Finally, good news about health insurance

In Capitol Review, Notes by Mark Hillman

For the first time in six years, Colorado’s health insurance market is showing signs of improvement.  More employers are offering insurance coverage, and more working families are being covered.

From 2005 to 2006, 1,289 more businesses offered coverage to their employees and dependants, according to a report from the Colorado Division of Insurance.

That seems like a very modest improvement until it’s compared to the previous five years.   From 2000 to 2005, nearly 23,902 businesses discontinued coverage – an average loss of 4,780 businesses per year.

A key contributor to this improved climate is something called "rating flexibility."  In plain English, that means forcing insurance companies to compete for your businesses.

Unfortunately, a handful of special-interest lobbyists at the Capitol now want to go back to the "bad old days" by rolling back reforms that helped Colorado turn the corner toward a stable health insurance market.

In 2003, the Colorado legislature confronted a health insurance market that was about to implode:

• Premiums had soared 92% in two years.

• Nearly one out of four small business employees had lost coverage.

• Consumer choices were dwindling as the number of insurance companies doing business in Colorado fell from 83 to less than 24 in ten years.

One of the significant changes was moving away from the well-intended but fatally-flawed system of one-size-fits-all pricing known as "community rating."

Under "community rating," health insurance companies were prohibited from providing discounts to good customers – those who kept health care costs low or whose employees were relatively healthy.

Instead, insurance companies were forced by state law to charge the same premium to a 40-year-old who exercises regularly, eats responsibly and hasn’t been sick a day in her life as to a 40-year-old who smokes like a chimney, drinks like a fish, eats like there’s no tomorrow, and exercises only the remote control.

It’s easy to see why this system cannot work.

The healthy woman soon decides that she can’t afford to pay such a high price for something she never uses, so she discontinues insurance because it competes with other important expenses like house and car payments and food and clothing for the family.  While that may not be a wise choice, it is a very practical one for many families.

As healthy consumers drop insurance coverage, what remains are mostly unhealthy consumers, causing insurance costs to soar even higher.  This "death spiral" typically presages the collapse of the health insurance market for small employers.

When the law was changed to allow rate flexibility, insurance companies were authorized to offer low-cost customers a discount of up to 25 percent.  Understandably, many were skeptical that "greedy insurance companies" would really give anyone a discount.

Sure, health insurance companies are out to make money, but it’s crucial to understand how they make money.  Health insurers make money by selling coverage to people who are healthy – people who pay premiums but rarely make claims.

A rule of thumb is that 20 percent of health insurance customers drive 80 percent of the costs.  The other 80 percent of customers are simply purchasing peace of mind in case they become injured or seriously ill.

By offering discounts to attract more low-cost customers, insurers can pay for the care required by those whose costs are high.

From the Division of Insurance report, we can see that nearly 65 percent of small businesses received a discounted premium in 2006, and 36 percent received the largest discounts available.

Another legitimate concern expressed about rating flexibility was the fear that the very smallest businesses – those with 15 or fewer employees – wouldn’t receive the same breaks as those with 16-50 employees.

Because businesses with 15 or fewer employees comprise nearly two-thirds of the small group market, insurance companies need their business most of all.  The report indicates that businesses with 15 employees or less receive discounts at virtually the same rate as their larger counterparts.

As legislators consider steps to make health insurance more available and affordable, the first principle should be making health insurance more economical for healthy people, thereby enabling the open market to accommodate even more people who are sick.

Rather than undo reforms that are working, legislators should improve the current law to allow business and families that pay their own way to receive even larger discounts.