Health Care Cost Spiral

Without doubting the crisis in health care coverage, recent legislation offered by Sen. Olympia Snowe to provide lower-cost insurance for small businesses presents more problems than it solves. If the purpose of insurance is to spread risk among a broad range of people and offer an affordable guarantee of benefits to all, her bill to authorize association health plans needs, at the very least, a major overhaul.

The motives behind S. 545, the Small Business Health Fairness Act, are good and recognize a severe problem: Many small businesses cannot afford to offer health care coverage for their employees and need less-expensive options for coverage. It is often overlooked that the uninsured are often employed or family members of someone employed. Association health plans (AHPs) allow similar small businesses to form groups across state lines to negotiate together for lower health care costs. A sensible idea generally.

Unfortunately, one of the ways AHPs attempt to lower costs is through exemptions from state requirements for coverage of such important health benefits as mammography screening or preventive child health care. Health data suggest these savings are not substantial, about 5 percent savings at most, but the lost benefit of early detection of disease can matter immeasurably. More troublesome from a coverage viewpoint is who would want these plans. Insurers conclude that it would be people who have higher than average health care costs. When AHP-type plans were approved in Arkansas in 2001 no insurer would offer one because each figured the need for higher premiums soon would drive out lower-cost participants, leaving only the sickest in the plans.

Len Nichols, vice president for the Center for Studying Health System Change, testified last month before the Senate Small Business Committee that, “If the Arkansas insurers were correct, and it is telling that they all reached the same conclusion, this kind of association could lead to rapidly increasing but actuarially fair premiums over time for well-intentioned members of the association plan. … [T]his process is known as a death spiral.”

AHPs rely more heavily on self-regulation than standard plans, a difficult sell in a time of Enron and Arthur Andersen. The danger of these plans becoming insolvent is apparent in their requirement that they need carry only $2 million in surplus no matter how many people they cover, a hedge well below normal state levels, and even the plan’s stop-loss coverage comes with problems, according to one Maine official. A further risk is that AHPs could be set up as profit-making entities, which combined with the lack of oversight, makes them dangerously like Multiple Employer Welfare Arrangements (MEWAs). The National Governors Association last month warned Sen. Snowe that MEWAs had left more than 100,000 consumers with unpaid claims and that “AHP legislation would exacerbate these problems by replacing state oversight with minimum certification by the U.S. Department of Labor, which has no capacity for regulating insurance arrangements.”

Sen. Snowe has said she is open to making revisions in her bill to answer these concerns. But it is not clear, for instance, how an association could form in multiple states yet have state regulations apply in each or why AHPs would provide the stability and affordability small businesses deserve. The frustration over the clear need to provide a lower-cost option to these businesses and the needed protections passed by states points once again to the failure of Congress to enact comprehensive health care reform. If the bill is to be saved, it will require a far larger vision of health care reform than is currently offered.