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group, again separating the currently sick from the currently healthy.) Insurers may also quote artificially low rates for the first year in order to gain new business.

Medicaid does not reach more than a fraction of the low-income population. In 1987, just 42 percent of people in poverty were covered. Even among extremely poor people—those with family incomes below 25 percent of the poverty line-nearly a quarter did not receive Medicaid or any other coverage in that year.20

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One other rating practice that was once rare in the small group market but now appears to be gaining currency is some form of group-specific rating, especially for years after the initial year of the policy. Experience rating, in which premiums are based on actual costs for the particular group, is still uncommon in the small group market. However, some insurers may classify small employers into broad ranges, or tiers, by claim experience. A group with unexpectedly high costs during a year may be reclassed into a new, higher-rate tier.

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There are two reasons why so many low-income people do not get Medicaid coverage. An applicant not only must meet income and asset tests to qualify, but also must be in one of the protected populations defined in Medicaid law. Medicaid was designed to cover the welfare population-families with children receiving Aid to Families with Dependent Children (AFDC) and aged, blind, and disabled persons receiving Supplemental Security Income (SSI). Although current law defines some 40 different population groups potentially eligible for Medicaid coverage, either by federal mandate or under state option, all Medicaid beneficiaries must be aged, disabled, or members of families with children. Almost three out of four Medicaid beneficiaries are welfare recipients.

Finally, employers who present the best risks may respond to annual rate increases by seeking a new insurer who will offer a more affordable first-year rate, a process known as churning. As a result, while insurers are competing more vigorously for the groups that present more favorable risks, their renewal business may increasingly consist of higher-risk groups unable to find a lower price. This spiraling process, which makes insurance less and less affordable for the higher-risk groups, has accelerated in the past decade.

Defects of Public Health Care Coverage

Government provides health coverage for lowincome people through the federal/state Medicaid program. Medicaid has accomplished a great deal: its enactment undoubtedly improved access to care for the segments of the poor population it has reached. But basic flaws in the design of Medicaid prevent it from covering many of those who need help. Some states have tried to fill in with other programs of their own. But funding limitations and other problems prevent these programs from helping most of the millions of poor people without health coverage.

"Obtaining the benefits one is entitled to by law is not easy. It can be a time-consuming, complex, and demeaning journey. I have three documents here with me today. ... One is an application for food stamps. It's 10 pages. On the second page of the application there are 38 questions. This is an application for (Supplemental Security Income] benefits. It is 15 pages long. I quit counting the questions at 100. This is an application for a $100,000 home mortgage. It's three pages long."

- Herb A. Sanderson, deputy director,

Division of Aging and Adult Services, Arkansas Department of Human Services

Medicaid-Medicaid provides coverage to about 26 million people who are aged, blind, disabled, or members of families with children. Each state designs and administers its own Medicaid program within broad federal guidelines. 17 The federal government pays an average of 55 percent of the cost of the program, a share that ranges from 50 percent to 80 percent depending on a state's per capita income. Combined federal and state expenditures for the program are expected to reach $70 billion in fiscal year 1990, just over half of which (55 percent) will go for hospital, physician and other acute care services. 18, 19

Completely omitted from the program, even if they are literally penniless, are single people and childless couples who are under 65 and do not meet disability tests. And within the protected populations, Medicaid rules continue to use distinctions and exclusions carried over from the welfare programs. An intact, two-parent family headed by a full-time worker, for example, cannot be covered as a family. The children may be covered and the mother is eligible during the period of a pregnancy, but the father is never eligible.

Along with these complex categorical exclusions go enormous variations in the financial standards im

limits in many states, dropped 30 percent in real o flation-adjusted dollars between 1970 and 1988.22

posed by the states. For many of the eligible groups there are no minimum federal standards. A family of three in California could get Medicaid in 1990, for example, with a monthly income of up to $934, about 106 percent of poverty. The same family could get Medicaid in Alabama in 1990 only if its income was $118 a month or less. This cutoff is just 13 percent of poverty.21 Further aggravating the disparities, many states fail to adjust their financial standards adequately to reflect inflation, making the real standards more restrictive over time. The median state AFDC payment level, which determines family Medicaid eligibility

In the last several years, the Congress has mand coverage up to higher income levels for a few gro beginning to separate eligibility for Medicaid f eligibility for welfare. The major focus since 1984 been on expanding eligibility for pregnant women young children. The most recent expansion, the nibus Budget Reconciliation Act of 1989 (OB 1989), requires states, beginning April 1990, to co pregnant women and children under age six

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Diana Seeger could not qualify for Medicaid or afford care at a hospital close to home; her baby

Small firms, regardless of their line of business, also face an additional barrier to coverage: medical underwriting, or the practice of designing plans according to the medical history of the potential enrollees. For groups of fewer than 10 or 15 workers, an insurer may require medical information about each employee. If some members of the group are determined to present high risks, the insurer may follow any of a number of courses:

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BARNEY TRAXEL/NYT PICTURES

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Susanne Dotson was willing and able to buy insurance but could not get it because of a preexisting condition.

Susanne Dotson could afford a substantial insurance premium. At 45, she earns $72,000 a year as a self-employed manufacturing representative for an office furniture distributor. Yet no insurer will take her due to a preexisting condition. Like many small employers and individuals seeking coverage, Susanne Dotson is in a bind—and concerned.

Even if the group is not determined to be especially high risk, other limitations may apply. The policy may exclude coverage for preexisting conditions, problems that were already diagnosed at the time the policy took effect but that may not have been known to the insurer-or it may impose a waiting period before coverage begins. Another limitation is to offer coverage only on a nonguarantee issue basis, meaning that the insurer makes no guarantee that it will offer the same policy to the group when the contract expires. Many small group policies also require minimum participation levels to guard against the possibility that only the higher-risk, more costly employees will participate. For the very smallest groups the policy may stipulate that 100 percent of eligible workers must enroll. To achieve these participation levels, employers must limit the share of premiums paid by the employees themselves to make the plan affordable. Very small employers may even be required by the terms of their policies to pay the entire premium.

Ms. Dotson had been insured through her former husband's Blue Cross/Blue Shield plan. The company covered her despite a longstanding gynecological condition for which she had been treated, and which should be resolved as she enters menopause.

After her divorce, Ms. Dotson applied for Blue Cross/Blue Shield coverage in her own name through an organization that helps small businesses purchase health insurance. She was turned down due to the same condition for which they covered her previously. And she has found no other company is willing to insure her.

Small employers who clear all these hurdles and obtain health coverage are still likely to pay 10 percent to 15 percent more than larger groups for an equivalent plan. This difference is generally not attributable to differences in the cost of benefits, but to the higher administrative costs involved.

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"I can go bare and hope that nothing hap

go back and work for a corporation that would provide me coverage,” Ms. Dotson stated before the Commission. “It's sort of ironic that in a country that encourages women and minorities to go forth and to take care of themselves, and celebrate[s] us as being small business owners, I don't really have a lot of choices.”

For the smallest plans (one to four employees) administrative expenses can equal as much as 40 percent of claims. They drop to 35 percent for groups of five to nine, 30 percent for groups of 10 to 19, and 25 percent for groups of 20 to 49. Total administrative expenses of the largest conventionally insured plans (10,000 and more employees), by contrast, average 5.5 percent of claims. In self-insured plans, which are generally not an option for small employers because they are too small to take the risk, administrative costs can be as low as 2.5 percent of claims. 15

less predictable than for larger ones. But sn groups also pay a higher risk charge because of limited bargaining power.

In addition to general overhead items, which are fixed and therefore have to be spread over fewer enrollees, certain cost components are especially likely to be higher for small groups. The first is the commission paid to the insurance agent or broker who sells the policy. This averages 8.4 percent of claims for a group of fewer than five enrollees, and less than 1.0 percent of claims for groups of 500 or more. A second is the risk or risk and profit charge, which includes both the insurer's profits and some cushion against unexpectedly high claims cost. The risk charge averages 8.5 percent for groups of fewer than five, in sharp contrast to 3.5 percent or less for groups of 500 or more. 16 Small groups face higher risk charges in part because costs for these groups may be

In addition to facing higher initial costs for co age, small employers sometimes find that their pr ums increase sharply after the first year of covei A group may start out with a healthy pool, since group members with a known, immediate need health services have been excluded. Over time, I ever, those left in the pool will gradually use met care at higher rates, leading to increasing c claimed under the policy. Accordingly, many insu raise the rates after the first year of the policy. (S may offer, as an alternative, to re-underwrite

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The Greseks eventually found a state program that provides coverage for the disabled at reasonable rates, and they are once again offering insurance to their employees. But the couple is still angry at their former insurer. Said Mrs. Gresek, “At a time we should have been totally concentrating on Daniel and our family, we had to put so much time and effort into our insurance

Mr. and Mrs. Gresek were covered under a group health policy through their small, family-owned business in Ipswich, Massachu

Small firms, regardless of their line of business, also face an additional barrier to coverage: medical underwriting, or the practice of designing plans according to the medical history of the potential enrollees. For groups of fewer than 10 or 15 workers, an insurer may require medical information about each employee. If some members of the group are determined to present high risks, the insurer may follow any of a number of courses:

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BARNEY TRAXEL/NYT PICTURES

• The whole group may be denied coverage, • The insurer may offer coverage to the group

only if the high-risk employees are excluded, • The insurer may permit the inclusion of these

employees but increase rates to the entire group.

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Susanne Dotson was willing and able to buy insurance but could not get it because of a preexisting condition.

Susanne Dotson could afford a substantial insurance premium. At 45, she earns $72,000 a year as a self-employed manufacturing representative for an office furniture distributor. Yet no insurer will take her due to a preexisting condition. Like many small employers and individuals seeking coverage, Susanne Dotson is in a bind—and concerned.

Even if the group is not determined to be especially high risk, other limitations may apply. The policy may exclude coverage for preexisting conditions, problems that were already diagnosed at the time the policy took effect but that may not have been known to the insurer-or it may impose a waiting period before coverage begins. Another limitation is to offer coverage only on a nonguarantee issue basis, meaning that the insurer makes no guarantee that it will offer the same policy to the group when the contract expires. Many small group policies also require minimum participation levels to guard against the possibility that only the higher-risk, more costly employees will participate. For the very smallest groups the policy may stipulate that 100 percent of eligible workers must enroll. To achieve these participation levels, employers must limit the share of premiums paid by the employees themselves to make the plan affordable. Very small employers may even be required by the terms of their policies to pay the entire premium.

Ms. Dotson had been insured through her former husband's Blue Cross/Blue Shield plan. The company covered her despite a longstanding gynecological condition for which she had been treated, and which should be resolved as she enters menopause.

After her divorce, Ms. Dotson applied for Blue Cross/Blue Shield coverage in her own name through an organization that helps small businesses purchase health insurance. She was turned down due to the same condition for which they covered her previously. And she has found no other company is willing to insure her.

Small employers who clear all these hurdles and obtain health coverage are still likely to pay 10 percent to 15 percent more than larger groups for an equivalent plan. This difference is generally not attributable to differences in the cost of benefits, but to the higher administrative costs involved.

pens or

"I can go bare and hope that nothing hap

go back and work for a corporation that would provide me coverage,” Ms. Dotson stated before the Commission. “It's sort of ironic that in a country that encourages women and minorities to go forth and to take

of themselves, and celebrate[s] us as being small business owners, I don't really have a lot of choices.”

care

For the smallest plans (one to four employees) administrative expenses can equal as much as 40 percent of claims. They drop to 35 percent for groups of five to nine, 30 percent for groups of 10 to 19, and 25 percent for groups of 20 to 49. Total administrative expenses of the largest conventionally insured plans (10,000 and more employees), by contrast, average 5.5 percent of claims. In self-insured plans, which are generally not an option for small employers because they are too small to take the risk, administrative costs can be as low as 2.5 percent of claims. 15

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