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Structuring Health Insurance Markets

Protecting Consumers & Promoting Competition

Summary of a Workshop for State Legislators and Senior State Health Officials

This workshop was designed to assist policymakers in understanding the dynamics of a rapidly changing health care marketplace and the role of the State in structuring health insurance markets. It was held in Lake Buena Vista, Florida, May 13-15, 1998.

About the Workshop Sponsor.


Over the past decade, the major payers for health care services have pressured providers and insurers to cut costs and improve the quality of their services, sparking a revolution in the financing and delivery of health care services. Health care markets have been shifting from indemnity insurance to managed care, from cost-based reimbursement to prospective payment, and from independent physicians and hospitals to more integrated and coordinated health care systems. Some find it increasingly difficult to distinguish between insurers and providers, with traditional insurance companies developing health care delivery systems and health care providers taking on more financial risk.

As more employers and government purchasers encourage and/or require their beneficiaries to select managed care plans, consumer groups and others are voicing concerns about the potential shortcomings of managed care, including real or perceived denials of service and limits on provider accessibility.

Juxtaposed against these "market" transformations, State officials find themselves reacting to, contributing to, and trying to take advantage of these dramatic changes.

As the traditional regulators of commercial health insurance companies, the primary goal of States is to assure financial solvency, so that health plans have the resources needed to pay claims and meet their business obligations. The emergence of new forms of risk-bearing organizations, however, raises a new set of challenges:

  • Should States create licensure categories for each new type of risk-bearing entity—such as provider-sponsored networks—or develop a consolidated licensure approach based on their common, core functions?
  • How should States regulate "down stream" risk, whereby the licensed insurer passes risk on to providers or other entities through capitation or similar payment arrangements?
  • How will the new Federal standards for Provider-Sponsored Organizations (PSOs) under Medicare mesh with existing State rules?

Beyond solvency protections, States also seek to hold health plans "accountable" to consumers for the quality of their products and services. Largely through the work of the National Association of Insurance Commissioners (NAIC), States can now adopt or adapt a series of five model laws that set standards for health plans regarding quality assessment and improvement, verifying the credentials of health care professionals, managed care plan network adequacy, utilization review, and grievance procedures.

Even as such rules are being implemented, however, State legislatures are wrestling with a raft of proposals regarding the definition and scope of benefits for mental health services, emergency care services, mastectomies, and other specific treatments or interventions. More than ever, State initiatives in the area of insurance regulation are also being influenced by Federal actions, including the Health Insurance Portability and Accountability Act (HIPAA), the Balanced Budget Act (BBA) of 1997, and the President's Commission on Consumer Protection and Quality, not to mention new court rulings on the breadth of the Employee Retirement Income Security Act (ERISA).

Like other large health care purchasers, States are increasingly using their purchasing leverage in the marketplace to spur competition and improve the value of their health premium dollar. Additionally, some States are seeing the benefits of using risk adjustment techniques to mitigate the risk selection problem whereby insurers seek to enroll healthier individuals and avoid potentially high cost users. For example, Colorado's Medicaid agency and California's health insurance purchasing cooperative for small businesses are now risk-adjusting their premium payments to health plans.

Beyond their own enrollees, States can also shape the broader market by providing information to consumers and purchasers about the health plans and providers operating in their area. Pennsylvania and New York have gained experience in releasing financial and clinical "outcomes" data, profiling hospitals and/or physicians who provide certain procedures, such as coronary artery bypass graft (CABG) surgery. Missouri has released similar data on obstetrical services. A growing number of States, including Florida, Maryland, Minnesota, and New Jersey, have supported the development of health plan "report cards" comparing health maintenance organizations (HMOs) and other managed care entities on a variety of consumer satisfaction and other measures.

Such activities raise both methodological and practical questions for State officials:

  • Are the data being released adjusted for case-mix and comparable across providers/plans?
  • What kinds of information do consumers really want when making health plan choices?
  • Are State agencies or private accreditation groups currently producing the appropriate types of information, or are new surveys needed?

Combined with traditional regulatory oversight of insurance and provider markets, State health policy decisions can have a profound impact on how markets develop and how that development affects consumers. States need to consider how they can monitor and assess health system changes, promote market forces where feasible, comply with Federal legislation, and assert regulatory authority when necessary to protect consumers.


The specific objectives of the workshop were to:

  • Provide an overview of the evolution of health insurance markets in the United States and the major forces transforming how health care services are financed and delivered.
  • Discuss State efforts to regulate managed care health plans in order to provide consumer protection and promote competition, and examine the constraints on and challenges to these efforts placed by ERISA and new court interpretations of ERISA.
  • Describe the role of States in regulating the business of health insurance, assuring fiscal solvency of newly emerging forms of risk-bearing health care organizations, and State and Federal efforts to reform health insurance markets.
  • Provide examples of State programs that use risk-adjustment technologies in setting health plan capitation payments.
  • Describe the role of States in overseeing the conversion of nonprofit health plans to for-profit corporations and protecting the public's interest in the charitable assets of the nonprofit entity.
  • Discuss what States can do to assess/monitor health plan performance and health care markets and examine the role of the State in disseminating this information to purchasers, policymakers and consumers.


The participants for this workshop included senior policymakers in legislative and executive branches of State government who want to enhance their understanding of economic market forces in health care and health insurance markets and strategies for using market discipline to achieve public policy goals. Among them were several State legislators, insurance commissioners, directors of health departments and health benefits divisions, and representatives from planning and development agencies.

Workshop Sessions


The User Liaison Program (ULP) disseminates health services research findings in easily understandable and usable formats through interactive workshops. Workshops and other support are planned to meet the needs of Federal, State, and local policymakers, and other health services research users, such as purchasers, administrators, and health plans.

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