Laboratories of Reform

State Health Insurance Experiments Yield Lessons for the Nation

By M. Susan Marquis and Stephen H. Long

Susan Marquis is a senior economist — and Stephen Long is a former senior economist — at RAND.

Once again, the expansion of health insurance coverage has become an issue of debate on the U.S. presidential campaign trail. Since the past presidential election, we have compiled new evidence on the results of several state-based efforts to expand coverage.

Over the past two decades, the states have been the laboratories for testing new approaches to insuring the uninsured. The overall results show that the states have not yet solved the problem of the uninsured. However, many state efforts have produced important lessons that could help federal policymakers in shaping the next wave of national health insurance proposals.

We studied the effects of five kinds of state experiments: regulatory reforms, purchasing alliances, public subsidies for private insurance, expanded public insurance, and attempts to shore up the “safety net” of public hospitals and clinics that offer care for the uninsured. Based on these types of efforts in a limited number of states, we have observed the following results (see Table 1):

  • Efforts to make private health insurance more accessible and affordable to small businesses — either through regulatory reforms or through purchasing alliances — have had no significant effect on the number of uninsured. These efforts have neither increased the number of small businesses offering insurance to workers nor reduced the market price of insurance premiums

  • Efforts to make health insurance more affordable for the low-income uninsured — by subsidizing the purchase of either private or public health insurance — have met with mixed success. Large reductions in the numbers of uninsured would require large subsidies — often larger than the states could realistically provide on their own. Moreover, these subsidies could unintentionally flow not just to the uninsured but also to individuals who had previously purchased health insurance.

  • Efforts to strengthen the safety net could be more effective in improving the health of some disadvantaged populations than if they obtain health insurance themselves and are left to navigate the health care system on their own.


Regulatory Reforms and Purchasing Alliances

Small businesses are less likely to offer health insurance to their workers than are larger firms. For this reason, the states have experimented with insurance market regulations and with purchasing alliances to make private insurance more accessible and affordable to small businesses. These efforts to expand the availability of employer-sponsored health insurance policies are targeted to small-business employees and their dependents. These people constitute 40 percent of the uninsured population.

In the mid-1990s, several states enacted strict regulatory reforms to counter insurance company practices that prevent groups from purchasing insurance or that make it prohibitively costly to do so. The reforms required insurers to make all of their policies available to any employer who wished to purchase a policy. The goal was to make insurance more accessible to workers at risk for having high health care expenses. The reforms also prohibited the use of health status as a rating factor. The rating restrictions were intended to keep the premiums affordable for high-risk groups.

We compared the behavior of small businesses in 9 states that adopted the reforms between 1993 and 1997 with the behavior of small businesses in 11 states and the District of Columbia, where none of the reforms existed before 1997. We compared the following: the percentage of firms offering insurance, the percentage of workers enrolling, the size and variability of premiums, and the percentage of firms altering their decisions about whether to offer insurance.

Figure 1

The reforms had no appreciable effect on any of the outcomes. There were few significant differences in the percentage of small businesses offering insurance before and after the reforms; and there was no consistent direction of effect across the states (see Figure 1). Similar patterns emerged when comparing the percentage of workers enrolling in insurance before and after the reforms. The reforms had no significant effect on the price or variability of premiums. Some reform states had lower premiums than nonreform states; others had higher premiums. We also found no evidence that reforms reduced the rate at which small businesses change their decisions about whether to offer coverage.

Purchasing alliances, meanwhile, were intended to lower administrative costs for small businesses and to give them collective purchasing power to negotiate lower rates from insurance carriers. The alliances were also intended to stimulate competition in the rest of the small-group insurance market, thereby expanding coverage outside of the alliances as well.

We examined the results in the three states — California, Connecticut, and Florida — that had the largest statewide small-group alliances in the nation. Overall, the alliances neither increased the percentage of small businesses offering health insurance nor reduced the price of premiums in the small-group market (see Figure 2).

Figure 2

Public Subsidies for Either Private or Expanded Public Insurance

While regulatory reforms and purchasing alliances are meant to make insurance more accessible to uninsured workers, public subsidies for either private insurance or expanded public programs are meant to make insurance more affordable for uninsured low-income people, regardless of work status.

The state of Washington offers a state-subsidized private insurance program known as Basic Health. The program contracts with managed care plans to deliver services to individuals who purchase the state’s Basic Health coverage. In 1997, individuals in families earning below 200 percent of the poverty level paid a sliding-scale premium ranging from $10 to $100 per month, plus a small copayment for most services.

One issue in designing a subsidy program is the amount of subsidy needed to motivate large numbers of people to enroll. We found that cutting the premium in half would reduce the number of uninsured people in the state only slightly. Lowering the monthly premium from $50 to $25, for example, would reduce the proportion of uninsured adults and of uninsured children by about 3 percent. Even with a very modest premium of $10 per month for all enrollees, we found that about one-third of adults and nearly 10 percent of children would remain uninsured (see Table 2). This outcome suggests that substantially decreasing the ranks of the uninsured will require very large subsidies.

Table 2

And that leads to a bigger problem. The tax capacity of many states makes them unable to cover their uninsured without federal help. We defined the “tax capacity” of each state as the increase in federal income taxes that residents of a state would need to pay to help finance a hypothetical national health insurance program that would cover all uninsured low-income people across the country. We then calculated how far each state’s contribution could go toward subsidizing health insurance for low-income people within the confines of the state.

Nationwide, only half the states would be able to cover all of their uninsured with a budget limited to the state tax revenues that would otherwise contribute to a national health insurance program. The reason for this wide disparity is that there is wide variation in the rates of the uninsured across the states and in per-capita incomes. To insure all of their low-income residents, some states would need to spend nearly twice as much per capita as other states. Moreover, the states with the greatest need to extend coverage would have the least capacity to do so. Many states would require federal assistance either to introduce or to expand programs to subsidize private insurance coverage for the uninsured.

Another important concern in evaluating the success of public subsidies for health insurance is the extent to which public spending substitutes for — or “crowds out” — private spending. For instance, some people could drop their private insurance to take advantage of a lower premium in the publicly subsidized program. Or some businesses could drop health insurance as an employee benefit because of the alternative offered by the subsidized program. Crowding out increases the cost of a public program, because the state ends up paying for insurance for those who would otherwise buy it with their own money.

We examined what happened in seven states that expanded public coverage between 1991 and 1997. The expansions increased the percentage of the population enrolled in public insurance programs. Enrollment grew by about 4 percentage points for adults and about 5 percentage points for children. However, the percentage of low-income people covered by private insurance fell in the seven states by about 3 percentage points more than would have been expected based on the changes in other states. These findings suggest that about half of those who newly participated in the public programs had replaced their private insurance with public insurance.

A Stronger Safety Net

Even with substantial public subsidies, some people will remain uninsured. They will depend on a strong safety net for access to care. For some people, such as low-income pregnant women, better health outcomes could result from reinforcing the safety net rather than from expanding insurance coverage.

Improving birth outcomes for low-income pregnant women has been an important health policy objective for two decades. Policymakers have pursued this goal both by expanding public insurance programs, such as Medicaid, and by investing in public health care systems that typically coordinate prenatal care and combine clinical care with nonclinical support services.

We evaluated Florida’s experience with both of these approaches. We compared both the use of prenatal services and the birth outcomes for low-income uninsured women and Medicaid-insured women who received care in either the private system or the public system. The results were intriguing. Although the women with Medicaid insurance had more prenatal care visits than did the uninsured women, regardless of the choice of delivery system, the birth outcomes among the women depended on where they received their care, rather than on their insurance status. Consistently, low-income pregnant women fared significantly better in the public health system than in the private health system of physician offices, hospital clinics, and health maintenance organizations, regardless of whether the women were uninsured or covered by Medicaid (see Figure 3).

In the case of uninsured low-income pregnant women, the expansion of health insurance coverage by itself does not appear to lead to better health outcomes, even though it increases the use of health services. Instead, the critical factor appears to be the receipt of care within a public health system that coordinates clinical care and combines it with nonclinical support services.

A Combination of Efforts

States have tried several incremental approaches to expand health insurance coverage. None of the approaches has eliminated the problem, but we can derive valuable lessons nonetheless.

A successful approach will likely involve multiple strategies. Regulatory reforms and purchasing alliances can help to eliminate market practices that make insurance inaccessible to some groups. To increase the demand for coverage substantially, however, will require large subsidies.

Very likely, states will be unable to solve the problem of the uninsured on their own, especially given the current constraints on state budgets. Large reductions in the numbers of the uninsured will require either new federal expenditures or innovative public-private approaches to financing. Many states are now pursuing the latter approach on behalf of uninsured working families, for example, by using public money to pay the employee’s share of employer group coverage.

In a system in which purchasing health insurance is voluntary, we cannot expect everyone to purchase it. Maintaining a strong safety net will remain necessary to ensure that those who remain uninsured will retain access to health care. We clearly need to expand health insurance coverage; at the same time, we need to ensure that the integrity of the safety net does not erode.

Related Reading

“Effects of ‘Second Generation’ Small Group Health Insurance Market Reforms, 1993 to 1997,” Inquiry, Vol. 38, Winter 2001/2002, pp. 365-380, M. Susan Marquis, Stephen H. Long.

“Employment Transitions and Continuity of Health Insurance: Implications for Premium Assistance Programs,” Health Affairs, Vol. 22, No. 5, September/October 2003, pp. 198-209, M. Susan Marquis, Kanika Kapur.

“Federalism and Health System Reform: Prospects for State Action,” Journal of the American Medical Association, Vol. 278, No. 6, 1997, pp. 514-517, M. Susan Marquis, Stephen H. Long. Also available as RAND/RP-647.

“Have Small-Group Health Insurance Purchasing Alliances Increased Coverage?” Health Affairs, Vol. 20, No. 1, 2001, pp. 154-163, Stephen H. Long, M. Susan Marquis.

Health Care Coverage for the Nation’s Uninsured: Can We Get to Universal Coverage? RAND/RB-4527, 2000, 6 pp.

“Medicaid Eligibility Expansion in Florida: Effects on Maternity Care Financing and the Delivery System,” Family Planning Perspectives, Vol. 31, No. 3, 1999, pp. 112-116, M. Susan Marquis, Stephen H. Long. Also available as RAND/RP-797.

“Participation in a Public Insurance Program: Subsidies, Crowd-Out, and Adverse Selection,” Inquiry, Vol. 39, No. 3, Fall 2002, pp. 243-257, Stephen H. Long, M. Susan Marquis.

“Public Insurance Expansions and Crowd Out of Private Coverage,” Medical Care, Vol. 41, No. 3, March 2003, pp. 344-356, M. Susan Marquis, Stephen H. Long.

“The Role of Public Insurance and the Public Delivery System in Improving Birth Outcomes for Low-Income Pregnant Women,” Medical Care, Vol. 40, No. 11, November 2002, pp. 1048-1059, M. Susan Marquis, Stephen H. Long.

State Efforts to Insure the Uninsured: An Unfinished Story, RAND/RB-4558/1, 2003, 6 pp.