User:Ivantheorganized/Sandbox/NYS Small Group Reform

New York State Small Group Reform, 1992
Chapter 501 of the Laws of 1992 set forth fundamental changes in the way individual and small group health insurance is sold and rated by insurers, including HMOs, in New York State. These changes were designed to achieve the following goals:


 * To facilitate access to health insurance by all New York residents who wish to obtain it directly or as members of small groups; and
 * To promote competition among insurers and health maintenance organizations on the basis of efficient claims handling, ability to manage health care services, consumer satisfaction, and low administrative costs, rather than on the basis of differing underwriting and rating practices which allowed some insurers to exclude higher risk applicants from coverage and caused unaffordable premium rates to those unable to meet selection standards.

The legislation specifically authorized the Superintendent of the New York State Insurance Department to promulgate regulations to assure orderly implementation and ongoing operation of the community rating and open enrollment requirements of Chapter 501. The two key regulations of importance in this regard are:


 * Regulation 145 (11 NYCRR 360): sets forth rules clarifying various provisions of Chapter 501 and includes interpretations designed to assist insurers in carrying out their responsibilities and obligations under that law.
 * Regulation 146 (11 NYCRR 361): established market stabilization processes to share costs attributable to different population risk characteristics among insurers in the individual and small group health insurance markets.

The following section gives more detail on the Medicare Supplement Demographic Pool, which is the only market stabilization process from the original Regulation 146 that has survived unscathed to the present day.

Regulation 146 Market Stabilization: Demographic Pooling
One of the basic tenets of health insurance coverage is that the premium rates charged should be commensurate with the risk assumed. With respect to the community-rated small group market, for example, if Carrier A's book of business has better risk characteristics than Carrier B's, then all else being equal Carrier A can charge lower premiums than Carrier B. This situation obviously puts Carrier B at a competitive disadvantage and over the years insurers, being naturally sensitive to such things, have come up with ever more creative ways to improve the risk characteristics of their pool of community-rated insureds. These have typically involved some means of adjusting the overall community rate to better reflect the perceived risk characteristics of each individual or small group in (or applying for coverage in) the pool, either through up-front medical underwriting and “underwriter judgment”, or through less subjective approaches such as the assignment of (presumably) statistically-determined relative risk factors. Under this approach, for example, forty year old males might receive a factor of 1.00 (no adjustment to the community rate) because they tend to have average costs, while sixty year old males, being much riskier, might get a factor of 2.50. Workers in the mining industry might get a factor of 1.50, while bankers might get a 1.05. Formerly, these sorts of demographic and industry adjustments were predominant, although lately diagnosis-based predictive modeling scores have steadily gained ground in this area. Suffice to say, the risk-adjustment “arms race” continues with unabated fervor in many markets around the country to this day.

New York State, however, with its small group reform legislation of 1992, went in a completely different direction. In New York, no risk-adjusting of small group community rates is allowed – period. A group of 10 sixty year old coal miners will get the same rate as a group of 10 forty year old bankers. The legislators specifically wanted to avoid the risk-selection arms race that occurs in other states and which can price those unable to pass the risk bar out of the insurance market.

However, the legislation faced a formidable obstacle in the shape of the competitive disadvantage problem noted above. If Carrier B has a sicker population than Carrier A and is forced to charge higher premiums as a result, then Carrier B is at a competitive disadvantage for which it has no good means of redress. It might be doing everything right in terms of operating efficiency, customer satisfaction and so forth, but if the price differential induced simply by virtue of its starting the game with a sicker population is enough, it could be caught in a “death spiral” of having to charge ever-higher rates as its risk profile continually deteriorates because of those higher rates.

It is doubtful whether the specter of insurance CEOs rioting in the streets of Albany weighed heavily on the legislators’ minds, but nonetheless the prospect of legislating massive competitive disadvantages in the health insurance industry was clearly not a desirable one. For this reason, several market stabilization mechanisms were implemented through 11 NYCRR 361 (Regulation 146), the simple goal of which was to level the risk-profile playing field and promote competition in more desirable areas (see above).

Demographic pooling was one of the market stabilization processes launched by Regulation 146 to achieve this goal. The basic idea involved setting up a pool of money (the "Demographic Pool") into which insurers with lower-risk books of business would be required to pay, and from which those with higher-risk blocks would receive disbursements. The New York State Insurance Department's clear intent was that insurers receiving disbursements from the pool would use them to reduce premiums. Originally, two demographic pools were set up, one for community-rated Medicare Supplement business, the other for community-rated non-Medicare Supplement. Only the former still remains.

The actual assessment of risk for determining payments to, or disbursements from, the pool is based on using standard actuarial demographic factors. As outlined above, these are simple statistical measures of expected relative costs that are based solely on an individual's age and gender. For example, 40-year old males typically have a factor close to 1.0, signifying that their costs are close to average, while 60-year old males may be assigned a factor more in the range of 2.5, indicating that they tend to cost about two-and-a-half times the average. Assigning these scores to each member in an insured's book of business, and then computing their overall average is thus a measure of expected relative costs for the entire book.

Footnotes: