Colorado is scrapping a five-year experiment that allowed insurers to charge small businesses varied premiums based on the health status of their workers, and opinions differ on its success.
Colo. ends rate banding
Payers: Rates will rise; others say hikes just gouging
The experience in the Centennial State shows the deep divides between insurers and employers on how to reform the small-business market, which is experiencing high year-over-year premium increases with no end in sight.
In 2007, Colorado Gov. Bill Ritter signed HB 1355, a bill that ended so-called “rate banding,” where insurers gave discounts of up to 25% to small businesses with healthy workers. Small businesses—those with fewer than 50 workers—with unhealthy workers paid premiums up to 10% higher than average. Health status was determined by claims data. Some sources claim the premium distinction was set arbitrarily.
Rate banding in the small-group market had been in effect in Colorado since 2004, after the state passed a law allowing it. The idea was that the 25% discount would cause healthier workers to buy insurance, spreading the risk among a wider group of people and keeping premiums down.
“We needed incentives to attract and retain healthier people and stabilize the pool,” said Rebecca Weiss, director of governmental relations for Anthem Blue Cross and Blue Shield of Colorado, which supported rate banding.
Anthem says rate banding worked because the insurer was able to attract new business and entice healthier people into the market with the discounts. Anthem insures about 80,000 people in the small-group market in Colorado, of which more than half were getting the healthy discount, Weiss said.
The governor signed the ban on rate banding in 2007 but the law did not go into effect until 2009. Many small businesses were able to carry over their discount another year, so insurers say that the change is just starting to be felt now during employers' open-enrollment period, and in January 2010, when the new rates go into effect.
Without the 25% discount, Anthem said some small businesses are dropping coverage entirely. About 80% of those getting small-group coverage will see a rate increase, Weiss said. A normal rate increase of 8% because of medical cost trends, plus a loss in the 25% discount would mean a 33% jump in premiums for some small-business employers, according to Anthem.
“What we are seeing so far and we see intensifying is that they are not renewing,” Weiss said.
UnitedHealth Group, another major insurer in Colorado, also opposed the end to rate banding in the small-group market and is blaming it for high premium increases for small businesses in 2010. UnitedHealth did not respond to a call for comment.
Small businesses aren't buying the insurers' argument.
Tony Gagliardi, Colorado state director of the National Federation of Independent Businesses, said that insurers are using the new law as an excuse to jack up rates to new highs.
“The carriers love to talk about the discounts they gave,” Gagliardi said. “The discounts were nothing but a scheme.”
Gagliardi likened it to a department store that offers 30% off cookware all year round. “After a while you realize that 30% is the actual price of the product,” he said. “It's not a discount.”
Under HB 1355, insurers can still charge varying premiums based on age, geography, family size covered, industry and whether the customer is a smoker.
During the five years that rate banding was allowed, the small-group market was simply too volatile, said Evan Dreyer, spokesman for Ritter.
“Prior to HB 1355, a small employer's premiums could skyrocket from one year to the next if just one employee, or a member of an employee's family, became chronically ill or had a serious health incident,” Dreyer said in an e-mail. HB “1355 moved Colorado's small-group insurance market closer to the central purpose of insurance: spreading the risk of ill-health across a broad pool rather than forcing it to be borne directly by an ill employee and his or her colleagues.”
Being a business owner with fewer than 50 workers in Colorado is “death by insurance,” said Mark Hamouz, principal at Lonco, an engineering firm in Denver with 24 employees.
“I was rather appalled to see these insurers use the law as a reason to raise premiums,” Hamouz said. “Rate banding didn't help lower premiums either.”
Kaiser Permanente supported the law ending rate banding in the small-group market. Kaiser Permanente covers about 70,000 people who work for small businesses.
“All rate banding did was create added hardship for certain groups,” said Leo Tokar, vice president of marketing, sales and business development for Kaiser Permanente Colorado.
The poor economy is more to blame for small businesses dropping coverage than the end of rate banding, Tokar said. “What we came back to is that eliminating rate banding means a more rational system.”
Tokar said that, on average, premium rate increases for small businesses insured by Kaiser have risen 12% year-over-year. Ending rate banding means some small employers will pay more, but it also means that small employers with more unhealthy workers are seeing their rates drop.
On a national level, both the leading House and Senate healthcare reform bills propose ending rate banding based on health status, gender and some other factors. The majority of states have some form of rate banding in the small-group market, according to the Kaiser Family Foundation.
In Colorado, those who have experienced rate banding said that it doesn't solve a core problem.
“It doesn't get to the underlying trend of healthcare costs,” Tokar said. “To really curb healthcare trends, you're not going to do it by how you move money around.”
Gagliardi of the National Federation of Independent Businesses, agreed. Under rate banding, he said, “premiums kept going up and we never got to the heart of the matter—the cost of care.”
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