Sec. 361.1. Preamble

(a) Chapter 501 of the Laws of 1992 requires that the superintendent promulgate regulations regarding the orderly implementation of open enrollment and community-rating of policies issued to small groups and individuals pursuant to sections 3231 and 4317 of the Insurance Law. Such regulations are to include provisions designed to encourage insurers to remain in or enter the small group or individual health insurance markets, provisions designed to promote an insurance marketplace where premiums do not unduly fluctuate, insurers and HMOs are reasonably protected against unexpected significant shifts in the number of persons insured, and other market stability features deemed appropriate by the superintendent.

(b) Prior to enactment of sections 3231 and 4317 of the Insurance Law there was some concern that the open enrollment process would expose insurers and HMOs to financial losses due to the enrollment of persons for coverage who are very ill or have a history of poor health, and whose cost of health care would be higher than the amounts assumed in the establishment of premium rates. Insurers which encountered these situations, or feared they might encounter them, might cease their participation in either the small group health insurance or individual health insurance markets, or both. HMOs, which are required to participate in those markets, might suffer ruinous losses. In order to avoid those results the Legislature enacted section 3233 of the Insurance Law which explicitly requires that these regulations include market stability and other provisions designed to encourage insurers to remain in or enter those markets, and to protect all insurers and HMOs in those markets from extreme losses due to open enrollment.

(c) Chapter 501 was designed to cause insurers and HMOs to compete with each other in the small group and individual health insurance markets on the basis of administrative efficiency, customer satisfaction, the ability to manage care and cost-effective provider agreements, rather than on the basis of avoiding or terminating coverage of persons whose health care costs are high. In order to implement the statutory intent that insurers and HMOs be prevented from avoiding high cost persons in order to obtain a marketplace advantage over their competitors, the market stability provisions need to include all insurers and HMOs participating in the individual and small group health insurance markets. If the mechanism were voluntary, insurers and HMOs which did not cover a proportionate share of high cost persons would naturally decline to participate and thus continue to reap benefits from not covering a proportionate share of high cost persons.

(d) The purpose of this regulation is to establish a market stabilization process which achieves the following goals:

(1) to share among insurers and HMOs those substantive cost variations attributable to significant differences in demographic characteristics or specified medical conditions of the persons covered. The protection afforded by this sharing process will facilitate the introduction of mandated open enrollment and community rating by providing some assurance to insurers and HMOs that their business and competitive interests will be secure because they are protected from sudden or significant changes in the proportion of high cost persons they cover, and because other insurers and HMOs will not obtain a competitive advantage by avoiding or failing to insure a proportionate share of high cost persons;

(2) to promote competition among insurers and HMOs on the basis of efficient claims handling, ability to manage health care services, consumer satisfaction, and low administrative costs, and to deter competition on the basis of avoiding or terminating coverage of persons whose health care costs are high;

(3) to protect insurers and HMOs which are subject to the open enrollment and community-rating provisions of chapter 501 of the Laws of 1992 from undue variations in costs which are not related to differences in operating efficiency, the ability to manage care, or provider agreements; and

(4) to encourage insurers to enter, remain in, and compete vigorously in the small group health insurance and/or individual health insurance markets.

(e) The market stabilization process intended to be implemented by the sections below includes two components.

(1) The first component uses an age/sex relative morbidity table to measure the relative risk for each insurer and HMO, with respect to the demographic characteristics of the persons covered by that insurer or HMO. The average risk for all insurers and HMOs is then determined. Insurers and HMOs with relative risk factors less than the average contribute money to regional pools; insurers and HMOs with relative risk factors greater than the average receive money from the pools. Insurers and HMOs which are expected to make contributions are permitted to include their projected contributions in their premium rates as if the contributions were claim expenses, while insurers and HMOs which are expected to receive money shall treat the projected receipts as if they were offsets to claims and thus reduce premium rates below what those premium rates would otherwise need to be.

(2) The second component uses a list of specified, high-cost medical conditions. This component protects insurers and HMOs from part of the adverse financial effects of covering a disproportionate number of people with such conditions. Prior to January 1, 1999 each insurer and each HMO contributes to the pool a pre-set amount per person covered, and prior to January 1, 1998 each insurer and each HMO receives a pre-set amount from the pool for each covered occurrence of a listed medical condition. From January 1, 1998 through December 31, 1998 each insurer and each HMO may collect from the pool if the carrier's specified medical condition index is greater than the regional specified medical condition index.

(f) The market stabilization process is based on reasonably available data and factors that account for a significant portion of the cost differences among insurers and HMOs due to demographics and high cost medical conditions, but they are not expected to account for all differences among insurers and HMOs. A more precise adjustment process would require a marked increase in administrative effort, yielding marginal improvement in results. Cost variations among insurers and HMOs based on operational efficiency, ability to manage health care costs and patient care, as well as administration of health insurance policy provisions, are not intended to be neutralized and indeed are encouraged.