RENEWAL PREMIUM INCREASES:
What protections do people have?

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A couple in Michigan, John and Rhonda, are the subject of this article Recently, they learned that their health insurance premium, which had been $526 per month, would increase to $1,026 per month at renewal. John and Rhonda have held this policy for three years and never made a claim until recently (Rhonda had minor surgery on her knee and John had to go to the doctor when he had a reaction after eating a bad clam). Last year, John also celebrated his 60th birthday. John and Rhonda can't afford to pay more than $12,000 for health insurance, and so are about to join the ranks of the uninsured.

The article discusses rights that John and Rhonda have in Michigan, as well as protections that they would have if they lived in other states. It also reviews the limitations of a federal law that requires all health insurance to be "guaranteed renewable," but does not limit renewal premium increases.

FACTS: Rhonda and John live in Michigan and have a small business with no other employees. Rhonda and John were paying $526 per month for health insurance in the individual market. They’ve been covered under this policy for 3 years. Recently, Rhonda and John received their renewal notice, and were shocked to find their monthly premium would almost double to $1,026.

Both Rhonda and John are healthy and have not had any claims until last year. In his own words, “Last year we paid $7,000 in premiums and our insurer paid $2,200 in claims for us.” Their policy paid for a knee operation for Rhonda and a doctor’s visit for John, who had a reaction to a bad shell he ate. Rhonda and John cannot afford to pay over $1,000/month for health insurance. Unless they can find more affordable coverage, they will have to join the ranks of the uninsured.

WHAT PROTECTIONS EXIST, AND WILL THEY HELP IN THIS CASE?

Guaranteed renewability: A federal law known as the health insurance Portability and Accountability Act of 1996 (HIPAA) requires guaranteed renewability of all health insurance policies. So Rhonda and John’s insurers are prohibited from canceling coverage just because they have made claims. However, HIPAA does not limit renewal rates. The right to renew coverage at a 95% price increase does not seem a very meaningful protection to Rhonda and John.

Renewal rating limits: It is not clear exactly why Rhonda and John’s premium has increased so dramatically in one year. Three reasons are possible. First, Rhonda and John made claims this year. While many insurance policy contracts promise to spread the cost of claims experience evenly across all policyholders, some insurers (including, apparently, Rhonda’s and John’s) do assign premium increases to individuals who have made claims. Some insurers also use durational rating, increasing premiums for policyholders who have held their coverage for several years. Consumers in durational-rated coverage may be offered the option of reapplying for new coverage at cheaper rates, but they will be accepted only if they are healthy. Finally, most insurers use age rating, raising premiums as people get older. Rhonda is 52 and John just turned 60.

Just as HIPAA is silent on premium increases, a number of states, including Michigan, do not prohibit insurers in the individual market from increasing rates based on claims, duration of coverage, and age of covered individuals. In other states, however, insurers would be prohibited from increasing Rhonda and John’s premium like this. New York, for example, requires community rating of health insurance premiums. No policyholder can be charged more than any other based on health status, health history, or other risk factors. Other states require modified community rating with adjustments permitted for age, but not health status. Yet other states impose rating bands that limit how much premiums can vary based on health status, age, and other factors.

Shopping around: Rhonda and John would like the option of shopping around for less expensive coverage. However, their ability to do so in Michigan is limited. Most insurers in the individual market require applicants to pass medical underwriting, a process insurers use to assess the health and risk status of applicants. Because they have made recent health claims, Rhonda and John are more likely to be turned down by other insurers. Michigan does require one insurer, Blue Cross and Blue Shield, to guarantee issue coverage to all residents at community rates. That means Blue Cross can’t turn Rhonda and John down or charge them more because of their health problems. However, since this is the only company in the state subject to these requirements, sicker customers are more likely to gravitate there, and so premiums will be higher than for other policies that can turn sick people down. Rhonda and John report they have checked into Blue Cross coverage and can’t afford this, either.

In some other states, all insurers are required to guarantee issue and community rate health insurance. In these states, Rhonda and John would probably have multiple coverage options, although the community rated premiums still might be higher than what they can afford.

Protections for the self-employed: Although they both work for their own company, in Michigan, Rhonda and John are not counted as 2 separate employees. As a result, they are not eligible to buy small group coverage. The federal law, HIPAA, also considers a husband and wife team working together, without other employees, to be an individual family, not a small employer group. However, some other states, such as South Carolina, would count Rhonda and John as two employees, and therefore a group of two. In such states, they would be eligible to buy health insurance in the small group market. Nationwide, all small group policies must be offered on a guaranteed issue basis, so small employers cannot be turned down because someone in the group is sick, old, or high risk. (Unfortunately, Michigan is the only state in the U.S. that does not require guaranteed issue of all products for small employers. Even if Rhonda and John hired another employee to become a small group, they would not be guaranteed access to small group coverage from any insurer in Michigan other than Blue Cross.)

In 13 states, self-employed groups of one can buy coverage in the small group insurance market. In these states, therefore, even though they have no other employees, Rhonda and John would have guaranteed issue protections as a small group. Some states, such as Colorado, offer this protection year-round. Others, such as Maryland, allow the self-employed to buy a small group policy only during semi-annual open seasons. In both states, the rate for such policy would be an “adjusted community rate,” meaning Rhonda and John might pay somewhat more or less than other policyholders based on their age and where they live, but not because of their health.

LESSONS FOR POLICYMAKERS

Guaranteed renewability is an important protection for consumers. It prohibits insurers from canceling coverage when someone gets sick. However, unless guaranteed renewability is coupled with other protections – rating limits and guaranteed issue – it may be of limited value to consumers. For Rhonda and John, it means being stranded in a policy they can no longer afford.

Federal lawmakers could consider strengthening the protections they established in HIPAA, adding some limits on renewal premium increases to the guaranteed renewability of coverage the law already provides.

In fact, the National Association of Insurance Commissioners, an organization of state officials who regulate insurance, developed several model laws for small group policies and individual health insurance policies to address these practices. The Small Employer Health Insurance Availability Model Act requires insurance companies to use an adjusted community rate. There is a 200% limit on varying premiums based on ones age, meaning that a 64 year old individual would pay not more than twice as much as a 20 year old buying the same policy. If Rhonda and John lived in one of the states that have adopted the NAIC Model law, their insurance company would be prohibited from increasing their premiums due to medical claims or the amount of time they have been covered. Also, adjustment in premium for age would be limited. The NAIC Individual Health Insurance Portability Model also limits premiums and individuals may not be targeted for premium increases solely based on the amount of time they had been covered by the same policy or their medical claims.

Also at the state level, many states have adopted other protections – guaranteed issue requirements and expansions of the definition of who qualifies as a small group – that could expand coverage options for Rhonda and John. These actions provide models for other states to consider as they seek ways to protect the insurability of working Americans like Rhonda and John.

DISCUSSION OF OPTIONS

Rhonda and John's experience would be completely different if they lived in another state. So if Rhonda and John lived in Maryland, their insurance company would be prohibited from increasing their premiums based on a $2200 claim and the three years they were covered by the policy. Maryland is not the only state where claims experience and durational rating is prohibited.

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