April 1996

How Much Would Individual Insurance Premiums Cost Under Kassebaum-Kennedy?

One provision of the Health Insurance Reform Act of 1995 (S. 1028, sponsored by Senators Kassebaum and Kennedy) would guarantee the right to convert a terminating group health insurance policy into an individual health insurance policy. The Health Insurance Association of America (HIAA) has opposed this "conversion" provision, estimating that it would raise health insurance premiums in the individual market by 22.1 percent (HIAA's "most likely" long-term estimate). However, a RAND study has computed new estimates that are much lower, and therefore imply less reason to oppose the proposed legislation's conversion provision.

In New Estimates of the Effect of Kassebaum-Kennedy's Group-to-Individual Conversion Provision on Premiums for Individual Health Insurance, Jacob Klerman uses the HIAA analysis structure and assumptions but substitutes new tabulations from the Survey of Income and Program Participation (SIPP) and improved estimates based on newly released, improved Current Population Survey (CPS) data. The resulting estimates of potential increases range from 5.7 percent to under 1 percent. The highest estimate maintains all of the HIAA assumptions but substitutes improved values for some of the key figures. The lowest estimate, under 1 percent, uses alternative assumptions about how states will regulate these conversion policies and the likely claim costs of those buying the conversion coverage.

Why the Difference in Estimates?

Under the proposed Health Insurance Reform Act of 1995, job leavers who have been continuously covered under a group health insurance plan for 18 months--and who do not have access to any other group health insurance--would be guaranteed the right to purchase individual health insurance from any health insurance company offering such insurance in that state. For job leavers from firms with 20 or more employees, this conversion right would take effect after an individual exhausted continuation coverage under the Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), usually 18 months after leaving a job. For job leavers from firms with fewer than 20 employees--who are not eligible for COBRA--the conversion right would take effect when an individual leaves the job.

The HIAA opposes this conversion provision, claiming that over the long term it would raise insurance premiums for people currently in the individual health insurance market by 22.1 percent. This estimate assumes that individuals purchasing conversion policies would have claims double those of individuals currently purchasing individual health insurance policies. Furthermore, it assumes that these higher costs would be spread evenly over all participants in the individual health insurance market; that is to say, it assumes pure community rating in the individual insurance market.

Given these assumptions, to project the effect of the conversion policies, an analyst needs estimates of (1) the number of covered lives currently in the individual health insurance market and (2) the number of newly covered lives in that market resulting from conversion policies. The table below shows how the HIAA methodology estimates the number of additional covered lives resulting from the proposed conversion right. The estimate combines separate computations for the COBRA market (firms with 20 or more employees) and the sub-COBRA market (firms with fewer than 20 employees). For each market, the subtotal is the product of the first four rows of the table.

Premium Effects: Original HIAA Estimate and RAND Estimates

The "HIAA-RAND" estimate maintains the HIAA analysis structure and assumptions but uses newly released CPS data and new tabulations from the SIPP. These new figures are preferable to those used by HIAA for several reasons:

First, the RAND population estimates ("covered lives") are based on 1995 CPS data that have been released since the original HIAA analysis. Beyond being more current, these new CPS data are based on a new battery of CPS health insurance questions specifically redesigned to improve the measurement of health insurance status.
Second, while HIAA used only what data were available from published sources for job turnover rates (shown in the table as "percentage leaving job"), the SIPP tabulations used by RAND were computed specifically to analyze the proposed legislation. As far as possible, the concepts used in these tabulations are the appropriate ones for the analysis of conversion coverage.
Third, HIAA's estimates for the length of time people currently spend on COBRA and the share of people exhausting COBRA (used in the table to estimate the "percentage of job leavers eligible for the program" and "insured years per eligible person") are based on a small number of survey responses from an unrepresentative sample of employers. The RAND figures are based on the SIPP, a nationally representative probability sample conducted by the U.S. Bureau of the Census.

Using these newer, more specific CPS and SIPP figures, the center panel of the table (labeled "HIAA-RAND") recomputes the HIAA estimate. This HIAA-RAND estimate implies that premiums in the individual insurance market would rise by 5.7 percent--about a quarter of the HIAA estimate of 22.1 percent.

Why the Conversion Effect Might Be Even Lower

The HIAA-RAND estimate of 5.7 percent deliberately follows the HIAA analysis, except where the RAND analysts have used new tabulations (from CPS and SIPP data) to suggest more appropriate or more accurate estimates. The right panel of the table (labeled "RAND-Best") recomputes the HIAA estimate and adjusts two assumptions about the most likely effects of the proposed legislation:

First, the RAND-Best estimate assumes that the new conversion policies will be pooled not only with those that are currently regulated as individual policies, but also with policies that are sold like individual policies (even though they may not currently be regulated as such). This increases the estimate of the number of the current insured years from 10.4 million to 13.1 million.
Second, while HIAA assumes that claim costs for the conversion policies will be much higher (200 percent higher) than those for current group insurance claims, the RAND-Best estimate assumes that claim costs for conversion policies will be similar to the claim costs of people currently insured under COBRA (150 percent of individual rates).

With these two assumptions, the RAND study's best estimate of the effect of the legislation--in states with perfect community rating (which is the HIAA assumption)--is only 2.3 percent.

However, there is strong reason to believe that even these estimates are much too high. The HIAA methodology estimates the "aggregate additional cost that would be imposed on the individual insurance market." That would be the effect on the premiums for people currently purchasing individual health insurance--but only if conversion coverage policies are priced in a pure community-rated pool together with existing individual policies. Nothing in the proposed legislation prevents insurance companies from treating the new conversion policies as a separate rating pool. If insurance companies did so, there would be absolutely no premium increase for those currently buying individual health insurance.

Both the proposed legislation and HIAA's analysis note the crucial role of state regulation in the individual health insurance market.

Many states already provide--either directly or through high-risk pools--some form of guaranteed issue rights similar to the conversion rights guaranteed by the proposed legislation. Because passage of the federal legislation will not increase the number of policies nor the cost of policies in these states, the estimates should not be applied to individuals living there. Furthermore, most states currently impose no rate restrictions on individual premiums. In those states, insurance companies could treat conversion policies as a separate rating pool. Thus, in those states there would also be no effect on health insurance rates for those currently buying individual health insurance.

Finally, even in those states that now regulate individual health insurance premiums (or those that might choose to do so if the proposed legislation becomes law), the regulation does not require a single rate but only limits the range of rates in the individual markets. On premiums for those currently purchasing individual health insurance, such limits would also imply an effect considerably smaller than that implied by even the RAND-Best estimate presented in the table.

Thus, plausible increases in premiums for those currently purchasing individual health insurance would range from 5.7 percent to under 1 percent. The upper end of the range maintains the HIAA assumption of pooling costs between those currently purchasing individual insurance and the new conversion policies. The lower end of the range assumes the continuation of current state insurance regulations. The most plausible estimate is toward the lower end. Moreover, the phase-in period of this long-run estimate would be several years. Since the market has had recent premium increases well over 5 percent per year, the long-run effect of this legislation would likely be undetectable.

Klerman concludes that "[t]he original HIAA estimate of premium increases of over 20 percent for those currently buying health insurance in the individual health insurance market understandably induced many to reconsider the desirability of such a conversion right. By comparison, our preferred range of estimates of 5.7 percent to under 1 percent suggests that likely premium increases for those currently buying health insurance in the individual insurance market provide less reason to oppose the proposed legislation."

RAND research briefs summarize research that has been more fully documented elsewhere. This research brief describes work done in RAND's Center for the Study of Employee Health Benefits, supported by the Pension and Welfare Benefits Administration, U.S. Department of Labor. The work is documented in New Estimates of the Effect of Kassebaum-Kennedy's Group-to-Individual Conversion Provision on Premiums for Individual Health Insurance, by Jacob Alex Klerman, MR-766-DOL, 1996, 82 pp., $15.00, ISBN: 0-8330-2394-2, available from National Book Network (Telephone: 800-462-6420; FAX: 301-459-2118) or from RAND on the Internet (order@rand.org). Abstracts of RAND documents may be viewed on the World Wide Web (). RAND is a nonprofit institution that helps improve public policy through research and analysis; its publications do not necessarily reflect the opinions or policies of its research sponsors.

RAND's Home Page