The State of Health Insurance in Colorado*
• 48% of small businesses offer group health insurance to their employees, while only 38% are actually covered.
• 75% of all businesses are small (50 or under employees), but only 29% of the working population is employed by them.
• 11% of the state population’s health insurance is from small business group coverage; 52% from large group businesses; 6% from individual coverage, and the balance from Medicare, Medicaid, the self-insured and uninsured.
• Group health insurance premiums for everyone increased 84% between 1996 and 2002.
• In 2002, premium costs peaked, and small businesses actually paid higher premiums per employee than large ones.
An Historical Perspective
Prior to the mid-80’s, on a national basis the cost of health care was simply not the issue it is today. But after that time, propelled by an economy suffering from double-digit inflation, health care costs also accelerated. Then as now, insurance companies were regulated by each state, resulting in a quilt-like national pattern of rules and regulations. Some states did mirror each other in terms of mandating what the average insurance consumer could purchase on the open market, and did seek to protect their best interests.
But after health care costs dramatically increased, the adequacy of premiums collected by the insurance carriers, the expense of claims paid, and their shrinking profit margins began to be a major issue in that industry. At that point, the interests of insurance consumers began to take a back seat to the interests of the insurers.
To be sure, for a time in the hyper-inflation 80’s, the carriers were able to tolerate the high cost of claims paid via so-called cash flow underwriting. Then health underwriters happily assumed the risk of insuring business groups of all sizes because the premium collected was invested in a similarly inflated financial market that provided huge returns. But that ended abruptly in the late 80’s when the Tax Code was changed and the market took a long term nosedive. Stuck with diminishing investment returns along with relatively high risk, high cost insurance customers, the insurers found themselves in a financial bind.
They needed help. Anytime a major business sector with sufficient financial and political clout finds itself bleeding money, it looks to Uncle Sam and his state counterparts to bail them out. The health insurance industry was no different. Unable to dump its unprofitable customers without picking up and leaving the state all together, while still facing unrelenting health care cost inflation with no free market solution in sight, the insurer’s picked up the hotline to their state legislatures, those entities that determine how insurers could do business within their boundaries.
While they were screaming for help, the insurers began to especially scrutinize their small business group policyholders, realizing that particular risk was different from the one presented by their larger customers. Large or small, Colorado and other states governed the specification of benefits that had to be offered by different health plans; the guaranteed issue of those plans (coverage had to be offered to all employees, not just the healthy ones), and the setting of premium rates.
So the insurers, caught in a financial squeeze, began to manipulate what they legally could in order to reduce their losses. Since group health plans were mandated to be guaranteed renewable (they could not drop a group based on its claims experience), they instituted rate banding, where premium rates were determined by the age or health status of individual members of the group. This allowed them to charge higher premiums to make up for their increasing loss ratios.
For the first time, the insurers also implemented the use of individual underwriting of group members via health status questionnaires. Prior to that time, group insurance had as its founding principal the fact that if a group originated other than for the purpose of obtaining insurance, individual evaluation of each member of that group was statistically unnecessary, as the group risk taken as a whole would mirror the health status of the general population. In other words, anti-selection, the tendency of individuals to seek health insurance only when they were sick, was not an issue if it was provided to all employees in a group on an equal and timely basis.
This represented the insurer’s first attempt to undermine their own long established actuarial principals and begin to weed out “unhealthy” employees from their covered groups. From their point of view, it was their only choice while still operating under the state’s guaranteed issue and guaranteed renewal group insurance mandates. In the small business market, they were now able underwrite the entire group by using the health status of single individuals.
*Source: The Small Group Health Insurance Market in Colorado [1]
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