No. 78Msrch
25,1997
How to Implement
Kassebaum-Kennedy
A State Legislators’ Guide
to the Health Insurance Portability
and Accountability Act of 1996
By Conrad F. Meier*
Introduction
Changes are being made to the national health insurance market that will have farreaching consequences for the cost and quality of health care in the U.S.Duringcurrent
legislative sessions, state legislators face the formidable task of implementing the mandates set
forth in The Health Insurance Portability and Accountability Act of 1996 (Public Law 104 191), popularly known as the Kassebaum-Kennedy health care reform bill.
The analysis that follows clarifies key
provisions, examines some issues behind the
national health insurance market that
provisions, describes the likely effects on the
nation’s health care system, corrects errors
will have far-reaching consequences
made in interpreting the law by the
for the cost and quality of health care
Department of Health and Human Services
(HHS) and the National Association of
Insurance Commissioners (NAlC), and
reviews the options available to state legislators and administrators.
1.
The Role of State Legislatures
As is discussed in more detail below, state governments are given considerable leeway in
how they go about implementing HIPAA States may take a conservative approach to
implementation, doing no more than is necessary to facilitate efforts by the private insurance
market to achieve the portability and coverage requirements set forth by the law and remain
*Conrad I;. M&r, Rhu; is a heallh policy a~wlystfor The Heartland !~~s~ilutc.
a Scah~cwriter for Williams and Wilkins medical
journals, and presidentofCFi-4 Rcrcamh. He is a r&cd health insuranceconwltant xnd past Missouri state chairman of the
health insurance committee afthc National Association of Lik Undenvritcn~ and was rcccntiy 011assignment to the Center for
Advanced Social Rescamh at the University of Milssouriat Columbia. He cm be reached by e-mail at [email protected].
consistent with the intent of the Act. Other states, however, may take this opportunity to
establish more stringent provisions that could lead, intentionally or otherwise, to much greater
state government control over health care
It is important to understand that
HIPAA does not require extensive state
government regulation of either the
individual or group health insurance markets.
This point has not been adequately
communicated to state legislators, perhaps
insurance markets.
because many of those responsible for
communicating what HIPAA requires and
how it should be implemented support a larger role for government in health care than is
currently the case in most states.
It is important to understand that
HIPAA does not require extensive
state government regulation of either
the individual or group health
1
HIPAA provides some useful insurance reforms, but it also contains flaws because its
authors misunderstood the problem of health insurance availability and did not take seriously the
consequences of hasty implementation. While the bill addressesthe issues of portability and
guaranteed issue, the main focus of HIPAA seemsto be more on enforcement and greater
regulation of an already highly regulated market. If not careful, state legislators can cause
unprecedented federal regulations to be layered over current state regulations in the small group
and individual health insurance markets.
Because even a conservative interpretation of HIPAA will require some degree of new
regulation and restrictions on insurers, we should not expect, nor should officials promise, a
reduction of health care costs or a drop in the percent of the general population that is uninsured.
Prices are likely to rise as competition is discouraged and the cost of regulatory compliance
increases, and rising prices are~likely to lower the percent of the population that is covered by
private health insurance.
Many of the group and individual market provisions of The Health Insurance Portability
and Accountability Act of 1996 (HIPAA) must be made effective at the state level no later than
July I, 1997. The four-year Medical Savings Account demonstration project began on January 1,
1997. An implementation schedule appears at the end of this report.
II.
Guaranteed Issue and Collective Renewability
Supporters of health care reform frequently claim that denial of insurance coverage to
people with pre-existing medical conditions is a serious problem in the U.S. The solution that is
often recommended is to require that everyone be offered insurance at affordable rates, so-called
“guaranteed issue.” Closely related to the issue of accessto insurance is the issue of
renewability, Some reformers claim there is a serious “job-lock” problem (i.e., people fear losing
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.
their jobs because their health insurance coverage would terminate), and that guaranteed
renewability regardless of employment or health status should therefore be required by law
How Big a Problem?
Previous health care debates have taught us that bad data and bad theory equal bad
policy, As Beaufort B. Longest, Jr., Ph.D., has observed, if the theory in a policy is wrong, the
policy cannot be effectively implemented,
since it will not solve the stated problem. It
makes no difference that the goals are
admirable.’ In the case of guaranteed issue,
the data concern how many people genuinely
lack access to health insurance. The theory
for medical reasons.
concerns why such persons are not insured.
According to the Agency of Health Care Policy and Research, a branch of the U.S.
Public Health Service, only 1 percent of the general population (about 2 million people) has ever
been denied health insurance for medical reasons.’ While we do not know how many people
pay higher or “rated” insurance premiums due to health conditions, we do know from the
nationwide Behavioral Risk Factor Surveillance System3that about 6 percent of the population
says it is in “fair or poor health.”
Very few people stay uninsured or unemployed for long periods of time. The latest
verifiable estimates suggest that 40 million people are uninsured at any one time.& During a 12month period, 58 million people may be uninsured for at least one month. Most uninsured spells
are temporary, half last less than six months, and nearly three-fourths last less than 12 months.s
Only 15 to 18 percent of all episodes of being uninsured last longer than 24 months.
‘Beaufort B. ,nngcst Jr., “Policy hn~lementation>”i,, Hmltlr l’oliqm,olh,,gin the lhriled Slnfes,ALPHA Preu.Gkalth
Administration Press; 1994, page 91.
2 Karen M. Bcaurcgsrd, “Persons Dcnicd Private Health Insurance Due To Poor ITealth,” Agency for llealth Cart
Policy and Rcwarch, Report No. WOO 16, December 199 I.
’ ~~Mliesearch, Columbia,MO.,analysisdhe 1995HehavioralRisk Factor Survcillancc System heallh study
available al \\~~.cdc.go\,:ncl,s,~~,~,/d~l,,,~,l,~ft~~~~~.
4 Katherine Shwrtz, “Counting Uninsured Americans: I3ackgroundMcmurandum,” Kaiser Health Rcfirm Project,
January1994.
5 Katherine Sbwartz and Timolby D. McUridc, “Spells Witbunl Health lnsurancc: Dislributions of Durations and Their
Link to Point-in-Time Estimates of fbe Uninsured.” bquir,: RII 1990.
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-3.
Since most health insurance accessis tied to the job market, being uninsured is similar to
and usually the result of being temporarily unemployed, The vast majority of people will
experience both conditions at some time in their lives without becoming either poor or
unhealthy.
One reason lapses in insurance tend to
be so brief is because many states have
already passed laws and established programs
to guarantee accessin casesinvolving preexisting conditions and other factors that
could make buying insurance difftcult. Other
reasons include: Hospitals are required to
provide emergency service without consideration of a patient’s ability to pay; treatment of nonemergency medical conditions, with few exceptions, can be postponed until insurance is
reestablished; those who are most likely to be uninsured are relatively young and healthy, and
therefore least likely to need medical care; and finally, lacking insurance does not stop a person
from buying needed medical services with cash from savings, credit, or borrowing6
The phenomenonof people being
temporarily without insuranceis not a
problem that requires a total overhaul
of insurance practices.
I
These data suggest that the phenomenon of people being temporarily without insurance
is not a problem that requires a total overhaul of insurance practices. And yet, that is precisely
the “problem” that HIPAA was enacted to “solve.”
What HIPAA Requires
In developing policy, Congress determined that job-lock affects interstate commerce and
is, therefore, the subject of federal jurisdiction. not state insurance regulation,’ Prior to HIPW
states had exclusive jurisdiction to regulate insurance. Though they still have jurisdiction, any
state law inconsistent with the Act will be preempted.
The new health insurance coverage guarantees required by JXIPAA are guaranteed issue
for small business (2 to 50 employees) and “eligible individuals” and collective renewal of
health insurance in all markets. More specifically:8
.
Small group insurers must offer at least one standard policy available to every small
6
SW Juscph L. Unst, Richard C. Rue, and Sluart A. Wcsbury, Ir., W/z,jIV,?.QwzdTood4ucho,, IIenlfh Cam (Chicago,
IL: The Ikartland Institute, 1993), pages73.78.
7
The auUlor is not a lawyer, but a similarly loose reading of tile commerce clause recently Icd the US. Supreme Court
to de thc Safe Schools Act unconstitutional. Perhapsa similar challenge could be made to HD’AA
a Public Law 104 -191, August 21, 1996. “Hcaltb InsurancePortability and Accountability Act of l%X”(henceforth
"HPAA"),Section 27O2,Section2711,pages26,27,2X,29.
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employer with 2 to 50 employees. Large group insurers may issue insurance on an
“accept-reject” basis to employers with 5 1 or more employees. (That is, if the insurer
accepts the group it may not exclude high-risk employees or those with pre-existing
conditions, and if it rejects a group it must reject the whole group and not only the highrisk members.)
No group insurer is allowed to condition individual ehgtblhty on health status, medical
condition (physical and mental condition), claims experience, receipt of health care,
medical history, genetic information, evidence of insurability (including hazardous
activities and conditions arising out of domestic violence), or disability of any member of
the group.
“Eligible Individuals” must be guaranteed accessto some type of coverage. To qualify as
undera
an “Eligible Individual,” a person must have had 18 months of prior coverage
group plan, have elected and exhausted continued benefits coverage under COBRA
(typically 18 months), and not be eligible for any other group health coverage.
All group and individual insurance
must be collectively renewable. This
means that an insurer who elects to
cancel a policy because of high claim
costs is forbidden from offering any
insurance in that market in that state
for five years.
guaranteedissue of all small group
policies offered by an insurer.
How to Comply with Small Group Provisions
HIPAA defines a small business as having as many as 50 or as few as 2 employees. The
Health and Human Services Department (HHS) Press Oflice mistakenly reports the definition as
being “50 and fewer employees.“’ HHS’s false definition would allow a single, self-employed
person to qualify as a small business, a situation that would pervert the individual insurance
market and contradict HIPAA’s other provisions allowing self-employed individuals to deduct a
gradually increasing percentage of insurance premiums from their taxable income,
The National Association of Insurance Commissioners (NAIC), too, makes a mistake in
interpreting this part of HIPAA. NAIC’s draft template for state implementation of the Act says
the Act requires guaranteed issue of all small group plans offered by an insurer in that state
’ Hcallh and Human Scrviccs Pms O&c. “H&h
1996. Contact HHS, 202~6906343.
Insurance Porfabilily and Accountability Act of 1996,” August 21
-5-
because “the act does not
limit its guaranteed issue requirement to two packages.“‘” That
may be literally true, but neither does BIPAA specifically re@re guaranteed issue of all small
group policies offered by an insurer. This omission is significant because when the Act
addresses guaranteed issue in the individual insurance market, it is very specific about the kinds
of coverage affected (see below)
Because HIPAA does not does not
require states to force insurers to guarantee
issue all small group policies, Virginia has
complied with HIPAA by enacting legislation
requiring guaranteed issue of only a basic
policy complying with the NAfC’s 1992
small group model legislation. Other states,
including Oklahoma, Georgia, Idaho, Utah,
and South Dakota are in the process of adopting the same compliance strategy. This approach
complies with HIPAA and allows the rest of the insurance market to function normally.
Virginia has complied with HIPAA
by enacting legislation requiring
guaranteed issue of only a basic
policy complying with the NAIC’s
1992 small group model legislation.
.I
How To Comply with Individual Insurance Provisions
The definition of “Eligible Individual” is very narrow and intended to reinforce the
notion that once a person is in the insurance system (in this case, insured for 18 months or
longer), he or she should be given the opportunity to buy insurance regardless of employment
status. A very small number of people meeting these requirements has any difficulty getting
insurance under the current system.
In interpreting HlPAA’s provisions for individual health insurance, the NAIC makes the
same mistake as it made whenaddressing the small group market. Its draft template states that
“the bill [HIPAA] provides for guaranteed issue of all products to eligible individuals,“” But
HtPAA is clear that guaranteeing issue of all products is only one of many choices available to
state regulators in determining how to craft an acceptable set of policies for the individual health
insurance market.
States may choose to require firms to offer two different health insurance coverage plans
that comply with the new federal guidelines and regulations regarding the individual health
insurance market,12or they may choose among the following alternatives:
National Association ol~hnnrance Conunissioncru(NAK), “Draft ‘fernplate for the State Implementation of hc
Health Insurance Portability and Accouatlbility Act of 1996.“ October 1996.
” NAIC, op. cit., page 28.
12
._.
HIP4
Section 2741
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.
A qualified high-risk pool following the NAIC Model Health Plan for Uninsurable
Individuals Act;
.
The NAIC Individual Health Insurance Portability Model Act;
.
The NAIC Small Employer and Individual Health Insurance Availability Model Act;
.
A risk-adjustment, risk-spreading, or risk-subsidization method; or
.
A method under which eligible individuals have a choice of all available health insurance
products.
It is not necessary for state
governments to radically change their current
regulatory policies to comply with HIPAA
continue this proven approach and
In fact, many states may already meet the
remain in compliance with the intent
Act’s individual insurance requirements by
operating state-based high-risk insurance
pools for the di%xlt-to-insure. These pools,
currently insuring over 100,000 individuals in 28 states,” generally charge premiums that are 25
to 50 percent higher than those charged a healthy person.
According to the American Academy of Actuaries study, “The uninsurable population in
these states [with high-risk pools] already has accessto health insurance, in most casesat
premium rates at or below what those insurers would charge for individuals with high expected
health care costs.“‘4 States with high-risk pools can continue this proven approach and apply to
have the requirements of HIPAA waived.
The risk-pool approach works becauseit removes the high health-risk individual from
the standard-risk insurance pool. This makes it unnecessaryfor insurers to increase premiums for
everyone or community-rate the premium in order to compensate for the extraordinarily high
health insurance claims that would otherwise occur in the standard-risk pool. The rest of the
insurance market is therefore able to function normally.
Besides high-risk pools, Medical Savings Accounts also hold promise as a market-based
reform that expands access and improves portability. The next section discusses them in greater
detail.
‘30ne u,-lhena stales; Texas; has a,, onfimded risk pal. Indications are that the pal will bc iunded during the 1997
General L.egialative sessim
I4 American Amdemy of Acruarics, “Commend on lhc Effect of S.1028 on Premiums in the Individual Health
Insumnce Market,” February 20, 1996, pqe 5.
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III.
The Promise of Medical Savings Accounts
Understanding MSAs
An MSA is a trust or custodial account created exclusively for the benefitof theaccount
holder and subject to rules similar to those applied to individual retirement accounts (IRAS).
Instead of buying expensive low-deductible health insurance, an MSA allows individuals to
purchase less-expensive high-deductible insurance and place the premium savings in the savings
account, to be saved and allowed to accumulate until needed to pay for medical expenses. MSAs
wean health care consumers from their excessive reliance on third-party payment of their
medical bills, thereby addressing one of the most fundamental reasons for health care price
inflation, waste and inefficiency.”
Banks, insurance companies, and
other approved entities may become trustees
of MSAs. HIPAA limits MSAs to the selfemployed and employees in small group
plans with between 2 and 50 employees (two
populations more likely to be without
insurance than the general population) when
coupled with a high-deductible health
insurance policy.
from their excessivereliance on third
party payment of their medical bills,
thereby addressing one of the most
fundamental reasonsfor health care
Other provisions of HIPAA related to MSAs are:
.
Individuals are allowed a tax-free contribution to and tax-free distributions from an MSA
of up to 65 percent of the health policy plan deductible from $1,500 to $2,250, with
family coverage set at 75 percent of the deductible between $3,000 to $4,500.
.
Maximum out-of-pocket expensesare established for individuals at $3,000 and $5,500
for a family policy.
.
Funds withdrawn for nonmedical expenses are taxable as income and subject to a 15
percent penalty-unless such withdrawals are made after age 65 or at the onset of a
disability.
.
Interest earned on funds that accumulate in an MSA is also tax-free.
‘%ee John C. Gwdman and Gerald L. Musg~,ie~ FUr,,, Power: So,vi,rgAmvicn Z HealrlrCore Crisis, Joseph Bast,
Pjchnrd Rue, and Stuart Wesbury, op cil.; Amekan Medical Association2“Why the American Medical A~~iation
Supports
Medical Swings A~cou~~ts,“.~r~o/~s~~,
1994.
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.
There are no “sunset” rules for MSAs. Those who establish them get to keep them after
the four-year project is concluded.
.
At death, any remaining funds may be included in the decedent’s gross estate under rules
similar to those governing IRA funds.
Cap on Enrollment
HIPAA restricts the number of MSAs that may qualify for favorable federal tax treatment
to 750,000 people who had health insurance coverage at any time during the prior six months,
but there is no limit on the number of people who can sign up for MSAs who were without
insurance coverage during the prior six months. Recruitment from both classes must stop when
the cap of 750,000 previously insured persons is reached.
The cap on MSAs limits the ability of
states to use them to expand access to and the
portability of health insurance. State
legislators nevertheless can enact or expand
state-level MSAs, promote the viability of the
concept, and lobby their congressional
counterparts to remove the ceiling on the
number of federally approved MSAs~
Over one thousand employer groups
already have established what
amountsto MSA plans for their
employeesthrough a federal pre-tax
plan called Sec. 125 Medical
Spending Accounts (Cafeteria Plans).
There was little reason to limit MSAs
to a demonstration project. Over one thousand employer groups, both public and private, already
have established what amounts to MSA plans for their employees through a federal pre-tax plan
called Sec. 125 Medical Spending Accounts (Cafeteria Plans). The program, with over a million
enrollees, differs from MSAs in that persons enrolled in cafeteria plans lose whatever funds are
left in their account at the end of each calendar year (the so-called “use it or lose it” rule). MSAs,
by allowing people to “use it or keep It, ” would go even further than cafeteria plans to reduce
employer health insurance costs and individual out-of-pocket medical expenses while restoring
patient power to health care consumers.
MSAs Are Creditable Health Coverage
The NAIC, in the same draft statement to state regulators mentioned earlier, makes two
statements regarding MSAs that could mislead policy makers. The NATC claims that MSAs are
not creditable health coverage and therefore would not be considered an option for guaranteeing
coverage to Eligible Individuals. The NAlC also claims that when the pilot program ends,
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MSA account holders may keep their accounts but will no longer be able to make tax-deferred
deposits into their accounts.‘” Both statements appear to be wrong.
HIPAA contains a list describing
health insurance coverage that would meet
the requirement that Eligible Individuals be
given access to insurance. There is no
indication in the Act that specific individual
or group health insurance policies would fail
to qualify on account of the size of the
deductible they establish, nor (and consequently) any suggestion of where or how such a line
would be drawn. If the authors of the NAIC statement feel high-deductible insurance doesn’t
provide sufficient protection from medical bills, then they fail to understand the self-insurance
role played by an MSA. It seemsobvious that HlPAA considers an MSA accompanied by highdeductible insurance to be creditable health insurance.
The NAIC statement also incorrectly states that “if Congress does not specifically
extend the program after the year 2,000, those participants with MSAs will be allowed to keep
them, but without favorable tax treatment.“” But once again, HIPAA contains language that
clearly allows individuals who establish MSAs prior to the cut-off date to contribute to their
accounts on a tax-preferred basis after the program ends, as long as they maintain highdeductible health insurance policies.‘*
To further clarify, individuals who do not open an MSA prior to the cut-off date rn~y still
establish a tax-preferred plan if they become employed by a small employer that established an
MSA program bejore the cut-off date.‘”
A Flawed Experiment?
The restrictions placed on MSAs limit the number of people who can buy them and make
their purchase complicated and maintenance very complex. The program is encumbered by
dozens of intricate statutory conditions on employers and insurers and requires tight policing by
the IRS. For example, a small employer who grows beyond the employee limit within the fouryear demonstration period could be forced to change policies.
” NAIC, op. cit., page 40.
‘7 Ibid.
” HlPA.4 Section 301, page 103.
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The Treasury Department
is required to evaluate the MSA experiment and report to
Congress on the adequacy of high-deductible insurance purchased in conjunction with MSAs.
More bureaucracy is created by establishing an independent health policy organization to study
and report on the impact on health care spending, adverse selection, and preventive care.
Many small employers already are
The MSA program is encumberedby
overwhelmed by bookkeeping and regulatory
dozens of intricate statutory
compliance paperwork. The MSA program,
with its strict reporting requirements, is not
conditions on employers and insurers
designed to be an appealing option for
and requires tight policing of these
harried small business owners. Moreover, the
artificially small pool of potential
policyholders is not an inviting opportunity
for commercial insurers. The small size of the experiment will limit the competition to a small
number of companies already specializing in high-deductible health insurance. And while some
insurers may welcome the lack of competition, the result will be higher premiums for consumers
facing limited choices.
The unusual restrictions placed on this free-market product ensure that the demonstration
project will not be able to answer many of the questions posed by MSA opponents. According to
Merrill Matthews, Jr., Ph.D., vice president of domestic policy for the National Center for Policy
Analysis. “For example, will MSAs result in ‘adverse selection’-in which the healthy move
into one plan while the sick remain in another? By limiting the demonstration to 50 or fewer
employees, Congress has virtually guaranteed that the answer will be no.“*’
State legislators need to understand that adverse selection can occur only when
employees have a choice between two or more employer-provided health insurance plans. The
reality is that almost all small employers offer only one health insurance plan. Without the
ability to switch insurance coverage, adverse selection barely exists.
Despite these problems, the MSA legislation is off to a good start. Whether or not it
makes it to the finish line remains to be seen. The Congressional Budget Office
estimated that the health insurance provisions in HIPAA could help some 150,000 people gain
insurance. Medical Savings Accounts, however, could have helped millions were it not for the
Congressional limit of 750,000.
*’ Merrill Matthews, Jr,, Ph.D., “ Mcdica, Savings Accounl Lzgial~lion: The Good, the Bad, the Ugly.“Eriefil~~ulyri.s
No. 211, National Center h Policy Analysis, August 19, lYY6.
Summary
One of the most promising ways to expand accessto health insurance and improve
portability is to allow people to open Medical Savings Accounts in conjunction with highdeductible health insurance policies, The lower cost of the premiums brings the price of health
insurance within reach for millions of people who are presently priced out of the health
insurance marketplace, while the MSA provides cash for first-dollar coverage of routine or
unexpected small medical expenses.
Unlike insurance coverage mandates or community rating, MSAs work with rather than
agai?zsrunderlying market forces in the health care industry. MSAs give consumers a reason to
ask for prices and comparison shop for less expensive health care, behavior that was common
before World War II and changes in tax policy that led to our present over-reliance on thirdparty insurers.”
HIPAA was a breakthrough for MSAs
by authorizing over 750,000 accounts to be
must be free of federal taxes, in order
opened. Many states have already passed
MSA legislation granting state tax breaks,
and these accounts are helping to demonstrate
the power of such a reform. But to be
effective, deposits to MSAs must be free of
federal taxes, in order to put out-of-pocket
spending on a level playing field with employer-paid insurance premiums.
State legislators should lobby their congressional counterparts to remove the ceiling on
the number of MSAs allowed under HlPAA Short of that happening, they should consider state
tax deductions or credits to make state-level MSAs attractive compared to employer-paid
insurance. Such efforts should qualify as part of an effort to implement HIPAA
IV.
Policies to Avoid when Implementing HTPAA
Three alternatives to risk pools and MSAs, all of them less sensitive to the consequences
of forcing compliance on the health insurance marketplace, are mandating coverage, regulating
prices, and requiring insurers to use “community rating,” Past experience suggests that these
alternatives are unsound.
*‘Peter Ternin. “An konamic History of hmcrjcan Hospitals,” in II.E. Itech III, ed., HealthCare in Anwica: The
Pohfrcol ~~:conon,yofH”prml.~
mrd IL&h Inmronm (San Francisco2CI\: Pacific Rewnrch Institute, 19X8), pages 75-97.
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