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Testimony by Gregory V. Serio, Superintendent of Insurance, before the New York City Council Committees on Economic Development and Health Concerning the Availability of Affordable Health Care for Small Businesses and Sole Proprietors in NYC

December 10, 2003

I. Introduction

Good afternoon. I would like to thank members of the Committees for the opportunity to testify about the availability of affordable health care for small businesses and sole proprietors in New York City.

There is no question that small businesses and sole proprietors are important to the U.S. and New York State economies. Nationally, they represent over 99% of all employers and employ more than half of all private sector employees. While the numbers may fluctuate from year to year, small businesses generate between 60 and 80% of all new jobs annually, thereby being major contributors to the economic recovery that is currently underway. In 2002, there were approximately 23 million small businesses in the United States. Of these, just over 500,000 were located in New York State, and approximately 197,000 of them were situated in the five boroughs of New York City. Governor George E. Pataki has oftentimes referred to small businesses as the backbone of New York’s economy.

A majority of New Yorkers who have health insurance coverage obtain it as part of their employment benefits package. According to the latest figures available from the United Hospital Fund, approximately 64% of New Yorkers are covered under employer-sponsored health programs. Their figures also show that 18% of New Yorkers are uninsured even though a majority of them are working. Nearly 90% of uninsured workers do not have access to employer-sponsored coverage either because their employer did not offer coverage or the worker is not eligible for coverage under the employer’s plan.

While the issue of the uninsured is a national problem, New York experiences more than its fair share when compared to other states. With more than 43 million people in the United States lacking health insurance, and that number rapidly increasing because of soaring health care costs, the majority of the uninsured are neither poor nor unemployed, but employees of small businesses.

According to the 2002 Census Bureau report, there are over 25 million working Americans who do not have health care coverage. According to the United Hospital Fund, there are 1.8 million workers in New York State who were without health insurance coverage. New York City alone accounted for one million of those workers. Clearly, this is a chronic problem in the New York City area. The fact that this is a small business issue is borne out by the statistic that 2 out of 3 uninsured workers are employed by businesses with less than 100 employees, and half are employed by businesses with fewer than 25 employees.

The availability of affordable health care coverage for small businesses and sole proprietors has been the topic of national public debate for the last two decades. The debate typically focuses on the costs of health care services, which have been increasing rapidly. Another problem is that health care utilization is on the rise as people continue to take advantage of the many advances in both medicine and technology. Prescription drugs and their consumer-directed advertising also impact the rising costs, driving them even higher. Many attempts have been made to control the cost of health care services in an effort to lower premium costs for health insurance coverage. While the discussions at the state and federal level have resulted in many alternatives and solutions, such as managed care, we continue to explore all possible options.

Health care costs have been subjected to double-digit rate increases throughout the country, including New York. Small businesses have been particularly hard hit by these increases. Many of these businesses, which offer employer-sponsored health coverage to their employees, are now forced to either shift more of the health insurance benefits cost onto their employees, through higher employee contributions, co-payments and deductibles, or to drop health coverage for employees altogether.

Controlling health care costs and eliminating the uninsured working population in New York will take a concerted effort from all parties concerned. To that end, the Department is currently engaged in several important initiatives, such as the Health Insurance Alliance, bringing together HealthPass, Healthy NY, Working Today, the New York City Mayor’s office, the Department of Health (Family Health Plus and Child Health Plus) and the Long Island Association’s Health Alliance, in an effort to assist small businesses and sole proprietors with their health insurance needs and costs. In addition, this issue is debated on a regular basis with the industry and trade associations at our Healthcare Roundtable meetings. And, in order to specifically address the uninsured problem in the five boroughs of New York City, we are working with New York City, the City’s Chambers of Commerce, hospitals and health insurers to make health insurance coverage more available and affordable.

Even though we have made great strides in securing health care coverage for many of New York’s working uninsured, much more needs to be done. The challenge for us is to expand access to high-quality health care coverage for all New Yorkers.

II. Initiatives Enacted to Address the Uninsured Population

During the last several years, a number of initiatives and programs have been enacted in New York to address the issues of health care costs and accessibility in the individual and small group markets. Several of the recent initiatives were contained in the Health Care Reform Act of 2000 (HCRA 2000). These initiatives, which include Healthy NY, Family Health Plus and the direct pay market stop loss funding pools, in conjunction with the new sole proprietor law and the existing Child Health Plus and EPIC programs, offer a number of choices for New York’s small businesses, sole proprietors and families. These initiatives have provided access to affordable health care coverage to more than one million New Yorkers who otherwise would be uninsured in whole or in part. Moreover, while the number of the uninsured continues to increase nationwide, New York, because of these initiatives, has been able to steady the tide of the uninsured, now at just under 3 million people.

The 2002 Census Report indicates that while many of the uninsured are also unemployed, more than half of all uninsured actually worked during the past year. While many may have had entry-level positions or jobs that did not provide health care benefits, it is of significance that over 600,000 people with household incomes exceeding $75,000 joined the uninsured ranks in 2002, bringing the total for this category to 7.2 million people nationwide. New York was among the first states in the nation to seriously address the issue of the working uninsured.

The Healthy NY program is available to uninsured small businesses, sole proprietors and individuals whose employers do not provide insurance. Through lower premiums, it encourages employers to offer benefits to their employees and provides a low cost alternative for individuals seeking to obtain insurance on their own.

Healthy NY offers comprehensive coverage in a streamlined benefits package and combines it with state funding to create a unique approach to covering the uninsured. Every Health Maintenance Organization (HMO) is required to offer Healthy NY. Therefore, it is available in every county of the State. One unique feature of Healthy NY is that individuals and sole proprietors pay the same premium rates as small businesses.

For a business to be eligible to purchase Healthy NY, it must have 50 or fewer eligible employees; at least 30% of those employees must earn $32,000 or less in annual wages; the business must be located in New York State and must not have provided insurance to its employees in the prior 12 months. The Department does not have the discretion to waive this 12-month "crowd out" period. However, the Department supports reducing the "crowd out" period from 12 months to 6 months to allow more of New York’s small businesses and sole proprietors to enroll in Healthy NY.

To participate in Healthy NY, at least half of the eligible employees must enroll in Healthy NY and at least one enrolled employee must earn $32,000 or less. In addition, the business must agree to contribute at least half of the employees’ premium. By enrolling in Healthy NY, a small business can save up to 20% or more on the cost of health insurance.

Healthy NY became available on January 1, 2001. Today the program averages more than 3,500 new enrollments each month. More than 55,000 people have participated in the program since it began. Overall enrollment is comprised of approximately 58% individuals and 42% small businesses and sole proprietors. Based on the latest figures available, total enrollment in Healthy NY in the New York City area is over 7,500. While some have criticized the program as not living up to expectations, I believe that much of this criticism is unwarranted. To begin with, we were fully aware, based on the Department of Health’s experience with Child Health Plus, that enrolling individuals into Healthy NY was going to be a gradual process. We knew the decision among consumers would take time especially for those consumers who may have elected to be uninsured up until contemplating the affordable option of Healthy NY.

As the Department turns its attention to the New York City area, we expect Healthy NY enrollment figures to increase, particularly when the premium for Healthy NY coverage is compared to the standard market rates. For example, Aetna’s standardized individual coverage costs $389.60 per month while its Healthy NY premium (without drugs) is $164.34 per month, a difference of 58%; GHI’s standardized individual coverage costs of $626.91 per month while its Healthy NY premium (without drugs) is only 154.53 per month, a 75% difference; and Healthnet’s standardized family coverage costs $1,604.38 per month while its Healthy NY premium (without drugs) is only $548.29 per month, a difference of 65%.

Similar to what we have seen in upstate New York, these cost savings should have a tremendous impact for New York City’s working uninsured. In addition, while not as dramatic as the individual direct pay market, small businesses should experience savings when purchasing Healthy NY coverage compared to the rate they would pay in the traditional small group market. And the proof is in the numbers. Since the Healthy NY program began, there has been a steady increase in enrollment in part due to the Department’s extensive outreach efforts aimed at New York’s uninsured small businesses and individuals. This past October, the Department launched a new advertising campaign featuring small business owners, recent college graduates and uninsured workers --who, because of Healthy NY, are now eligible to obtain health coverage. The advertisements were designed to raise awareness of Healthy NY and encourage eligible New Yorkers to enroll in the program. In addition, the Department maintains a Healthy NY website and a toll-free hotline service which is available around the clock. Application materials can be printed from the website on a 24/7 basis and mailed directly to the HMO of choice.

Earlier this year, the Governor announced important changes to the Healthy NY program which make it easier to apply for coverage, provide more choice in benefits and, most importantly, make it more affordable. The employment requirement has been made more flexible to allow more of New York’s residents to qualify. Businesses that make a de minimus contribution toward employee coverage can now qualify for Healthy NY notwithstanding the "crowd out" period. And finally, although the vast majority of health insurance premiums are on the rise, Healthy NY premiums were reduced in July by an average of 17%. The Healthy NY program now offers coverage without a prescription drug benefit, allowing people to save an additional 12% on premiums.

The Department also worked with numerous organizations such as the National Federation of Independent Businesses, the New York State Business Council and Chambers of Commerce statewide to reach New York’s small businesses.

We continue to work with other agencies such as the Departments of Health, Labor, and the Empire State Development Corporation to make sure that Healthy NY has a presence at various public events such as the New York State Fair, county fairs, the Governor’s Capital for a Day, local town hall meetings and Chamber of Commerce meetings. We provide training in Healthy NY features and criteria to facilitated enrollers who assist people enrolling in other public programs.

In January 2003, the Department together with the Mayor’s office created a working group referred to as the Health Insurance Alliance (HIA). HIA is a voluntary alliance of not-for-profit and government organizations that provide access to health insurance for the working uninsured. While this is a statewide initiative, the working group has begun to focus efforts in the New York City metropolitan area. Its target population is small businesses and not-for-profits, sole proprietors and working individuals. HIA, under the Department’s leadership, seeks to support in an ongoing fashion the following objectives:

Members of the Health Insurance Alliance include representatives from the Department, Working Today, Brooklyn HealthWorks, the Brooklyn Chamber, the NYC Mayor’s Office of Health Insurance Access, HealthPass, Child Health Plus, Family Health Plus, the NYS Business Council, the United Hospital Fund and the Long Island Alliance. What the Department has found is that through the HIA, a synergy has been created, bringing together parties that share a common interest -- providing health insurance coverage to the uninsured. Each member brings to the table their unique perspective toward insuring individuals, sole proprietors and small businesses.

Working Today offers group-rate health, life, and disability insurance to independent workers in certain industries in the New York City metropolitan area. Independent workers include freelancers, consultants, part-time and temporary employees, and others not tied to full-time employment. Health insurance coverage is offered through HIP Health Plan of New York and features coverage for doctor and specialist visits, prescription drugs, hospitalization, preventive dental and basic vision. Life and disability coverage is offered through the Guardian Life Insurance Company of America.

Brooklyn Health Works is a program that will offer GHI health insurance coverage to small businesses in northern Brooklyn. The program also offers a pharmacy discount card that can be used at a 150 participating pharmacies in Brooklyn.

The NYC Mayor’s Office of Health Insurance Access created HealthStat, a citywide initiative that brings together the work of more than 20 city agencies and private partners to find and enroll qualified residents in public health insurance.

HealthPass is offered in 10 downstate counties to small businesses. HealthPass is offered by 5 insurers with 26 benefit options including PPOs, EPOs, POS, HMOs and dental coverage.

Child Health Plus is New York State’s health insurance plan for children under the age of 19. Currently, there are more than 425,000 children in New York State enrolled in Child Health Plus. The program provides comprehensive benefits, including a full array of inpatient and outpatient services, vision care, dental care, and prescription drug coverage. The amount of monthly health insurance premiums, if any, that families are required to pay depends on their income. There are no other costs to families such as co-payments, coinsurance or deductibles for any covered services.

Family Health Plus is also a program under the direction of the Department of Health. It provides comprehensive coverage at no cost to low income adults who are between the ages of 19 and 64, who do not qualify for Medicaid or Medicare, and who do not have insurance. Currently, there over 217,000 people enrolled in Family Health Plus. Family Health Plus enrollees can choose among the participating health plans available in their area.

Long Island Alliance is an association designed to increase insurer competition and expand choices for small businesses and their employees.

There is no mistaking the fact that the HIA is working. The purpose of the alliance is to work together so individuals, sole proprietors and small businesses who may not qualify for one program may nevertheless qualify for another. To this end, the Department and members of HIA have created links from their websites to those of other alliance members -- in the event an individual or small business does not qualify for Healthy NY, they may nevertheless be able to find affordable health insurance coverage through one of the other members of the alliance.

III. Sole Proprietor Coverage

In 2002, legislation was enacted to address the availability of health insurance for sole proprietors. Prior to this law, insurers had the option of classifying sole proprietors in either the individual or small group-rating category. There was no requirement that insurers make small group coverage available to sole proprietors, even where such sole proprietors were legitimate members of an association group or Chamber of Commerce. To be more competitive in the marketplace, many insurers began examining their book of business and decided to discontinue offering group coverage to sole proprietors. It was their position that the claims experience of sole proprietors was worse than that of small businesses, and therefore adversely impacted the small group rates. Many sole proprietors had to resort to the expensive standardized direct payment market for individuals.

The sole proprietor legislation requires insurers that issue association group coverage, including coverage to Chambers of Commerce, to issue the same coverage to sole proprietors who purchase coverage through an association group. This ensures that sole proprietors who are members of an association or Chamber may purchase the same group health insurance coverage as the other small businesses purchasing insurance through the association or Chamber.

The legislation prohibits an insurer from charging sole proprietors a premium rate differential that is greater than 20% of the premium rate established for the same coverage issued to groups. It is important to note that insurers are not required to impose a rate differential on coverage issued to sole proprietors. Such rate differential is only permissive and insurers wishing to impose a rate differential are required to submit a formal rate application to the Department with actuarial documentation in support of the request. In order to substantiate a rate differential for sole proprietors, the health insurer needs to actuarially justify the additional charge, if any, for sole proprietors. The claims experience for sole proprietors, if submitted by the insurer, is examined separately and compared with the claims experience of small groups.

Initial rate applications are thoroughly reviewed by Department actuaries and, depending upon the sufficiency of the actuarial justification, the request for the rate differential will be denied in its entirety, reduced or approved as requested. If disapproved, there are no established timeframes for resubmission of the filing. An insurer can resubmit the filing at any point statistically significant experience becomes available to justify a higher rate for sole proprietors. It should be noted though that notwithstanding a disapproved rate filing, it remains the insurer’s obligation under the legislation to issue the sole proprietor coverage at the small group rates.

The insurer may only implement the sole proprietor rate differential upon receiving prior approval from the Department. Subsequent rate adjustments, because of the Appellate Division’s decision in Matter of Excellus Health Plan Inc. v. Serio, are subject to "file and use" rules, which permit insurers to implement rate changes without the prior approval of the Department. However, insurers must file statements with the Department on an annual basis demonstrating that they meet statutory loss ratio requirements. These reports will be scrutinized by the Department to determine whether statutory loss ratio requirements are met. Such reports will also demonstrate whether the insurer has been adversely selected against as a result of this legislation. Premium rates for small groups may be adversely impacted if sole proprietors exhibit higher morbidity rates than small groups as asserted by some in the insurance industry. It is, however, too early to tell at this point whether adverse selection is occurring -- the Department will continue to monitor the situation as experience develops in subsequent years.

In overseeing the implementation of this important legislation, the Department became concerned that it may be viewed by some as authorization to remove sole proprietors from existing group business or otherwise change existing business practices to the detriment of sole proprietors. My staff and I have traveled throughout the State meeting with insurers and Chamber groups to ensure that the law is not being interpreted or applied improperly. In support of this, in 2002 the Department issued Circular Letter No. 27 and a later supplement to clarify the intent of the sole proprietor legislation and to provide additional guidance for the implementation of its provisions (see, Attachment). We will continue to monitor the implementation of the sole proprietor legislation and will take action against any licensee found to be violating the intent or spirit of the law. As you are well aware, the Department has the authority to impose financial penalties against licensees for violations of any statute or regulation. Further, the penalties are correlated to the severity and extent of these violations.

The sole proprietor legislation has had a positive impact on the availability and affordability of health insurance coverage for New York’s smallest businesses, particularly in upstate New York. The legislation clearly provides that if a health insurer offers coverage to small businesses through an association or Chamber group, it must also provide the same coverage to sole proprietors who purchase coverage through the association or Chamber group. We have found that the Chambers of Commerce in the upstate area have been proactive in securing health insurance coverage for their members, taking advantage of the legislation requiring insurers to offer coverage to sole proprietors who are members of that Chamber. I have called upon the downstate Chambers to work with area health insurers and avail themselves of the benefits of this legislation. In fact, I have met with the Presidents of the Brooklyn and Manhattan Chambers to promote the opportunities created by this legislation to encourage partnerships between the Chambers and health insurers.

IV. Conclusion

While New State York State has been innovative in creating solutions for the uninsured, and making insurance more affordable and accessible for New York’s small businesses and sole proprietors, the simple fact remains that more than one quarter of workers in New York City are uninsured. Of New York State’s uninsured population, more than 40% are eligible for some type of government-sponsored program. It is therefore our collective responsibility to make sure that those individuals who are eligible for these public programs are enrolled in them. Furthermore, it is up to each and every one of us, including the Chambers of Commerce, communities groups and the HIA, to make certain that we work together toward the common goal of making health care coverage both affordable and available to the uninsured in NYC and, indeed, throughout the State. I am pleased with the progress that we have made so far, but more still needs to be done.

Therefore, I stand ready to work with the New York City Council and Mayor Bloomberg so that all New Yorkers in the metropolitan area have access to affordable and comprehensive health insurance coverage.

Thank you and I will be happy to take any questions.


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