An Evaluation of New York's Reform Law

Introduction and Methods

Content and Purpose of Reform

New York enacted comprehensive reforms of its individual health insurance market, effective 1 April 1993, as part of a package of legislation that also implemented small-group reforms. This legislation was prompted by mounting losses at Empire Blue Cross Blue Shield, whose reserves had sunk far below the required level and were quickly approaching insolvency. Although this claim was later shown to be somewhat inaccurate, ¹ Empire Blue Cross claimed at the time that this rapid deterioration was largely attributable to its block of community-rated and open-enrolled individual and small-group business and its inability to compete effectively in these market segments with commercial insurers who were able to select risks. New York has several separate Blue Cross plans, but Empire--which markets in the southern part of the state, including New York City--had by far the largest block of individual subscribers, many of whom had chronic or serious illnesses. Empire also has historically been a strong force in the development of New York's health policy (Marmor 1991). Other Blue Cross plans offered community-rated and guaranteed-issue individual coverage in other parts of the state, as did a number of HMOs. Although these other plans were not experiencing the same difficulties as Empire, they too were eager to require commercial insurers to offer coverage on the same terms as they were, to prevent the serious adverse selection that results when there is only one "insurer of last resort" in the market. This legislative strategy was considered necessary to avoid either the bankruptcy of Empire Blue Cross or a huge increase in Medicaid enrollment, which was already overburdened (Hackey 1998, Sparer 1996).

The 1993 law requires all insurers that sell in either the individual or the small-group market to offer each of their products on a guaranteed-issue basis. Insurers must also use pure community rating within each of these market segments. Pure community rating allows no rate adjustment for age, gender, health status, occupation, group size, or other risk-based factors. Adjustments are allowed only for location, family size, or scope of covered benefits.

Initially, the small-group market was defined as groups with three to fifty employees, but in 1997 this was reduced to groups of two to comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). The self-employed fall in a zone between these two markets. Insurers are permitted to sell them community-rated individual insurance, but insurers may also include the self-employed in their small-group block, although they are not required to do so. Thus, group insurers other than HMOs are not required to market to either individuals or to the self-employed, and they are allowed to include only the self-employed. If they do sell to the self-employed, they must do so on the same terms of community rating and guaranteed issue that apply to small groups.

In 1996, the reform law was amended when Empire Blue Cross decided, despite these reforms, to withdraw its indemnity products from the individual market and cancel its existing subscribers, due to the large losses it was continuing to suffer in this block of business. This would have left a major portion of the individual market without any plan offering comprehensive coverage with free choice of physician---plan characteristics that are especially desired by chronically or seriously ill people. In place of Empire and other indemnity insurers, the 1996 law requires all HMOs to offer a standardized HMO and point-of-service (POS) benefit plan in the individual market. Previously, all insurers could decide whether or not to sell in the individual market, and insurers could sell any plan design and benefit package they wished. Following the 1996 amendments, all HMOs must participate and only the two standardized managed care plans may be sold...