996; (2) all lower order state regulations that were super-seded by HIPAA; (3) state provisions that lost market relevance onceHIPAA was enacted (mostly bare-bones plan provisions); and (4) cer-tain provisions that were enacted but judged to have no market rele-vance based on actuarial experience. These items are listed in Exhibit 3,and the reasons for excluding these groups are detailed in a previous pa-per (Xirasagar et al., JHSP forthcoming).

A total of 74 items in the master list were judged to have some marketrelevance, and therefore eligible for inclusion in the reform indices.These constituted the item population for Kappa statistic estimation. Ofthese, 18 items (approximately 25%) were selected (every fourth itemas ordered in the catalogue), ensuring to have adequate representationof all four groupings (Access, Pricing, Stability of Coverage, and En-hancing Plan Features). Of the 18 selected items, 15 were dichotomousvariables (yes/no for each state) and 3 were ordinal variables (quantita-tive gradations in the regulation, such as rating bands). The dichoto-mous variables lend themselves to a two-by-two tabular representationof inter-reader concordance. The ordinal variables were also formattedinto a two-by-two table as follows. Since the subsequent step of jointdocument review resolved disputed scores, the responses to ordinalvariables were classified into correctly identified numeric values andincorrectly identified numeric values by each reader. The aggregatetwo-by-two table for the 18 variables was subjected to Kappa statisticevaluation.

The Kappa statistic was 0.81 (Kappa > 0.70; Rosner, 2000) repre-senting excellent inter-reader agreement at the initial stage of documentreview, and therefore high reliability. It should be noted, however, thatthe data recorded independently by the two readers was further im-proved upon by subsequent joint document review to resolve disputedscores and zero values. Therefore the rankings presented in this paper

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EXHIBIT 3. States’ Reform Provisions Excluded from the Ranking Process

I. State Small Group Market Provisions Reiterating HIPAA, 19961

1. Definition of a small employer (SE) = Employer with 2-50 employees.

2. Guaranteed issue of all plans on offer by an insurer in the SG market, provided theemployer satisfies the insurer’s participation rate requirements.

3. Insurer cannot deny a health plan to any small employer due to risk characteristics.

4. May stop accepting SEs if the plan/carrier is determined to be financially impaired.

5. Forbids exclusion of individuals (employees or dependents) from enrolling in any SEplan within the enrollment period based on health status or claims experience.

6. Restrictive riders regarding specific individuals/diseases/services forbidden.

7. Pre-existing condition exclusions forbidden for new entrants with prior creditablecoverage in the previous one-year period.

8. Pregnancy does not qualify as a pre-existing condition and newborn coverage shall beprovided.

9. Genetic information in the absence of manifest condition does not qualify as PEC, andcarrier shall not require genetic information from applicants/insured persons.

10. The duration of PEC exclusion from coverage or waiting period in lieu of PEC shallbe limited to 12 months for regular enrollees and 18 months for late enrollees.

11. Duration for defining PEC shall be any medical condition requiring medical attentionin the last 6 months.

12. The period of PEC exclusion or waiting period in lieu thereof shall be reduced by theduration of coverage in the last one year allowing for a break in coverage of 63 days.

13. Adopted children aged less than 18 years with prior creditable coverage are not liablefor pre-existing condition exclusion restrictions or waiting period.

14. Duration for defining PEC shall be any medical condition requiring medical attentionwithin the prior 12 months/24 months.

15. Guaranteed renewal of every small employer’s plan with the same benefits as before.

II. Statute Provisions Superceded by HIPAA, but Retained on State Statutes2

1. Definition of a small employer (SE):(a) Less than or up to 25.(b) less than 49.

2. (a) Guaranteed issue of any one plan in the SG market.(b) Guaranteed issue of the basic or standard plan in the SG market.(c) Guaranteed issue of 2 plans (basic and standard) in the SG market.(d) Guaranteed issue of 3-5 plans (basic, standard and catastrophic or equivalent).

3. Denial of plan due to risk characteristics to be accompanied by explanation along withcompulsory offer of the basic/standard plan.

4. Prohibit exclusion of individuals from enrolling in a plan within the enrollment periodbased on health status or claims experience.

5. Prohibit exclusion of individuals from basic and/or standard plan only.

6. Restrictive riders regarding specific individuals/ diseases/services are forbidden in thebasic/standard plan.

7. Small employers terminated at the insurer’s discretion in the six months prior tolegislation to be offered a plan with identical benefits as the one held before termination.

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8. (a) Every SE shall be offered a renewal option with at least the basic/standard plan.(b) Every SE shall be offered a renewal option with any one plan on offer in the SG

market.

III. States’ Bare-bones Plan(s) Regulations that Lost Market Significance in theLight of HIPAA3

1. One model plan (no-loss, no-profit basis) to be offered on guaranteed issue basis byevery SG carrier for previously uninsured SEs.

2. Cannot suspend marketing or issuance of the basic plan.

3. Shall market basic and/or standard plan (if provision for both exists) on equal footingwith other plans in the SG market.

4. Shall not require more stringent application process for the basic and standard plancompared to other plans.

5. Detailed cost control mechanisms specified for health service reimbursementsunder basic/standard plan only.

6. Administrative expenses shall be systematically allocated by specified criteria, andshall be allocated to the basic and standard plan no less favorably than other plans inthe class of business.

7. (a) All carriers to offer a HMO version of the basic and standard plan.(b) All carriers to offer a HMO version of the basic and standard/catastrophic plans

or all three.

8. (a) Every SE shall be offered a renewal option with at least the basic/standard plan.(b) Every SE shall be offered a renewal option with any one plan on offer in the SG

market.

9. A statutory Health Benefits Committee or other statutory body with small employers’representative(s) will recommend benefit levels in the basic and standard plan.

IV. State Small Group Market Regulations Judged to Have No Market Relevance4

1. Every HMO in the state shall offer a small group (SG) policy.

2. Every carrier in the state will offer at least one small group plan.

3. Every carrier shall offer in the small group market the most managed care version ofall its plans.

(The above three are not relevant to market operations because an insurer that does notwant to offer in this market can offer a plan at such high prices that it is irrelevant for themarket.)

4. Every carrier shall elect to serve as a risk carrier or reinsuring carrier but not both.

5. A carrier can limit the number of new entrants in its plans to a fixed percentage of totalenrollees.

6. Statutory purchasing alliance formed to negotiate group purchasing for smallemployers with six or fewer employees only.

7. Mandated minimum loss ratio rate is(a) 50%(b) 60%(c) 65%

(Loss ratios in the small group market range between 75% to 85% (Hall, 2000).Stipulation of lower loss ratios is irrelevant since an insurer cannot be competitive byoffering premiums with these loss ratios.)

8. The permitted age rating band is 4:1.(The permitted rating band is too wide, and therefore meaningless for a competitivemarketplace.)

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represent information of greater reliability than the Kappa statistic esti-mate.

Identification of Reform Constructs

Identification of reform constructs was driven by past literature andthe potential direction of market impacts. At the document review stage,the reforms were classified into four constructs, Access Improvement,Pricing and Rating Reforms, Improving the Stability/Continuity of Cover-age, and Improving Valued Features of Plans. These constructs weredrawn from the literature: Morrisey and Jensen (1999) who identified threereform constructs, access, portability of insurance, and rating practices;Curtis, Lewis and Haugh et al. (1997) who focused on selected access andrating reforms; Lambrew (2001) who focused on continuity of cover-age; Wicks and Hall (2000), and Long and Marquis (2001) who referredto plan choice as a value addition to health plans. Hall (2000-2001)identified premium differential-reducing reforms as a key dimension ofreforms.

But this study aims to quantify states’ reform status based on marketimpact potential, and rank the states. This required a construct classifi-cation scheme that separates constructs with conflicting impact poten-tial. In past literature, the construct Pricing and Rating Reforms hasincluded two types of reforms: those aiming to decrease average premi-ums for the marketplace, and those focused on reducing price differen-



9. Premium discounts permitted for continuous enrollments of more than two years.(Continuous enrollments are not actuarially profitable. Hall (2000-2001) also reported fromhis survey of insurers that most claims profiles of enrollees eventually regress to themean within about 2-3 years. In reality therefore, although discounts might be permitted,they are not relevant for market operations.)

Notes: 1. The Health Insurance Portability & Accountability Act, 1996 represents baseline level ofreforms guaranteed in all states. Hence these provisions are irrelevant for cross-state compari-sons.2. Many state statutes still carry certain provisions that were superseded by HIPAA, which may nothave been amended for technical reasons.3. Research (Families USA, 1993; Dyckman and Burnette, 1992; Morrisey, Jensen and Morlock,1994) has suggested that once all plans are guaranteed for issue to all small employers, the basicplans lose market relevance because of the preference for comprehensive benefits over limitedbenefits at a reduced price.4. Judged based on actuarial experience.

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tials across risk categories. Reforms to reduce average premiums, inmany cases, automatically translate to higher premiums for the high-risk groups. Reforms to reduce premium differentials mostly translateto higher average premiums for the marketplace, i.e., the price of insur-ance for low to average risk enrollees. Logically, therefore, price-reduc-ing reforms should have a net positive effect on health insurance uptakeby average to low-risk enrollees. But premium differential-reducing re-forms could have a net negative effect on uptake due to setting up a vi-cious price raising cycle, engendered by high premiums for low-riskindividuals who are needed in any insurance pool to make it work. Asaverage premiums for low-risk individuals increase, more of them willdrop coverage, leaving behind a higher-risk profile for the insured pool,which drives up average premiums, in turn causing more lower-risk en-rollees to drop coverage. In order to construct reform indices based onmarket impact potential, the price reduction dimension of an item had tobe assessed separately from its premium differential-reduction dimen-sion. Thus five reform constructs are identified for this study, based onpast literature and the criterion of market-impact potential: (1) AccessImprovement Reform; (2) Price-Reducing Reform; (3) Price Differen-tial-Reducing Reform; (4) Continuity of Coverage Reform; and (5) Im-proving Valued Plan Features.

Grouping of Items Under Constructs

The criteria for including an item under a construct included face va-lidity and actuarial judgment of market impact potential. Thus a provi-sion was classified under Access if its self-evident intent appeared torelate to access. In addition, if actuarial experience indicated its influ-ence on any other construct(s), it was included under those constructstoo. This strategy helped to construct robust indices of reforms from amarket perspective, and to ensure fair comparisons of the net regulatorystatus on each dimension across states.

Exhibit 1 shows the grouping of items under the five reform con-structs. Access Improvement reforms included those related to defininga small employer, enhancing access for small groups regardless of riskstatus, enhancing compliance and enforcement, improving access to in-dividual workers regardless of risk, pre-existing conditions and waitingperiod restrictions, and preventing uninsurance due to plan insolvency.Price-Reducing reforms included all reforms that were judged to influ-ence premium prices for the marketplace. Those judged to reduce aver-age premiums, or premiums for low to average risk groups were scored

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with a positive sign to reflect their positive effect on this construct, andthose judged to raise average premiums were scored with a negativesign. Price-Reducing reforms included provisions related to premiumstructure, classes of business, rating practices, rating factors, rating bands,loss ratios, premium increase restrictions, enforcement, reinsurance,coverage of very high-risk individuals, and cost control mechanisms. Arating band is a ratio representing the maximum permissible differentialbetween the highest and lowest group premium rates, owing to groupdifferences on the specified criterion.

Premium Differential-Reducing reforms include rating practices, rat-ing factors and rating bands. These reforms mostly constitute a subset ofprice-reducing reforms, with each of these provisions exerting the op-posite direction of impact on this construct relative to the Price-Reduc-ing reform index. A provision that tends to reduce premium differentials(therefore exerting a positive impact on the objective of premium differ-ential reduction) often increases average premiums for the marketplace,which would constitute a negative impact on the price-reduction con-struct. For example, Hall (2000b) noted that community rating in NewYork caused young single males aged 30 (one of the lowest risk groups)to receive a rate shock of a 170% increase in premiums in the year thatcommunity rating took effect.

An item is classified under “Continuity of Coverage” if the item, atface value, aims to encourage continuity of coverage for employees andtheir dependents over time, despite changing or losing a job. Continuityof coverage reforms include state regulations that strengthen HIPAAprovisions related to guaranteed renewal clauses, and portability of in-surance for employees changing jobs. Also included are state regula-tions that guarantee continuation coverage for small business employeeslosing jobs. Continuation coverage refers to the federal guarantee ofcontinued group coverage for employees of firms with 20 plus employ-ees on losing their job under Consolidated Omnibus Budget & Recon-ciliation Act (COBRA). Some states extend this definition to all smallemployers. Improving valued plan features include items related tohealth benefit mandates, advance disclosures on network providers, andchoice of plans for employees.

The total 74 items were grouped as follows (with some items repeatedunder multiple constructs): Access Improvement Reform included 22items; Price-Reducing Reform, 36 items; Price Differential-ReducingReform, 16 items; Continuity of Coverage, 11 items; and ImprovingValued Plan Features, 7 items. Exhibit 1 shows the listing of items undereach construct.


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Computing the Reform Indices

The general approach to quantify states’ reform status was to com-pute an index on each construct for each state. An index differs from ascale as described by DeVellis (1991), “An index is made up of causeindicators or items that determine the level of a construct.” An index isdetermined by a quantitative function of its cause indicators, and doesnot lend itself to statistical methods of establishing construct validity.An index differs from a scale, which consists of effect indicators, oftenvalidated by factor analysis. The reform indices computed for this studyalso differ from most well-known concepts of indices, such as eco-nomic indices. Economic indices are weighted aggregates of their causeindicators that are empirically measured (e.g., the Consumer Price In-dex). Other indices, such as the reform indices defined for this study, arecomputed based on expert judgment, that the construct and the itemsfeeding into it represent a specific dimension of the index (face valid-ity).

Under each construct, quantitative scores were allotted to each itemin the master list, based on actuarial experience of small group marketdynamics. The scoring scheme was driven by the judged market rele-vance of each regulation relative to other regulations under the con-struct. Regulations with significant market relevance were allotted ascore of one. Other regulations were allotted scores by assessing theirmarket relevance relative to items allotted a score of one. For example, aregulation that was judged to exert about a fourth of the influence of the0-1 scored regulations was allotted a score of 0.25. After allotting thescores for each regulation in the master list, each state was allotted ascore on each regulation based on its presence on the state’s statute. Astate that did not have a regulation in place received a zero on that item.Under a given item, variations on a ratio scale representing greater orless intensity (for example, rating band variations) were allotted scoresbased on the judged relative intensity of market relevance. Exhibit 1shows the scores allotted to each regulation under the respective con-structs, the rationale, and the relevant past literature related to the signif-icance of the regulation.

Each state received five reform index scores, computed by adding theitem scores. Finally each state’s scores on these five dimensions wereadded up to a total score reflecting the overall depth and comprehen-siveness of its reforms from a market perspective.

What the Reform Index Scores Represent

A question arises, what do these scores mean? A state’s Access scorerepresents the depth of a state’s reforms (that do not explicitly target

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prices) to promote small employer access to health insurance. The Price-Reducing Reform score represents the net impact potential of a state’sreforms on the price reduction objective. This score is the net compositeof the positive effects of explicit price-reducing reforms and the nega-tive (mostly unintended) market impacts of other pricing reforms thattend to increase average prices. The Premium Differential-ReducingReform score represents the net differential-reducing impact potential,after taking into account regulations explicitly designed to reduce pre-mium differentials, and those that increase differentials (mostly unin-tended market impacts of reforms designed to reduce average prices forthe marketplace). The Continuity of Coverage score represents the netimpact potential to enhance opportunities to sustain coverage followinga job change or job loss. The Improving Valued Plan Features score rep-resents the state’s net effect of enhancing valued plan features, judgedfrom an actuarial perspective (which is also borne out by the literature).Thus each state’s reform index score represents the net goodness poten-tial of its regulations on each of the five reform constructs.

What does the Total Reform index represent? The Total score is thesum of the five construct scores. Recall that some regulations are re-peated under two constructs, though scored with the appropriate signand quantitative value in line with the judged market relevance underthe respective constructs. Thus the total score represents the net total re-form status in terms of enhancing the five desirable small group marketobjectives. The problems of the small group market, highlighted by theadverse pre-reform statistics, created the context for reforms, and steeredfederal and state reform efforts towards these objectives. Thus a state’sTotal score represents its net regulatory progress towards enhancing theoverall goodness potential of its small group market regulations tocounter the problems of this sector.

RESULTS

Table 1 shows the states’ scores on each reform index. The findingsof correlation analysis among the six reform indices are shown in Table2. Correlation analysis shows that the Total Reform index is signifi-cantly correlated with the Access, Continuity of Coverage, and PlanValue indices. Importantly, neither it nor the Access index is signifi-cantly related to either of the pricing reform indices. This shows thatmost states have emphasized either the access or pricing dimension ofreform, and very few states have attempted comprehensive reform on


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all the dimensions. Price Reduction and Premium Differential Reduc-tion indices are highly negatively correlated with one another. This isexpected, since the latter construct consists of a subset of the price-re-duction construct items scored with the opposite sign.

Table 3 shows the ranking of states on each dimension. Improvingplan value index scores show abrupt rather than smooth variability ofscores (range 0 to 2.15), with 13 states having a zero score, and 12 stateshaving a score of 0.1 or 0.2 (total 25 states with a near-zero score).Therefore it was decided not to rank states on this index. The Plan Valuescore, however, is included in the Total score for ranking the states onthe overall goodness impact potential of their reforms.

STATE RANKINGSON SMALL GROUP POLICY ENVIRONMENT

Table 3 shows that seven states figuring among the top ten on the To-tal score are also among the top ten on two or more of the four indices.These states are New Jersey, Montana, North Dakota, South Dakota,Oregon, California, and Texas. Overall, therefore, these seven states,(particularly New Jersey, which scores among the top ten on three of thefour indices) have considerable depth of reform in place, potentially ad-dressing a wide spectrum of issues in the small group market. Twostates, South Carolina and Nevada, though not among the top ten on anyof the component indices, are among the top ten in terms of total score.

Except for the seven states that did consistently well on two or moredimensions, the pattern of rankings across constructs is not consistent.That is, some states, such as Colorado, Idaho, Minnesota, DC, andAlaska have focused more on access reforms, but are not among the topten on other dimensions. Similarly, many states that focused on pre-mium differential reduction have not adopted significant reforms on ac-cess or other price reducing approaches that do not unfavorably impactpremium differentials. New York, most often quoted for its communityrating reform, is at the top on Premium Differential Reduction index.But it does not make it to the top ten on Total score (ranking 28th) due toa low Access score, very low Price Reduction index score (due to theadverse impact of community rating on average premiums, as supportedby Hall 2000b), and zero Plan Value score. Washington, Vermont andMaryland also show a similar pattern of near-community rating policiesalong with low Access index scores, very low Price Reduction index

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TABLE 1. State Scores on Small Group Market Reform Indices

State Access Pricered* Premdiff* Continu* Planval* Totscore*

AL 3.5 8.45 �6.2 3.25 1.25 10.25

AK 6.5 7.25 �7.5 1 0 7.25

AZ 2.75 5.25 �6.75 7 0.7 8.95

AR 4.75 11.35 �9.35 6 0 12.75

CA 4.9 1.75 �2.75 6.5 0.1 10.5

CO 6.25 4.35 �4.5 4.5 2.15 12.75

CT 4.25 5.75 �5 6 0.2 11.2

DE 5.25 7.6 �5.75 1.5 0 8.6

FL 4.55 6.75 �8 7 2.1 12.4

GA 5.25 5.25 �5 1.5 0 7

ID 6.3 6.75 �6 2.5 1.9 11.45

IL 1.5 8.85 �6.85 7 0.2 10.7

IN 2.1 9 �8.5 6.75 0 9.35

IA 4 5.2 �4.6 6 0.2 10.8

KS 3.55 8.75 �7.75 5.85 1.25 11.65

KY 2 4.25 �5.5 4.25 0.2 5.2

LA 3 10.25 �8 5.5 0.4 11.15

ME 4.55 5.6 �3.6 4.25 0.55 11.35

MD 3.95 2.5 �2 3.1 1.05 8.6

MA 3.5 4.25 �2.95 6.75 0.75 12.3

MN 6 5.75 �6.25 5.75 0.5 11.75

MS 4 9.25 �7.75 4.5 0.2 10.2

MO 4.75 8.5 �7.25 2.5 0 8.5

MT 6.75 9.25 �10.75 6.5 1.75 13.5

NE 3 9.5 �7.25 2 0.1 7.35

NV 5.45 8.85 �7.5 6.5 1.3 14.6

NH 4.55 4.75 �5.25 4 1 9.05

ND 6.5 6.7 �4.2 3.25 1.25 13.5

NC 4.5 7 �8.45 3.5 0.1 6.65

NM 3.65 6 �4.75 6 0 10.9

NY 3.8 �14 16 4.5 0 10.3

NJ 6.65 4.6 �4 6.75 1.35 15.35

OH 2.25 7.2 �9.6 4.1 0 3.95

OK 4.5 9 �6.5 3.5 0.2 10.7

OR 5.65 2.6 �3 7 1.05 13.3

RI 4 9.85 �7.75 2.5 0.75 9.35

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scores. In conclusion, the rankings show that the emphasis of the statesis highly varied with respect to the different dimensions of reform.

LINKAGES BETWEEN REGULATIONSAND THE MARKET PROBLEMS

The adverse pre-reform market statistics on access, price, continuityof coverage, and plan value created the impetus for federal and state re-forms to address the objectives represented by the reform indices.Based on the criterion of face validity, this section presents the concep-tual links between specific regulatory items and the small group marketproblems identified by the pre-reform statistics.

Prior to reform, an estimated 20% of the non-elderly population wasuninsured at some time in a given calendar year (Short, 1987). Smallbusiness employees and the self-employed accounted for a sizeableproportion of the uninsured, about 50% (EBRI, 1992). More than two-thirds of the uninsured were employed. Three-fourths of the uninsuredwere either working adults or dependents of a working adult, and two-

Xirasagar et al. 27

State Access Pricered* Premdiff* Continu* Planval* Totscore*

SD 3.75 8.45 �4.35 7.75 0.65 16.25

SC 4 8.05 �5.55 5.5 1.05 13.05

TN 4.75 9.35 �10.2 6 0 9.9

TX 5.5 9.35 �5.35 5 1.75 16.25

UT 4 8 �6.5 7 0 12.5

VT 3.5 0.6 �1.25 5.75 0.75 9.35

VA 2.6 7.35 �5.75 4.25 0.2 8.65

WI 5.75 9.35 �7.35 3.5 1.35 12.6

WY 5 7.6 �7.75 6.25 0 11.1

WA 0.85 2.25 2.05 4.25 0.7 10.1

WV 1.55 9 �6.5 2.5 0.1 6.65

DC 5.75 8.1 �7.85 6 0.1 12.1

HI 2.5 7.75 �7.5 3 0 5.75

*Pricered = Price-Reducing ReformPremdiff = Premium Differential-Reducing ReformContinu = Continuity of Coverage ReformPlanval = Improving Valued Features of PlansTotscore = Total Reform Index (Sum of Access, Pricered, Premdiff, Continu and Planval)

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thirds of uninsured workers worked in small firms with 25 or fewer em-ployees, mostly in firms with fewer than ten employees (Helms, Gauth-ier and Campion, 1992). Small business surveys showed that only 51% ofsmall businesses offered health insurance in 1993 (Morrisey, Jensen andMorlock, 1994).

Firm size was directly related to offering of health insurance: 85% offirms with 25-49 employees offered insurance, compared to 44% forfirms with fewer than ten employees (Morrisey, Jensen and Morlock, 1994).The offer rate dropped systematically with group size. Group sizegreatly influences premiums. Private insurers of large group plans esti-mate administrative expenses at about 5% of claims when setting pre-miums, compared to 13.7% for small group plans, and 40% for thesmallest ones with 1-4 employees (Helms, Gauthier and Campion, 1992).Besides price, the smallest groups also face a problem of access. Chris-tianson, Liu and Schroeder (1994) noted that 10% of small businesseswere turned down by insurers, half due to inadequate group size. Fur-ther, 11% of those who lost coverage did so because of failure to qualifyas per insurer’s criteria. According to Morrisey, Jensen and Morlock(1994), administrative hassles or inability to qualify for group rates werecited by 52% of uninsured small employers as reasons for not offering aplan. Several provisions (listed in Exhibit 1) potentially influence ac-cess and price for the smallest businesses. These include items related to


TABLE 2. Correlations Between Small Group Market Reform Indices

Pearson Correlation Coefficients(Prob > [r] under H: Rho = 0)

Access Pricered* Premdiff* Continu* Planval* Totscore*Access 1.000 0.04

(0.81)�0.11(0.46)

�0.05(0.74)

0.41(0.003)

0.49(0.0003)

Pricered 1.000 �0.92(< 0.0001)

�0.04(0.76)

0.02(0.87)

0.07(0.61)

Premdiff 1.000 �0.01(0.93)

�0.01(0.93)

0.08(0.60)

Continu 1.000 0.14(0.34)

0.58< 0.0001

Planval 1.000 0.56(< 0.0001)

*Pricered = Price-Reducing ReformPremdiff = Premium Differential-Reducing ReformContinu = Continuity of Coverage ReformPlanval = Improving Valued Features of PlansTotscore = Total Reform Index (Sum of Access, Pricered, Premdiff, Continu and Planval)

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TABLE 3. Ranking of States by Reform Index Scores

Rank Access PriceReduction

PremiumDifferentialReduction

Continuity ofCoverage

TotalScore

1 MT AR NY SD SD

2 NJ LA WA AZ TX

3 ND RI VT FL NJ

4 AK NE MD IL NV

5 ID WI CA OR ND

6 CO TX MA UT MT

7 MN TN OR IN OR

8 DC MT ME MA SC

9 WI MS NJ NJ AR

10 OR OK ND CA CO

11 TX IN SD MT WI

12 NV WV CO NY UT

13 GA NV IA WY FL

14 DE IL NM AR MA

15 WY KS CT CT DC

16 CA MO GA IA MN

17 TN SD NH NM KS

18 MO AL TX TN ID

19 AR DC KY DC ME

20 NH SC SC KS CT

21 ME UT DE MN LA

22 FL HI VA VT WY

23 OK DE ID LA NM

24 NC WY AL SC IA

25 CT VA MN TX OK

26 UT AK OK CO IL

27 SC OH WV MS CA

28 RI NC UT NY NY

29 MS ID AZ KY AL

30 IA FL IL ME MS

31 MD ND NE VA WA

32 NY NM MO WA TN

33 SD MN WI OH RI

34 NM CT NV NH IN

35 KS ME HI NC VT

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group size as a rating characteristic (item Ba-20), rating bands related togroup size (item Ba-36), provisions to preempt discriminatory practicessuch as imposing unviable participation rates (items A-8, 10 and A-11),discriminatory commission arrangements with agents (item A-17), se-lective exclusion based on arbitrary application of rating characteristics(item Ba-19), and provisions related to classes of business/group size(items Ba-26, 27, 28, and Bb-16). New Hampshire’s expansion of thedefinition of small businesses to those with up to 100 employees couldhelp the smallest groups get a better choice in the market as more insur-ers are likely to stay in the small group market to be able to get the busi-ness of the larger groups now termed small businesses (item A-1). ItemA-6 indirectly targets the administrative hassle issue, by requiring in-surers to respond to inquiries within a reasonable time period.

Cost of health insurance was also a major issue: 67% of firms withfewer than 100 employees could not offer health insurance due to inade-quate profits, and 62%, due to its high cost (Christianson, Liu and Schro-eder, 1994). Morrisey, Jensen and Morlock (1994) found that over 85% ofsmall employers who did not offer insurance indicated high premiums


TABLE 3 (continued)

Rank Access PriceReduction

PremiumDifferentialReduction

Continuity ofCoverage

TotalScore

36 VT GA AK OK NH

37 MA AZ RI WI AZ

38 AL IA MS AL VA

39 NE NH KS ND MD

40 LA NJ WY MD DE

41 AZ CO DC HI MO

42 VA MA LA ID NE

43 HI KY FL MO AK

44 OH OR NC RI GA

45 IN MD IN WV WV

46 KY WA AR NE NC

47 WV CA OH DE HI

48 IL VT TN GA KY

49 WA NY MT AK OH

*Plan Value score rankings are not presented because the distribution shows large groupings ofstates at specific score levels with many states scoring 0.

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as the reason. All the regulations included under Price-Reducing Reform(Ba-1 to 36) and Premium Differential-Reducing Reform (Bb-1 to 16) po-tentially impact premiums (both in terms of average premiums for thelow-average-risk groups and premiums for high-risk groups), and there-fore represent states’ attempts to address cost issues.

Of the small businesses that offered health insurance, 98% offered asingle plan, generally a conventional plan (Morrisey, Jensen and Morlock,1994). Choice of plans potentially enhances insurance uptake since em-ployees can choose a plan better suited to their needs. Given small busi-nesses’ size and insurer requirements of minimum participation rates(to avoid adverse selection), it is not often feasible to offer multipleplans. Purchasing cooperatives, however, facilitate the offer of planchoice to employees as shown by several authors (Long and Marquis,1999, 2001; Wicks and Hall, 2000). Item Ba-11 should potentially helpaddress this issue.

A major reason for small businesses not to offer health insurance wastheir reluctance to withdraw coverage in the future (56%), and uncer-tainty of premium increases (75%), while two-thirds of those that re-cently dropped coverage (12% of small businesses) did so in responseto steep premium hikes (Morrisey, Jensen and Morlock, 1994). In an-other study, Christianson, Liu and Schroeder (1994) found that 10% oftheir uninsured small business respondents were those who had droppedcoverage due to premium increases, and 80% of them remained withoutcoverage for over a year. Further, they also noted that high turnover ofsmall group contracts (due to employers changing carriers in responseto premium hikes) created a major source of administrative costs, whichin turn drives up small group premiums. Items Ba-3 and 4 represent at-tempts to cap premium increases and bring in a measure of predictabil-ity for individual employers, as well as to limit turnover and the asso-ciated administrative costs.

Involuntary uninsurance due to insurance company going out of busi-ness was cited by a small percentage (6.5%) of small business respon-dents (Christianson, Liu and Schroeder, 1994). Item A-14 targets thisdimension of involuntary uninsurance.

High employee turnover was cited by 35% of small employers as areason for not offering insurance (Morrisey, Jensen and Morlock, 1994).Items A-18, 19, 20, 21, Ba-1, 2, C-2, 3, 4, 5, 6, 8, 9,10 represent attempts toguarantee insurance eligibility of new entrants to a plan despite chang-ing jobs. Short and Lesser (2002) found that small employers in severalstates covered in the Community Tracking Survey have been extendingthe duration of waiting periods for employee eligibility for health insur-

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ance. Prohibitions on waiting periods by some states, such as Hawaiiand Illinois, and restrictions on the duration by several states (Item C-6)could potentially limit uninsurance due to a job change.

Lambrew (2001) and Gabel et al. (2002) noted that about one-fifth ofCOBRA-eligible employees that lost jobs retained health insurance attheir own cost. Item C-7, extending the scope of the federally mandatedCOBRA continuation coverage to all small employers, addresses thispotential source of uninsurance.

One-sixth of small businesses not offering coverage cited lack of asuitable plan as the reason (Christianson, Liu and Schroeder, 1994). Al-though HIPAA appears to address this dimension of uninsurance by re-quiring the guaranteed issue of every plan regardless of risk profile,some states have further facilitated access by requiring the active mar-keting of every plan to every small business, and/or requiring toll-freephones to provide plan information (items A-6 and 7).

The risk level of the small group market is also negatively affected byadverse selection arising out of several sources. One of them is due toself-insured employers herding high-risk employees out of their plans,particularly if spouses have access to private insurance (Retsinas, 1995).Self-insurers are sheltered from insurance regulations against risk selec-tion by the federal Employee Retirement Income Security Act (ERISA).Another source of adverse selection is the tendency of businesses withsignificantly sick employees to opt for insurance, while those withhealthy, young employees may choose to remain uninsured. Fifty-fivepercent of small businesses shopping for health insurance did so be-cause a family member needed significant medical care, the percentagebeing higher among the smallest businesses with six or fewer employ-ees (Christianson, Liu and Schroeder, 1994). The resulting high-risk pooltranslates into higher premiums; thus insurers build in a margin of 8.5%of claims for risk and profits for groups of one to four employees com-pared to 1.1% for the largest groups (Helms, Gauthier and Campion,1992). Higher average premiums cause low-risk individuals and em-ployers to decline insurance coverage, further reinforcing the trend to-wards adverse selection. Items A-10, 11, 12, 13 and Ba-6 representattempts to influence these dimensions of adverse selection.

The issue of uneven risk distribution in the small group market hasbeen disputed by some authors. Young, Joyce et al. (1995) concludedthat the health care costs of insured individuals in small firms was nodifferent from that of the larger firms after adjusting for age and gender,and that they were no sicker than covered individuals in large firms.However, the study itself was conducted in a health care market over-


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whelmingly dominated by one insurer (with 90% of market share), andwith one standard plan in operation. Under this situation, the entire mar-ket functioned as one large risk pool. Once the market is fragmented,with many players competing against one another on price and value,the potential for risk segmentation by insurers as well as purchasers in-creases. Therefore their findings are difficult to extrapolate to competi-tive markets.

CONCLUSION

The linkages discussed above show that almost all the reform provi-sions constitute supply-side initiatives to encourage health insurancecoverage in the small business sector. This establishes a normative ex-pectation of a link between states’ reform status (represented by the re-form indices) and uninsurance arising out of the small business sector.No doubt, many demand-related and structural problems of the smallgroup market remain unaddressed by reforms. Demand-related issuesinclude low revenues per employee in many labor-intensive small busi-nesses; inability to shift insurance costs to low-paid, low-skilled work-force; high workforce turnover; and seasonal and/or part-time employ-ment (Retsinas, 1995; Thorpe and Florence, 1999; Fronstin and Snider,1996/1997). A structural factor is the high administrative cost due tomarketing and paperwork for many small groups, and due to high rate ofturnover of small group policies. However, the supply-side interven-tions captured in the form of reform indices could be expected to showsome correlation with uninsurance rates once the demand-related fac-tors, such as secular economic and demographic factors, and the struc-tural smallest group disadvantages are controlled for.

A final comment on the study methodology needs mention. The re-form indices and state rankings are driven by the judgment of one actu-arial expert, based in one state. Several factors, however, mitigate thispotential weakness of the study methodology. These are: (1) The indexis driven by professional judgment, based on thirty years of actuarial ex-perience in a state unit of a nationwide insurance company that has adominant presence in all states. (2) Learnings on pricing policies andmarket responses get transferred across state units. (3) The commercialcompulsions of the competitive marketplace are more likely to producesimilarities than divergences in insurance companies’ pricing and mar-keting practices across states, in response to statewide regulatory pres-sures. (4) South Carolina has considerable depth of reform in place

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(ranking among the top ten in terms of the total reform index). Thesefactors suggest that the indices and rankings may be quite representativeof the states’ relative progress towards reforming the small group mar-ket.

The pattern of rankings on the different reform dimensions raisequestions as to how each dimension relates to uninsurance. This papersets the stage for an analysis of the impact of state reforms on uninsur-ance rates presently underway.

REFERENCES

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Small Group Health Insurance

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