HIPAA's small-group access laws: win, loss, or draw?

• Jurisdiction: United States
• Date: 22 March 2002
• Author: Hall, Mark A.

Perhaps the least controversial aspect of the Health Insurance Portability and Accountability Act (HIPAA) is the set of provisions regulating access to health insurance by small employers (those with 2-50 workers). HIPAA builds on an extensive set of regulations that states began enacting in the early 1990s to make health insurance easier to purchase and to keep. Its requirements include not only the guaranteed renewability and portability provisions, but also an all-products guaranteed issue mandate, which prevents insurers from refusing coverage under any of their small-group products.

Although the vast majority of states (over 40) already had versions of these laws in place prior to HIPAA, a few did not, and there was some variation among those that did. Most important, roughly half the states with guaranteed issue laws applied them only to certain designated products with standardized benefits that were designed for higher risk subscribers. HIPAA requires that higher risk purchasers be able to choose any of an insurer's offerings in the small-group market. HIPAA took what existed in most states and made it universal and uniform.

Assessments of HIPAA's guaranteed issue and related access and portability provisions generally conclude that they have achieved their limited aims and have done no immediate economic harm (Sloan et al. 1999; Hall 1999). Although coverage has not measurably increased as a result, small employers can purchase comprehensive coverage regardless of their workers' (or their workers' families') health problems, as long as they are willing to pay the cost. Because few previously uninsurable employers have elected to add coverage, in most markets there has not been any substantial, measurable increase in small-group premiums that is directly attributable to this added protection.

There certainly continue to be a large number of small employers who don't purchase health insurance. But it appears that the reason for not purchasing is the affordability of insurance, not its accessibility. Prior to guaranteed issue requirements, some insurers certainly turned down high risks, but they were not turning down very many people who actually wanted to purchase insurance for the price at which it could be offered.

In sum, HIPAA's small-group provisions might be scored a draw. By increasing accessibility but not helping affordability problems, HIPAA at best creates a modest gain at no great cost, but also with no great improvement. Appearances, however, can be deceiving. In addition to the added regulatory and administrative costs entailed in HIPAA's portability provisions, there are two sets of hidden costs: the foreclosure of market innovations, and the creation of new administrative burdens at the state level.

Foreclosing Market Innovations

HIPAA is constructed to fit the market structure as it existed in 1990, one that consisted of three distinct segments: individual (or non-group) purchasers, small groups, and large groups.

There are two kinds of dangers entailed in locking into place such a market structure. First, it could prevent the market from evolving into a more seamless or efficient structure. Second, solidifying market gradients creates unnatural opportunities for gaming, which then entail further regulatory costs to prevent regulatory circumvention.

The health insurance market's three segments (large, small, and individual) are not simply parts of a continuum (Hall 2000). They constitute entirely different product lines, often sold by different sales forces, and serviced by different insurers or corporate divisions--as distinct in their economic and legal characteristics as are mobile homes, apartments, and single-family houses. The characteristics of each market segment, and the way in which the boundaries are defined, have pervasive strategic and regulatory importance.

The market structure for health insurance first distinguishes between the individual, or non-group market, in which people buy insurance on their own, outside the workplace, and with after-tax dollars, versus the group market of employer-sponsored insurance, which is divided into the small-group segment and the large-group segment.

The large-group market, which accounts for roughly two-thirds of private health insurance, consists in great measure of self-insured employer groups. Self insurance is a strategy designed to take advantage of the Employee Retirement Income Security Act's (ERISA's) preemption of state regulations such as solvency oversight and mandated benefits. The small-group portion of the employer-sponsored insurance market consists of groups so small that they find it very difficult, if not impossible, to self-insure. Because adding extra regulations to the employer group market would encourage more opting out of state regulatory systems through self-insurance, HIPAA's insurance reform provisions apply only to groups of 50 or fewer workers, the level at which self funding is thought to be infeasible.

At the other extreme, the individual market, which accounts for less than 10 percent of private health insurance, consists of insurance purchased outside the workplace. Such insurance generates fewer or no tax breaks, and its regulation is almost entirely the province of the states. Most states do not impose the set of access and rating rules that apply to small groups because this market segment is too fragile and the tendency would be too great to price lower risks out of the market.

Small-group laws must be spliced in between these two extremes. Doing so requires not only defining precisely who counts as an employee, but also providing a special set of rules for the self-employed, who, after all, are small "groups" of one. Aside from these boundary-defining and border-policing problems, crafting different rules for different market segments creates a regulatory gradient, which presents opportunities for gaming the regulatory structure. Because different portions of the health insurance market have different economic characteristics and they are subject to different regulatory approaches, insurance purchasers will consider strategic opportunities to pose themselves as being on one side or the other side of a somewhat artificial regulatory divide.

Moreover, HIPAA's regulatory structure assumes that these market divisions are, and will continue to be, the natural and optimal shape of the market. Market innovations and evolutionary trends that might be contrary to this assumption are inherently disfavored. Examples of each type of problem follow.

Fictitious Employees and Groups

High-risk individuals may wish to present themselves as a group in order to claim the benefit of guaranteed issue. This can be done by employers falsely...