Loophole-Free Reforms Needed : Insurance: Community rating--where everyone pays the same regardless of health or occupation--is key to fairness.

With the death of universal health coverage in Congress for this year, Washington has turned its attention to incremental insurance reforms. These reforms can restore some fairness to the health insurance market, and set the stage for more fundamental changes that address access and cost.

But Congress must avoid proposals which would be counterproductive to the larger effort for real reform, for example, exempting selected low-risk businesses who self-insure or join trade associations from the general risk pool.

Community rating--the requirement that everyone pays the same premium regardless of health or occupation--is central to all serious market reform proposals. This equitable principle was embodied in the original nonprofit Blue Cross and Blue Shield plans. But it was seriously undermined when commercial insurers entered the market with special rates for favored occupational groups and aggressive medical underwriting to weed out people with potentially expensive medical conditions.

For example, insurance companies and agents aggressively sold coverage to trade associations--conglomerations of preferred customers--to the disadvantage of other small businesses. Frequently, they established these associations themselves.

As carriers excluded uninsurable individuals and businesses, and as costs escalated for everyone, other forms of health coverage evolved. One was the so-called “multiple employer welfare arrangement”--a self-insured health plan subscribed to by numerous small businesses. MEWAs include both phony insurers and health plans operated by non-fraudulent, but frequently undercapitalized, small business associations.

The American health insurance market has become highly fragmented and often does not provide insurance at all. Except in states such as California that have enacted limited reforms, insurance companies can reject customers at will, or charge business owners low introductory rates then raise premiums or cancel coverage if employees become really sick.

We have not one insurance market, but many: one for the entrepreneur who must pay thousands of dollars more for health insurance than he did in his corporate job; another for the kidney patient who could obtain an insurance policy only from a scam insurer that left her owing hundreds of thousands of dollars in medical bills; another for the white collar businessman whose membership in a professional association gives him comprehensive health insurance at below-market rates, and another for the convenience store owners whose insurance premiums are becoming unaffordable because their insurer gives great deals to big associations.

To address this travesty nationally, Congress must adopt market reforms that include community rating with no special deals. As a matter of simple arithmetic, special deals for selected groups necessarily drive up rates for everyone else.

Some proposals before Congress would reinforce market fragmentation and could undermine reforms already implemented in California. For example, the Senate “mainstream coalition” bill would permit many small businesses to escape community rating by self-insuring, insurers to give special deals to trade associations and self-insured MEWAs to operate.

By contrast, a special committee on health reform of the National Assn. of Insurance Commissioners recommends that all businesses with up to 500 employees be community-rated, that smaller businesses not be permitted to self-insure and that no special status be permitted for trade-association plans.

These positions reflect strong concerns both about solvency in MEWAs and self-insured plans and about the detrimental effect on the general market if low-risk groups can opt out.

Similarly, the California Department of Insurance has opposed amending California’s existing reforms to create loopholes for associations (about 20% to 30% of the small-group market). The California Legislature rejected such proposals two years in a row despite massive lobbying by influential trade associations.

While incremental insurance market reforms are not the cure for what ails us, these reforms have potential to move us in the right direction. Market reforms can correct real abuses and create rules that will be necessary in any system to provide and fairly finance universal coverage. Having apparently abandoned the big fight for this year, Congress must be careful not to re-establish privileges and loopholes that will stand in the way of the important work that lies ahead.