[Congressional Record Volume 142, Number 49 (Wednesday, April 17, 1996)]
[Senate]
[Pages S3480-S3484]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                THE HEALTH INSURANCE REFORM ACT OF 1995

  Mrs. KASSEBAUM. Mr. President, I ask unanimous consent that the 
following items with regard to S. 1028 be included in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                             Cost Estimate

                                                    U.S. Congress,


                                  Congressional Budget Office,

                               Washington, DC, September 22, 1995.
     Hon. Nancy Landon Kassebaum,
     Chairman, Committee on Labor and Human Resources, U.S. 
         Senate, Washington, DC.
       Dear Madam Chairman: The Congressional Budget Office [CBO] 
     has reviewed S. 1028, the Health Insurance Reform Act of 
     1995, as ordered reported by the Senate Committee on Labor 
     and Human Resources on August 2, 1995. CBO estimates that 
     enactment of S. 1028 would not significantly affect the 
     federal budget. (Each state's insurance commissioner would 
     ensure that the requirements of this legislation are carried 
     out by health insurance carriers in their state; CBO has not 
     attempted to estimate the amount by which state government 
     spending could be changed.) Pay-as-you-go procedures would 
     apply because the bill could affect direct spending and 
     receipts. the estimated change in direct spending and 
     receipts, however, is not significant.
       This bill would create uniform national standards intended 
     to improve the portability of private health insurance 
     policies. for example, these standards would allow workers 
     with employment-based policies to continue their coverage 
     more easily when changing or leaving jobs. Because most 
     private insurance plans require a waiting period before new 
     enrollees become eligible for coverage, especially for 
     preexisting medical conditions, workers with chronic 
     conditions or other health risks may face gaps in their 
     coverage when they change jobs. Alternatively, such workers 
     may be hesitant to change jobs because they fear the 
     temporary loss of coverage, a situation known as ``job-
     lock.''
       S. 1028 would reduce the effective length of exclusions for 
     preexisting conditions by crediting enrollees for continuous 
     coverage by a previous insurer. Insurance companies would be 
     prohibited from denying certain coverage based on the medical 
     status or experience of individuals or groups and would be 
     required to renew coverage in most cases. Insurers could not 
     deny coverage to individuals who have exhausted their 
     continuing coverage from a previous employer. This bill 
     would allow individuals to change their enrollment status 
     without being subject to penalties for late enrollment if 
     their family or employment status changes during the year. 
     To the extent that states have not already implemented 
     similar rules, these changes would clarify the insurance 
     situation and possibly reduce gaps in coverage for many 
     people.\1\
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     Footnotes at end of letter.
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       Because the bill would not regulate the premiums that plans 
     could charge, the net number of people covered by health 
     insurance and the premiums that they pay would continue to be 
     influenced primarily by current market forces. In other 
     words, although insurance would become more portable for some 
     people under this bill, it would not become any more or less 
     available in general.
       S. 1028 could affect the federal budget in two primary 
     ways. First, if the bill changed the amount of employer-paid 
     health premiums, total federal tax revenues could change. For 
     example, if the amount employers paid for premiums rose, cash 
     wages would probably fall, thereby reducing income and 
     payroll tax revenues. If individuals paid more for 
     individually-purchased insurance, they could increase their 
     itemized deductions for health expenses. Second, if the bill 
     caused people insured by Medicaid or government health 
     programs to purchase private coverage, then federal outlays 
     for those programs could change.
       According to the General Accounting Office [GAO], 38 states 
     have enacted legislation to improve the portability and 
     renewability of health plans among small employers.\2\ The 
     state laws do not apply to employees of larger firms with 
     self-funded insurance plans, however, and the GAO report 
     finds that state laws generally do not apply to the market 
     for individually-purchased insurance.
       Because many insurance reforms have already been 
     implemented by the states, GAO assumes that the new national 
     standards created by S. 1028 would not significantly change 
     the insurance market for most people. Although the national 
     standards created by S. 1028 would improve the portability of 
     health insurance for some additional groups or individuals, 
     GAO assumes that the incremental change in the insurance 
     marketplace would be minor. Any changes to overall insurance 
     coverage or premiums caused by the bill would probably be 
     small, and the direction of the change is uncertain. Most 
     people subject to the new insurance rules would have had 
     coverage under the old rules, so their total health spending 
     would probably not be noticeably different. Therefore federal 
     revenues would be unlikely to change.\3\
       CBO estimates that federal outlays for Medicaid would not 
     change because any persons eligible for free coverage from 
     Medicaid under current law would also seek out Medicaid 
     coverage if S. 1028 was enacted. CBO also estimates that the 
     bill would cause no appreciable changes to federal outlays 
     for Medicare, Federal Employees Health Benefits, or other 
     federal programs.
       If you wish further details on this estimate, we will be 
     pleased to provide them. The CBO staff contact is Jeff 
     Lemieux.
           Sincerely,
                                                     James L. Blum
                                  (For June E. O'Neill, Director).


                               Footnotes

     \1\ For additional discussion, see GAO testimony ``Health 
     Insurance Regulations, National Portability Standards Would 
     Facilitate Changing Health Plans,'' July 18, 1995, before the 
     Senate Committee on Labor and Human Resources.
     \2\ Health Insurance Regulation: Variation in Recent State 
     Small Employer Health Insurance Reforms (GSO/HEHS-95-161FS, 
     June 12, 1995).
     \3\ CBO cooperates with the Joint Committee on Taxation to 
     produce estimates of revenue changes under proposals that 
     would change the private health insurance market. Following 
     CBO's estimate that S. 1028 would not significantly change 
     spending for private health insurance, the Joint Committee 
     assumes that federal revenues would not change.
                                                                    ____

                                                    U.S. Congress,


                                  Congressional Budget Office,

                                   Washington, DC, March 22, 1996.
     Hon. Nancy L. Kassebaum,
     Chairman, Committee on Labor and Human Resources, U.S. 
         Senate, Washington, DC.
       Dear Madam Chairman: The Congressional Budget Office has 
     prepared the enclosed

[[Page S3481]]

     mandate cost statements for S. 1028, the Health Insurance 
     Reform Act of 1995, as reported by the Senate Committee on 
     Labor and Human Resources on October 12, 1995.
       Enactment of S. 1028 would impose both intergovernmental 
     and private sector mandates. The cost of the 
     intergovernmental mandates would not exceed the applicable 
     $50 million threshold, but the costs of the private sector 
     mandates would exceed the applicable $100 million threshold.
       If you wish further details on this estimate, we will be 
     pleased to provide them.
           Sincerely,
                                        June E. O'Neill, Director.
       Enclosure.

    Congressional Budget Office Estimated Cost of Intergovernmental 
                                Mandates

       1. Bill number: S. 1028.
       2. Bill title: The Health Insurance Reform Act of 1995.
       3. Bill status: As reported by the Senate Committee on 
     Labor and Human Resources on October 12, 1995.
       4. Bill purpose: S. 1028 would make it easier for people 
     who change jobs to maintain adequate coverage by requiring 
     issuers of group health plans and sponsors of health plans 
     for employees to: Limit exclusions for preexisting conditions 
     to 12 months (18 months for late enrollees) with a one-for-
     one offset against the exclusion for continuous coverage; not 
     impose eligibility requirements based on health status or 
     other medical information; and offer special enrollment 
     periods when an employee experiences a change in family 
     composition (e.g., the birth of a child) or a family member 
     of an employee loses health coverage under another health 
     plan because of a change in employment status.
       In addition, the bill would require health plans sponsored 
     by employers to: extend COBRA coverage an additional 11 
     months if an employee becomes disabled during the 18 months 
     of the original COBRA coverage or has disabled dependents, 
     and provide immediate coverage to newborns or adopted 
     children under a parent's COBRA policy.
       Furthermore, S. 1028 would increase the portability of 
     health insurance from group coverage to individual coverage 
     by requiring issuers of individual health insurance to 
     provide coverage if an individual has had 18 months of 
     continuous coverage. In addition, the bill would assist 
     employers and individuals in establishing voluntary 
     coalitions for purchasing group health insurance and preempt 
     some state laws dealing with purchasing cooperatives. 
     Finally, if the bill is enacted, states would have the option 
     of enforcing the bill's requirements regarding group and 
     individual health insurance. If a state chooses not to 
     enforce the requirements, the federal government would 
     enforce them.
       5. Intergovernmental mandates contained in bill: S. 1028 
     contains several intergovernmental mandates as defined in 
     Public Law 104-4, primarily the new requirements that would 
     be imposed on health plans sponsored by employers. State and 
     local governments who offer their employees health insurance 
     would have to abide by these requirements.
       6. Estimated direct costs to State, local, and tribal 
     governments:
       (a) Is the $50 Million a Year Threshold Exceeded? No.
       (b) Total Direct Costs of Mandates: S. 1028 would increase 
     the cost of health insurance for covered employees of state 
     and local governments, but this cost would primarily be borne 
     by the employees themselves and not by state or local 
     taxpayers. Although CBO cannot provide a precise estimate, 
     any increase in the cost of health insurance for employees of 
     state and local governments would amount to less than $50 
     million annually. As a result of higher health care costs, 
     state and local governments would reduce other elements of 
     their employees' compensation packages by a corresponding 
     amount. The amount of total compensation paid by the state 
     and local governments would thus remain unchanged in the long 
     run. Except for an initial transition period, during which 
     state and local governments may not be able to change other 
     elements of their employees' compensation packages, state and 
     local governments would not be required to spend additional 
     funds to comply with these mandates.
       (c) Estimate of Necessary Budget Authority: None.
       7. Basis of estimate: Based on a limited survey of State 
     and local governments, CBO found that the health insurance 
     plans currently offered by State and local governments are 
     generally in compliance with S. 1028. However, some State and 
     local governments would have to make minor adjustments to 
     their plans. Almost all plans already limit to 1 year, or do 
     not include, exclusions for preexisting conditions, but only 
     a few of the plans that have exclusions allow an offset 
     against the exclusion for continuous coverage. In addition, 
     some plans do not offer special enrollment periods when a 
     family member of a participant loses his or her health 
     insurance under another plan because of a change in 
     employment. Finally, the expansion of COBRA coverage would 
     affect all plans.
       CBO estimates that the cost of S. 1028 to the private 
     sector for the group health insurance reforms would total 
     about $300 million. A simple calculation, based on the number 
     of employees involved, would indicate that the cost of S. 
     1028 for employees of State and local governments would be 
     $60 million. CBO believes that the cost would actually be 
     significantly less than this, however, because health plans 
     sponsored by State and local governments are generally more 
     liberal than plans sponsored by private sector employers. 
     State and local governments therefore would be confronted 
     with fewer changes as a result of S. 1028. The cost of the 
     mandates imposed on State and local government would clearly 
     be less than $50 million, a change of about 0.1 percent in 
     the approximately $40 billion that is now spent on health 
     insurance for employees of State and local governments.
       Economists generally believe, and CBO's cost estimates have 
     long assumed, that workers as a group bear most of the cost 
     of employers' health insurance premiums. The primary reason 
     for this conclusion is that the supply of labor is relatively 
     insensitive to changes in take-home wages. Because most 
     workers continue to work even if their take-home pay 
     declines, employers have little trouble shifting most of the 
     cost of additional health insurance to workers' wages or 
     other fringe benefits.
       8. Appropriation or other Federal financial assistance 
     provided in bill to cover mandate costs: None.
       9. Other impacts on State, local and tribal governments: 
     States would have the option of enforcing the requirements of 
     S. 1028 on issuers of health insurance in the group and 
     individual markets. If a State decides not to enforce the new 
     requirements, the Federal Government would do so. Because 
     enforcement would be voluntary, this provision would not 
     impose an intergovernmental mandate as defined in Public Law 
     104-4. However, the enforcement provisions would have a 
     budgetary impact on State governments. States currently 
     regulate the group and individual markets, and CBO does not 
     expect any State to give up this authority and 
     responsibility. States thus would incur additional costs as 
     they enforce the new requirements. In 1995, according to the 
     National Association of Insurance Commissioners, States spent 
     $650 million regulating all forms of insurance (health and 
     others). CBO expects that S. 1028 would increase these costs 
     only marginally.
       10. Previous CBO estimate: None.
       11. Estimate prepared by: John Patterson.
       12. Estimate approved by: Paul N. Van de Water, Assistant 
     Director for Budget Analysis.

    Congressional Budget Office Estimate of Costs of Private Sector 
                                Mandates

       1. Bill number: S. 1028.
       2. Bill title: Health Insurance Reform Act of 1995.
       3. Bill status: As reported by the Senate Committee on 
     Labor and Human Resources on October 12, 1995.
       4. Bill purpose: The purpose of S. 1028 is to increase 
     access to health care benefits for workers and their families 
     both while the workers are employed and after they leave 
     employment. It would also increase the portability of health 
     insurance when workers change jobs, and make other changes 
     affecting health care benefits.
       5. Private sector mandates contained in the bill: S. 1028 
     contains several private sector mandates as defined in P.L. 
     104-4 that would affect the private health insurance 
     industry. Three general areas of coverage would be affected: 
     (1) the group and employer-sponsored health insurance market, 
     (2) the extensions of health insurance required under the 
     Consolidated Omnibus Budget Reconciliation Act (COBRA) of 
     1985, and (3) the market for individual health insurance.
     Mandates on group insurers and employee health benefit plans
       The bill would require sellers of group health insurance to 
     cover any group purchaser who applies. Group insurers could 
     stop selling coverage only under certain conditions, such as 
     ceasing to offer coverage to any additional group purchasers. 
     Under those circumstances, they could resume offering 
     coverage only after a 6 month cessation and would be required 
     to resume on a first-come-first-served basis. Those 
     availability provisions would apply separately to the ``large 
     group'' and ``small group'' markets--that is, an issuer would 
     be allowed to serve only one of those markets. Group insurers 
     would also be required to renew coverage at the option of the 
     group purchaser, except in certain circumstances including 
     nonpayment of premiums, or fraud or misrepresentation on the 
     part of the group purchaser. Network plans would not be 
     required to renew coverage to people living outside the 
     geographic area covered by the plan as long as this action is 
     done on a uniform basis, without regard to the health 
     status of particular individuals.

[[Page S3482]]

       Several provisions of the bill would apply both to sellers 
     of group insurance and to employee health benefit plans that 
     are ``self-insured'' by firms. Eligibility, enrollment, and 
     requirements relating to premium contributions could not be 
     based on the employee's health status, claims experience, or 
     medical history.
       In addition, the bill would limit the use of pre-existing 
     condition exclusions--clauses that exempt the plan from 
     paying for expenses related to a medical condition that 
     already existed when an enrollee first joined the plan. Under 
     the bill, twelve months would be the maximum allowable 
     duration of a pre-existing condition exclusion (eighteen 
     months for employees who did not join the plan at their first 
     enrollment opportunity). Furthermore, month-for-month credit 
     against that exclusion would have to be given to enrollees 
     for continuous coverage that they had prior to joining a new 
     plan. (Insurers and health benefit plans would be required to 
     keep records to document the previous coverage.) In addition, 
     pregnancy could not be excluded by a pre-existing condition 
     clause, and children who were signed up with a plan within 
     thirty days of birth could not have any existing conditions 
     excluded from coverage. (A similar provision applies for 
     adopted children.)
       Affiliation periods, in which new enrollees pay no premium 
     but receive no benefits, could be used if pre-existing 
     condition exclusions were not part of the plan. However, such 
     periods would be limited to sixty days (ninety days for late 
     enrollees).
       Finally, the bill would require that health plans offer 
     special enrollment periods for participants or family members 
     for various changes in family or employment status.
     Mandates extending COBRA continuation coverage
       Under certain circumstances, the bill would compel firms to 
     extend so-called ``COBRA'' coverage to former employees or 
     their family members for a longer period of time than is 
     currently required. Under current law, firms that offer 
     health insurance as part of their employee benefits package 
     and employ 20 or more people must allow employees (and family 
     members) to continue coverage for 18 months after leaving 
     employment (or for certain other reasons), at a cost that 
     cannot exceed 102 percent of the premium for regular 
     employees. Under certain circumstances, such as if a worker 
     is disabled when he or she first qualifies for COBRA 
     coverage, an additional 11-month extension of coverage also 
     must be made available.
       The bill would extend COBRA coverage by specifying an 
     additional condition that would qualify former employees (or 
     their insured family members) for the 11-month extension 
     period after the initial 18-month period. In particular, if a 
     former employee were to become disabled during the first 18 
     months of extended coverage, then they would qualify for 
     the additional 11-month period. Disability of an insured 
     family member also would be a qualifying condition for 
     continuation of CORBA coverage. Under the current law 
     COBRA provisions, a premium of 150 percent of the premium 
     for regular employees could be charged to former employees 
     in the additional 11-month period.
     Mandates affecting the individual insurance market
       Under S. 1028, sellers of individual health insurance 
     policies would be required to cover individuals who wanted to 
     enroll in an individual health plan, regardless of their 
     medical history or claims experience, if they had at least 18 
     months of continuous prior coverage by one or more group 
     health plans or employee health benefit plans. To be eligible 
     for such group-to-individual market ``portability,'' the 
     individual applicant also would have to be ineligible for 
     coverage by another group health plan, employee health 
     benefit plan, or COBRA continuation coverage. The bill would 
     leave the determination of premiums to the applicable state 
     laws or regulations.
       Issuers of individual plans also would be required to renew 
     policies at the option of the insured individuals, except for 
     certain circumstances including nonpayment of premiums or 
     fraud.
       To the extent that state laws or regulations were a 
     suitable substitute for the provisions of the bill, the 
     federal rules would not apply. Examples of such substitutes 
     could include laws providing for state-sponsored high-risk 
     pools that provide coverage to those who could not otherwise 
     obtain private coverage, open enrollment by one or more 
     health plan issuers to facilitate coverage in the individual 
     market, and guaranteed issue of insurance to all individuals 
     regardless of their health status.
       6. Estimated direct cost to the private sector: CBO 
     estimates that the direct cost of the main private sector 
     mandates in S. 1028 would be approximately $350 million in 
     the first year the provisions were effective, rising to about 
     $500 million annually in the fifth year. Those mandate costs 
     represent about one-quarter of one percent of total private 
     sector health insurance expenditures, although their 
     distribution among health insurance plans would be uneven. 
     (Plans that cover public sector employees are not included in 
     this analysis.) These estimates are subject to considerable 
     uncertainty because a number of underlying assumptions rely 
     on limited data or judgments about future changes in health 
     insurance markets.
       The specific mandates examined in this estimate are: 
     Limiting the length of time employer-sponsored and group 
     insurance plans could withhold coverage for pre-existing 
     conditions; requiring that periods of continuous prior health 
     plan coverage be credited against pre-existing condition 
     exclusions of a new plan; extending the conditions under 
     which an employer would have to offer 11 additional months of 
     COBRA coverage for disabled people; and requiring issuers of 
     individual health insurance policies to offer coverage to all 
     individuals who meet specific requirements, including 18 
     months of prior continuous group of employer-sponsored 
     coverage.
       Basis of the estimate: The direct costs of those mandates 
     consist of the additional health expenses that would be 
     covered by insurance as a direct result of their 
     implementation. Expenses for pre-existing conditions that 
     would have to be paid by insurers under the bill but would 
     not have been insured under current law, for example, are 
     included in aggregate direct costs. In contrast, insured 
     expenses that would be transferred among different insurers 
     because of the bill are not included in aggregate direct 
     costs.
       In making this estimate, CBO did not attempt to value any 
     social benefits that might result from expansions in 
     insurance coverage. That is, the estimate accounts only for 
     the additional insurance costs of the mandates, not the value 
     of additional insurance coverage to beneficiaries. Nor was 
     there an attempt to quantify any indirect costs or benefits. 
     Such indirect effects could include, for example, loss of 
     coverage if an employer ceases to offer group coverage when 
     premiums rise, or increases in worker mobility (or reduced 
     ``job lock'') with greater portability of benefits. It would 
     be important to weigh all such factors in considering the 
     bill, but only estimates of the direct costs of the mandates 
     in the bill are required by P.L. 104-4, the Unfunded Mandates 
     Reform Act.
     Direct costs of mandates on group insurers and employee 
         health benefit plans
       Two of the principal mandates in S. 1028 affect group and 
     employee health benefit plans: (1) limiting the maximum 
     length of pre-existing condition exclusions, and (2) 
     requiring that health plans reduce the length of pre-existing 
     condition exclusions for people with prior continuous 
     coverage under other health plans. CBO estimates that the 
     direct cost of those two mandates would total about $300 
     million in each of the first five years the provisions would 
     be effective. This cost is approximately 0.2 percent of 
     the total premium payments in the group and employer-
     sponsored market.
       Limiting the Maximum Length of an Exclusion. The mandate to 
     limit exclusions for pre-existing conditions to 12 months (18 
     months for late enrollees) is estimated to have a direct 
     private-sector cost of about $200 million per year. This 
     estimate is based on two components: (1) the number of people 
     who would have more of their medical expenses covered by 
     insurance if exclusions were limited to one year or less, and 
     (2) the average cost to insurers of that newly insured 
     medical care.
       CBO used data from the Survey of Employee Benefits in the 
     April 1993 Current Population Survey (CPS) to estimate the 
     number of people with conditions that are not now covered 
     because of a pre-existing condition exclusion of more than 
     one year. The survey asks respondents whether they or a 
     family member have a medical condition that their employment-
     based plan is not covering because of a pre-existing 
     condition exclusion. It also asks respondents how long they 
     have been with their present firm. For people with medical 
     conditions excluded by a pre-existing condition clause, 
     responses to the second question are used to estimate whether 
     the exclusion period exceeds one year.
       A number of adjustments were made to the data. In 
     particular, CBO's estimate of the number of people affected 
     by S. 1028 excluded people who said they were limited by a 
     pre-existing restriction but who also had other health 
     insurance coverage, because the other insurance plan might 
     have covered their pre-existing conditions. Under those 
     circumstances, the limitation imposed on employment-based 
     plans by S. 1028 would not raise their aggregate costs.
       The second modification to the CPS data adjusted for 
     changes in the insurance market that have occurred since the 
     survey date of 1993. In particular, since that time, about 40 
     states have implemented laws affecting the small group 
     insurance market that would limit pre-existing condition 
     exclusions to one year or less and require that previous 
     coverage be credited against those exclusions. Those laws 
     generally apply to groups of 50 or fewer employees and do not 
     include self-funded health benefit plans. Because plans 
     covered by such state laws would not have to change their 
     provisions as a result of S. 1028, CBO lowered its initial 
     estimate of the number of people affected by the bill.
       CBO's analysis led to the conclusion that approximately 
     300,000 people would gain coverage under S. 1028 for some 
     condition that would otherwise be excluded by a long (more 
     than one year) pre-existing condition clause. This estimate 
     represents less than 0.3 percent of people with private 
     employment-based coverage.
       The other component of the estimated private-sector cost is 
     the average cost of the coverage that would become available 
     under S. 1028. A recent monograph from the American Academy 
     of Actuaries (referred to as the Academy) indicated a surge 
     in claims costs of 40 to 60 percent when a pre-existing

[[Page S3483]]

     condition exclusion period expired for a sample of people 
     with high expected medical costs.\1\ That range is consistent 
     with information from Spencer and Associates indicating that 
     the costs of policies for former employees who have chosen to 
     take extended COBRA coverage are 55 percent higher than those 
     of active employees.\2\ Applying those percentages to the 
     average premium cost in the employer-sponsored market yields 
     a potential range of additional costs of $600 to $900 a year 
     per person who would gain coverage under S. 1028.
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     Footnotes at end of article.
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       Crediting Prior Coverage Against Current Exclusions. 
     Another provision in S. 1028 would require insurers under 
     certain circumstances to credit previous continuous health 
     insurance coverage against pre-existing condition periods. 
     That provision is estimated to have a private sector cost of 
     about $100 million per year. The key components of this 
     estimate are: (1) the number of people who would receive some 
     added coverage, and (2) the additional full-year cost of 
     coverage, adjusted to reflect the estimated number of months 
     of that coverage.
       CPS data were used to estimate the number of people who 
     would receive some added coverage under this mandate. These 
     are people who would otherwise face some denial of coverage 
     under a pre-existing condition exclusion period of one year 
     or less, and who would qualify for a shortened exclusion 
     period based on prior continuous coverage. CBO estimates that 
     about 100,000 people would receive some added coverage under 
     this provision of the bill. The relatively small size of this 
     estimate is due largely to the difficulty of meeting the 
     restrictive eligibility criteria for the reduction in the 
     exclusion period--particularly the requirement that at most a 
     30-day gap separate prior periods of insurance coverage from 
     enrollment in the new plan.
       The average number of months of coverage these people would 
     gain is constrained by the one-year limit on the exclusion 
     period that would be required under the bill. Based on 
     information from a 1995 study by KPMG Peat Marwick, CBO 
     estimates that people who would qualify would gain coverage 
     for an average of 10 months.\3\ CBO's estimate of the 
     additional insured costs per person is based on evidence 
     from the Academy, which suggested that people with pre-
     existing condition exclusions may not seek treatment 
     during the exclusion period but have rapid increases in 
     expenses when that period expires. That behavior would 
     reduce the effectiveness of exclusion periods in 
     protecting insurers from treatment costs. The shorter the 
     exclusion period, the less effective the pre-existing 
     exclusion is at reducing the insurer's costs. CBO 
     consequently assumed that full-year insured costs of 
     people getting coverage for pre-existing conditions under 
     this provision would rise by less than 40 percent.
       Other Considerations. The estimated direct cost of the 
     mandate to limit the length of pre-existing condition 
     exclusions is about $200 million annually, and the cost of 
     the mandate to credit previous coverage against pre-existing 
     condition exclusions is about $100 million. Together, those 
     mandate costs amount to about 0.2 percent of total premium 
     payments in the group and employer-sponsored market.
       Those estimates are subject to considerable uncertainty for 
     several reasons. First, they are based on individuals' 
     responses to surveys, which should be treated with caution. 
     In addition, unforeseen changes in health insurance markets 
     could result in the estimates being too low or too high. 
     Larger than expected increases in medical costs would result 
     in higher direct costs than estimated. On the other hand, the 
     growth of managed care plans would lower the direct costs of 
     the bill. The magnitude of this effect would depend on the 
     relative growth of HMOs, which generally do not use 
     preexisting condition exclusions, as compared to PPO and POS 
     plans, many of which do use preexisting condition exclusions.
       The distribution of the direct costs of the mandates would 
     be uneven across health plans. Only plans that currently use 
     pre-existing condition exclusions of more than 12 months 
     would face the $200 million direct cost of the first mandate. 
     Data from the Peat Marwick survey indicate that 2.5 percent 
     of employees are in such health plans. Consequently, the 
     costs to health plans that use long pre-existing condition 
     exclusions would be about 4.5 percent of their premium costs. 
     Likewise, only health plans that use pre-existing condition 
     exclusions would face the direct cost of the mandate to 
     credit previous coverage against the pre-existing exclusion. 
     The data indicate that almost half of employees are in such 
     plans--implying that the plans directly affected by this 
     mandate would have direct costs equal to about one-tenth of 
     one percent of their premiums under current law.
       Employers could respond in a number of ways to the 
     additional insured costs that would arise under these 
     provisions of the bill. They could reduce other insurance 
     benefits, increase employees' premium contributions, or 
     reduce other components of employee compensation. Employers 
     would be likely to respond in different ways, and these 
     changes could take time. Some employers that currently offer 
     health insurance to their employees might drop that coverage 
     if the costs became too large, although the magnitude of 
     such a reaction would probably be modest. These employer 
     responses, which would offset the costs of the mandates, 
     are indirect effects and do not enter into our estimates 
     of the direct costs to the private sector of the insurance 
     mandates.
     Direct costs of mandates extending COBRA continuation 
         coverage for the disabled
       CBO estimates that the aggregate direct costs of the COBRA 
     extension for disabled people would be negligible. Although 
     individuals qualifying for the extension would be expected to 
     have covered health expenses about three times greater than 
     their premium payments, very few people would actually 
     participate.
       CBO used two approaches to estimate the number of people 
     who would take advantage of the new COBRA extension. The 
     first method used evidence on the number of employees 
     electing COBRA coverage under current law who are disabled. A 
     study by Flynn found that only 0.09 percent of COBRA 
     elections are by disabled people.\4\ Even under the 
     assumption that the number of disabled people having COBRA 
     coverage would double as a result of the new extension, fewer 
     than 5,000 people a year would be covered by that extension.
       In the second approach, CBO used data from the 1992 Survey 
     of Income and Program Participation (SIPP) to examine the 
     prior insurance status of people who became covered under 
     Medicare disability coverage. That analysis also suggested 
     that the number of people qualifying for the additional COBRA 
     coverage under S. 1028 would be extremely small.
       The costs of coverage for disabled people were estimated 
     using information from the 1987 National Medical Expenditure 
     Survey, which indicated that non-elderly disabled people had 
     medical expenditures four to five times greater than non-
     disabled people. Those higher costs would be partly offset by 
     additional premiums that would be collected from persons 
     using the COBRA extension. COBRA allows insurers to charge 
     those people up to 150 percent of the premium for regular 
     employees. Consequently, assuming the full COBRA premium was 
     assessed, the insured costs of disabled people taking the new 
     extension would be about three times higher than the premiums 
     they would pay.
     Direct costs of mandates affecting the individual insurance 
         market
       S. 1028 would require issuers of individual health 
     insurance policies to offer coverage to all people who have 
     had group or employer-sponsored coverage continuously for at 
     least 18 months immediately prior to enrolling, but who are 
     not eligible for additional COBRA or other group coverage. 
     CBO estimates that this group-to-individual portability 
     provision would impose aggregate direct costs on the private 
     sector of less than $50 million in the first year the law was 
     effective. Those aggregate direct costs would rise to about 
     $200 million annually in the fifth year.
       The mandate costs are added insurance costs of people who 
     would gain coverage minus premium payments that the newly 
     covered individuals themselves would make to insurers. 
     Premium payments are subtracted because they would directly 
     offset part of the cost of the mandate imposed on insurers.
       A key element of this estimate is the calculation of the 
     number of people who would both qualify for and desire to 
     purchase individual market insurance under the provisions in 
     S. 1028, but who would not be extended insurance coverage 
     under current law. CBO analyzed data from the 1992 SIPP to 
     determine the number of people who: (1) had 18 months of 
     prior continuous group coverage, and (2) would purchase an 
     individual policy if insurers were not permitted to exclude 
     them on the basis of health. We assumed that uninsured survey 
     respondents who indicated that they were too sick to obtain 
     insurance would fulfill the latter condition. The data 
     suggest, however, that only about 25 percent of such people 
     would meet S. 1028's requirement of 18 months of continuous 
     prior group coverage.
       Because the SIPP survey used in this analysis ended in late 
     1993, we made two additional adjustments to our estimate. 
     First, we corrected for changes in the number of uninsured 
     since 1993. Second, we reduced our estimate to account for 
     state legislation that supersedes the S. 1028 provision. Many 
     states undertook reforms of their individual insurance 
     markets prior to the time of the survey, and a few additional 
     states have implemented such laws since then. We assumed that 
     all states with comparable laws would get waivers from the S. 
     1028 provisions affecting the individual market. Accordingly, 
     the estimate assumes that the mandate would only be effective 
     in states accounting for about 5.4 million of the estimated 
     13.4 million people currently having individual coverage.\5\ 
     (Note that estimates of the number of people insured through 
     the individual market vary considerably. CBO's assumption is 
     consistent with that of the Academy.)
       CBO concludes that approximately 40,000 people would become 
     covered by the end of the first year the bill would be 
     effective because of the group-to-individual portability 
     provision. The number of covered people would grow gradually 
     over time as more people who, in the absence of S. 1028, 
     would have been denied coverage because of poor health 
     would meet the 18-month continuous group coverage 
     requirement and choose to purchase individual insurance. 
     In about four years, the number of people covered because 
     of those portability provisions would plateau

[[Page S3484]]

     at around 150,000 people. Those estimates refer only to 
     the number of people who gain insurance coverage as a 
     result of S. 1028. The estimates do not include people who 
     might decide to move into individual insurance coverage 
     under S. 1028 but would have had insurance coverage from 
     elsewhere in the absence of the bill. It would not be 
     appropriate to count such people toward the aggregate 
     direct costs of the bill because their medical expenses 
     would have been insured anyway.
       In order to complete the estimate, we calculated the direct 
     mandate costs per person who would obtain individual coverage 
     because of this bill. Those costs equal the difference 
     between the added insurance costs of the people who would 
     gain coverage and the premium payments that those newly 
     covered people would make to insurers. Neither the additional 
     insurance costs, nor the additional premium revenue, can be 
     estimated with a high degree of confidence.
       S. 1028 would prohibit the denial of coverage because of 
     health status or claims experience. Consequently, people 
     gaining coverage through the portability provisions of S. 
     1028 would cost more, on average, than the typical person who 
     currently purchases an individual policy. But, because of the 
     multiple eligibility criteria required by S. 1028, surveys of 
     health expenditures do not provide an adequate basis for a 
     specific estimate of those higher costs.
       Likewise, the premiums that insurers might charge newly 
     covered people are highly uncertain because they depend on 
     the unknown responses of state insurance regulators that are 
     likely to vary among the states. At one extreme, state 
     regulators might not allow insurers to charge higher premiums 
     for people qualifying under the S. 1028 portability 
     provisions. The loss on those people would then be relatively 
     large. At the other extreme, state regulators might allow 
     insurers to charge them their full expected costs. In that 
     case, there would be no loss to insurers, and consequently no 
     aggregate costs from that mandate.
       Previous studies offer divergent views on these issues. The 
     Academy assumed that people obtaining individual coverage 
     through the portability provisions would have costs two to 
     three times as high as standard risks.\6\ They also assumed 
     that the premiums those people would pay would range from 125 
     to 167 percent of the average individual premium. That is, 
     the Academy assumed that states would limit what insurers 
     could charge to less than the full cost of the benefit.
       The Health Insurance Association of America (HIAA) assumed 
     that newly covered people who exhausted their COBRA coverage 
     would have costs between two and three times the average, 
     while the cost of those not eligible for COBRA coverage would 
     be 1.5 to two times the average \7\ HIAA made no specific 
     assumptions about the rating rules that states would impose 
     on health plans in the individual market.
       Although neither the costs nor the insurance premiums 
     associated with the newly covered individuals are known, it 
     is not unreasonable to assume that state insurance 
     commissioners would take the additional costs, and their 
     potential effects, into account in regulating the individual 
     market. If, for example, the expected costs of the newly 
     insured people were high relative to others in the individual 
     market, insurance regulators might allow insurers to charge 
     such people relatively high premiums. Conversely, if the 
     expected costs of the newly insured people were not much 
     higher than others in the individual market, state regulators 
     might not allow their premiums to deviate much from the 
     market average.
       This relationship can be viewed in terms of a target 
     ``loss'' percentage that regulators might seek. That 
     percentage would be the difference between the cost of 
     coverage and the premium, expressed as a share of the average 
     premium in the individual market. Based on a wide range of 
     possible cost and premium factors, CBO assumed that the 
     insurers' loss percentage associated with the newly covered 
     individuals would be about 70 percent. That is, the 
     difference between premium income and insurance costs for the 
     newly insured people is expected to be about 70 percent of 
     the average premium paid by others in the individual market.
       Multiplying the loss percentage by the average individual 
     market premium under current law and by the number of newly 
     covered people yields the estimated aggregate direct costs of 
     the group-to-individual portability provision. Those costs 
     are expected to be less than $50 million in the first 
     effective year of the legislation and to rise to about $200 
     million annually by the fifth year.
       Other Considerations. For those states in which the 
     individual market mandates are expected to apply, premiums 
     are estimated to be around 0.5 percent higher than otherwise 
     by the end of the first year of implementation and to be 
     approximately 2 percent higher than otherwise by the end of 
     the fifth year. Those premium increases represent the excess 
     costs that presumably would be passed on to people who would 
     have acquired individual policies in the absence of this 
     bill. The estimates of premium increases are limited to those 
     costs attributable to people who obtain insurance in the 
     individual market who would have been uninsured in the 
     absence of S. 1028.
       If individual insurance premiums rose sufficiently as a 
     consequence of S. 1028, some people with individual coverage 
     would probably drop their insurance. Those most likely to do 
     so would be lower-income people who were not in poor health. 
     CBO used an analysis by Marquis and Long to estimate the 
     number of people who would drop out of the individual 
     insurance market in response to higher premiums.\8\ By the 
     fifth year after S. 1028 became effective, about 35,000 
     people who would have purchased individual policies in the 
     absence of this legislation would not do so. Overall, 
     however, the number of people with insurance in the 
     individual market would probably rise as a result of S. 1028.
       CBO's estimate assumes that states that already meet the 
     individual market standards in S. 1028 would be granted 
     waivers of those requirements. Initiatives such as guaranteed 
     issue laws and state-sponsored risk pools to provide 
     insurance for high-risk people may qualify states for 
     waivers. The Academy has suggested, however, that states may 
     not seek those waivers even when they are eligible. States 
     might see the provisions of S. 1028 as a mechanism to 
     transfer some individuals out of partially state-subsidized 
     high-risk insurance pools into the private market, where 
     their additional costs would be picked up entirely by the 
     private sector.
       7. Appropriations or other Federal financial assistance: 
     None.
       8. Previous CBO estimate: None.
       9. Estimate prepared by: James Baumgardner.
       10. Estimate approved by: Joseph Antos, Assistant Director 
     for Health and Human Resources.
     \1\ See American Academy of Actuaries, ``Providing Universal 
     Access in a Voluntary Private-Sector Market,'' February 1996.
     \2\ Charles D. Spencer and Associates, Inc., ``1995 COBRA 
     Survey: Almost One in Five Elect Coverage, Cost is 155% of 
     Actives' Cost,'' Spencer's Research Reports (August 25, 
     1995).
     \3\ Based on unpublished tabulations from KPMG Peat Marwick, 
     LLP, Survey of Employer-Sponsored Benefits, 1995.
     \4\ Patrice Flynn, ``COBRA Qualifying Events and Elections, 
     1987-1991,'' Inquiry, vol. 31, no. 2 (Summer 1994), pp. 215-
     220.
     \5\ Calculations based on consultations with the 
     Congressional Research Service/Hay Group concerning state 
     individual insurance market laws.
     \6\ American Academy of Actuaries, ``Comments on the Effect 
     of S. 1028 on Premiums in the Individual Health Insurance 
     Market,'' February 20, 1996.
     \7\ Health Insurance Association of America, ``The Cost of 
     Ending `Job Lock' or How Much Would Health Insurance Costs Go 
     Up if `Portability' of Health Insurance Were Guaranteed; 
     Preliminary Estimates,'' July 26, 1995.
     \8\ M. Susan Marquis and Stephen H. Long, ``Worker Demand for 
     Health Insurance in the Non-Group Market,'' Journal of Health 
     Economics, vol. 14, no. 1 (May 1995), pp. 47-63.

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