Lessons from New Jersey

With little popular support for expanding or initiating entitlement programs of any sort (Blendon et al. 1998), state policy makers who are concerned about the rising number of people without health insurance are looking to initiatives that rely on the private sector. Policy makers are interested especially in regulations that would expand access to the individual (nongroup) insurance market. Some states have already implemented regulations that are intended to help people obtain individual coverage (e.g., limits on preexisting-condition exclusions, rate bands on premiums, guaranteed issue of policies to all applicants) (Chollet and Kirk 1998; GAO 1996). Furthermore, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) requires portability of coverage from group to individual policies for a limited number of statutorily defined "eligible individuals" (Nichols and Blumberg 1998). But in addition to these efforts, policy makers are increasingly interested in developing markets for individual coverage that offer more choice to all state residents and that are not composed of many segments, each serving restricted types of individuals.

Currently, most state individual health insurance markets are characterized by many carriers (indemnity companies and managed care organizations) selling policies. However, these carriers often limit competition by each developing a specialized niche within the market (e.g., self-employed individuals in certain occupations) and concentrating their writing of policies in that market niche. Furthermore, they routinely use medical underwriting to screen out applicants whom they do not want to insure (Stone 1993). Risk selection is rampant in this type of market. ¹

New Jersey imposed the most sweeping changes to date of any state's individual health insurance market when it implemented the Individual Health Coverage Program (IHCP) in August 1993. As we explain in detail below, the IHCP is the result of regulations that were intended to both increase access to insurance coverage and reduce the segmentation of the individual insurance market so that competition between insurers would yield greater efficiency. The latter objective is particularly important to policy makers concerned with creating incentives for insurers to reduce premiums for individual coverage. Moreover, given the lack of public enthusiasm for creating new entitlement programs for health care coverage, there is great interest in determining whether states can use regulations to force their individual insurance markets to behave more competitively and be accessible to more residents.

Were we to evaluate the first four years of the IHCP solely in terms of changes in premiums and the number of people covered by individual policies, we might declare the IHCP a failure. That is where many discussions of the IHCP simply end. But such an "on first glance" evaluation misses two points. First, the individual market in New Jersey was becoming unsustainable by 1992. Insurers' support for the state's system of subsidizing Blue Cross Blue Shield (BCBS) for being the insurer of last resort in the individual market had eroded by the early 1990s because insurers felt they were subsidizing BCBS's inefficient operations. ² If nothing had been done to alter the subsidy financing by 1993, the individual insurance market in New Jersey would have collapsed. Thus, the performance of the IHCP has to be compared with what New Jersey would have had without it--a situation in which BCBS would have had to raise premiums significantly, and the number of people covered by individual insurance would have dropped dramatically. Second, a first-glance evaluation misses the point that the IHCP induced changes not only in the number and types of insurers that participated in the individual market. But that also led the IHCP to changes in who could purchase individual coverage and as well altered how losses in the market were to be shared by insurers and ultimately the residents of New Jersey. These changes involve access and efficiency issues that should be considered in an evaluation of the IHCP. Policy makers in other states need to...