A bill signed into law this month by Gov. Bill Ritter could mean higher health insurance premiums – or it could simply be a way to more fairly decide who pays how much.
Senate Bill 1335 removes an insurance company’s ability to set premiums based on the health of employees. In some cases, insurance companies were raising premiums for entire companies if an employee suffered a chronic or major illnesses. Beginning in 2008, insurance companies doing business in Colorado won’t be able to do that.
“It looks to me that it would be good for the employers,” said Sheila Carlon, professor of human services administration at Regis University. “Insurance companies aren’t able to use prior claims or health status as a way to determine premiums.”
Insurers will have to determine rates using to standard industry classifications. The only health consideration they will be able to consider is smoking.
The strategy behind using the standard industry codes is an “innovative approach,” Carlon said.
“It’s a good place to start,” she said. “Obviously, the legislation was created to make the process fair. I’ve heard about a business whose insurance company dropped them because one of the employees had cancer and underwent bone marrow treatment. They even said that when the employee died, they’d take the company back. But they wouldn’t insure the company; it was too high a risk.”
Insurance companies say the situation is more complicated, and that rates in Colorado are already higher because of state law.
“There’s a limited rate band in the state,” said Jim Carlough, who is the head of sales for Destiny Health. “Other states underwrite groups at a high level. In Colorado, that band is only 1.10 percent in the small group area.”
Rate banding works like this: Insurers set a rate between 0.85 percent to 1.10 percent of their base. In other states, the max load can be as high as 1.65 percent, which allows insurers a larger band to work with, Carlough said.
If a company has five employees with a chronic disease, like diabetes, the most the insurers could charge is 1.10 percent of the base rate. In Illinois, for example, they can charge 1.65 percent of the base, allowing them to charge one company more – while other companies don’t have to carry the risk.
“Claims for that one company are going to cost more than we’re allowed to charge in the premiums,” Carlough said. “And that means we have to spread that risk out among other companies, charging everyone more.”
Carriers lose their flexibility with the combination of a limited rate band and the loss of the ability to underwrite in the small business category, he said.
“Now legislation is taking away the ability to use the entire rate band,” she said. “Regardless of medical condition, you have to give everyone the same rate. The industry can’t penalize based on medical risk, so that means they have to charge people more to make sure they’re collecting enough premiums to cover the claims.”
The law will cause carriers to re-evaluate rates, he said. Many insurance companies will charge to cover their risk.
Carlough said he doesn’t believe the law will force companies to reconsider insuring in the Colorado market. Destiny Health moved to Colorado earlier this year – and has no plans to leave.
Carlon said insurance companies are “over-reacting.”
“The lack of data – not knowing the claims history puts everyone on an even playing field,” she said. “It seems to me that would be a good thing. Their response doesn’t make sense. If the legislature knew they were just going to jack up the rates to cover it, why even pass it?”
But others involved in the health care industry say small businesses will suffer.
Steve Hicks is regional vice president of IIS Benefits. He also serves on the Greater Colorado Springs Chamber of Commerce’s legislative lobbying committee.
“The chamber was so opposed to this,” he said. “We lobbied hard against it. With insurers practically guaranteeing they’ll raise rates now that this has passed, business owners are the people who will suffer.”
Rising health insurance rates are one of the biggest drains on business bottom lines, he said. And since the law targets only the small business market, it will likely bear the brunt of any increases, he said.
“Certainly, insurers have to cover their risks,” he said. “But this legislation – while it was created to make an even playing field – will have unintended consequences. Small businesses could suffer if premiums increase.”