First, Do No Harm: Developing Health Insurance Market Reform Packages

Prologue: The health insurance market has become a target of reform efforts in the states and in Congress. One crucial variant in the reform proposals is the degree to which private health insurers are allowed to segment risk groups. In this paper Linda Blumberg and Len Nichols, both senior research associates at The Urban Institute, develop four reform proposals that provide a coherent framework for improving the market without exacerbating risk segmentation. Although the authors warn that these proposals are not the ultimate solution to the problems of the health care market, they “do no harm” and offer incremental improvements. Both Blumberg and Nichols hold doctoral degrees in economics and worked together in the Clinton administration. Blumberg, a health policy adviser on leave from The Urban Institute, helped to coordinate the quantitative modeling effort of the president's Health Security Act at the U.S. Department of Health and Human Services and later at the Office of Management and Budget (OMB). Nichols, on leave from Wellesley College, was a member of President Clinton's health care reform task force and the senior health policy adviser at OMB. He was responsible for federal budget estimates of administration and congressional health care reform proposals and for coordinating estimation methodology with the Congressional Budget Office. Now at The Urban Institute, Blumberg and Nichols are developing a microsimulation model for estimating the effects of health insurance reform proposals. ABSTRACT: Health insurance reform is complex, and discussions about preferred reforms are often marked by confusion. This paper focuses on the fundamental issue: how best to address adverse selection. We develop four reform packages that could improve insurance market performance without aggravating risk selection problems. We then compare the principles applied in our packages with two specific proposals that formed the basis for the compromise federal legislation passed in August 1996. We also review the evidence to date on the effects of small-group reforms on health insurance markets in various states, and conclude with suggestions for further research.