Baltimore: Health Insurance Market Primed for National Health Reform

With a track record of assertive state regulation of health care and Medicaid coverage expansions, the Baltimore metropolitan area appeared positioned for a relatively smooth transition to national health reform compared to many other markets nationwide, according to a Center for Studying Health System Change (HSC) study of the region's commercial and Medicaid insurance markets. Maryland's path to implementing health reform was somewhat easier because the state had previously adopted requirements closely paralleling the Patient Protection and Affordable Care Act of 2010 (ACA), including reforms in the small-group insurance market and Medicaid expansions for low-income adults without children. After the ACA's passage, Governor Martin O'Malley and the Legislature moved to embrace additional reform goals, among them establishing a state-run health insurance exchange.

Several key factors stood to shape how national health reform would unfold in the Baltimore area. Maryland's decades-old hospital rate-setting system regulated payment rates for Medicare, Medicaid, and private payers, producing slower-than-average hospital spending growth historically -- though Baltimore-area hospital systems were still acquiring independent hospitals and hiring physicians to build patient volume and revenue. On the employer side, while commercial coverage was generally comprehensive, there was limited innovation in insurance product design; employers had mainly responded to rising costs by increasing employee cost sharing and adopting high-deductible health plans. CareFirst BlueCross BlueShield dominated the commercial market, holding nearly 45 percent overall and 60 to 75 percent of the small-group and individual segments, with the rest divided among UnitedHealth Group, Aetna, CIGNA, and Kaiser Permanente.

Market Background

Home to more than 2.7 million people, the Baltimore-Towson metropolitan statistical area covered six counties in central and eastern Maryland -- Baltimore, Anne Arundel, Carroll, Harford, Howard, and Queen Anne's -- plus the city of Baltimore. The region's population had grown more slowly than the metropolitan average, with the city of Baltimore's declining population a major contributing factor.

The metropolitan area stretched across wide socioeconomic extremes, from Howard County -- one of the wealthiest counties in the nation -- to the city of Baltimore, which experienced high poverty and poor health outcomes. Historically a port city and transportation center with major manufacturers, Baltimore had seen many Fortune 500 companies depart because of declining industries, heavy regulation, high taxes, and strong union presence. By the time of the study, the area's largest employers included government entities at all levels, government contractors, public school systems, Johns Hopkins University and its health system, and other hospital systems. The region also housed Maryland's capital, Annapolis, and the federal Social Security Administration headquarters, with parts of the area within commuting distance of Washington, D.C.

A substantial public-employer presence had helped anchor the labor market and related health coverage. The region maintained lower rates of poverty, unemployment, and uninsurance -- along with a higher share of residents carrying private coverage -- than metropolitan areas on average. The recession nonetheless took a toll: unemployment climbed from 3.6 percent in 2007 to 7.5 percent in 2011 (compared with 9 percent nationally), and the share of private firms offering coverage slipped from about 63 percent to 57 percent between 2010 and 2011. Overall private insurance coverage edged down from approximately 65 percent in 2009 to 63 percent by 2011.

State Embraces Reform

Shortly after the ACA's enactment in 2010, Maryland's Democratic leadership threw its support behind the law and began implementation planning. The Legislature passed the Maryland Health Benefit Exchange Act of 2011, authorizing the state to operate its own exchange -- the Maryland Health Connection. The state sought broad stakeholder input on exchange design, and even respondents deeply critical of the ACA acknowledged that the state had acted reasonably in building the new insurance marketplace.

Even before national reform, Maryland had pursued commercial insurance regulation, Medicaid expansion, and hospital spending oversight through its all-payer rate-setting system. Since the early 1990s, the state had heavily regulated the small-group market (2-50 employees) with modified community rating rules allowing rate variation by geography and age but not health status. Small-group plans also had to meet minimum benefit standards and cost-sharing limits under the Comprehensive Standard Health Benefits Plan (CSHBP). The individual market, by contrast, had relatively few consumer protections -- no guaranteed issue, no rate restrictions, and no subsidies beyond 45 mandated services.

In 2003, Maryland created a high-risk pool -- the Maryland Health Insurance Plan (MHIP) -- for people denied coverage due to health status, with premiums capped at 150 percent of average rates and state subsidies for excess costs and low-income enrollees. The ACA required all states to offer a temporary high-risk pool through 2014, and Maryland grafted the new federal program onto its existing MHIP.

On the Medicaid front, enrollment in the Baltimore market had increased sharply as the state expanded eligibility to 116 percent of the federal poverty level for all adult citizens and legal immigrants. Parents and caretakers received full Medicaid benefits, while childless adults received a pared-down package through the Primary Adult Care (PAC) program. Between December 2007 and 2009, Maryland Medicaid enrollment surged by a third -- from about 537,000 to 715,000 -- compared to 14 percent nationally. With full federal funding for the first three years, Maryland planned to push Medicaid eligibility to 138 percent of poverty (roughly $14,850 for a single person) in 2014.

Hospital Rate Setting in Maryland

In 1971, Maryland established the Health Services Cost Review Commission (HSCRC) to set prices for all payers for inpatient and outpatient hospital services. Payment rates were calculated annually using a formula accounting for each hospital's patient population -- including uncompensated care burdens -- with modifications based on efficiency and quality scores. All payers, including Medicare, Medicaid, and private insurers, paid similar rates. When Medicare adopted its inpatient prospective payment system in 1983, Maryland received a waiver allowing continued rate setting for Medicare patients, on the condition that per-admission cost growth stay below the national average. By 2012, however, Maryland's growth rate had risen to approximate the national average, and in March 2013, the HSCRC submitted a revised waiver proposal to CMS that would cap hospital cost increases at the rate of state economic growth while shifting incentives toward reducing readmissions and improving care coordination.

Employer Coverage and High-Deductible Health Plans

Both public and private employers in the Baltimore area offered relatively comprehensive health benefits. While large-firm coverage offer rates matched the national average, small-firm offer rates exceeded it. The average employee premium contribution in Maryland -- 23 percent of the total premium for single coverage in 2010 -- was close to the national norm. PPO products were popular among large employers, while HMOs attracted more small employers drawn to their lower costs, even with somewhat narrower networks and referral requirements for specialists.

Like employers across the country, those in Baltimore had been raising employee premium contributions and point-of-service cost sharing through higher deductibles, coinsurance, and copayments. Both employers and individuals were increasingly choosing high-deductible health plans (HDHPs) with lower premiums. HDHPs on PPO or HMO platforms were growing across all employer sizes and in the individual market. Less than 20 percent of large-group enrollees were in HDHPs, while roughly a third of small employers offered only an HDHP. A 2011 state report found nearly half of small-group enrollees statewide were in an HDHP. Most HDHPs were linked to tax-advantaged accounts -- health savings accounts (HSAs) or health reimbursement accounts (HRAs).

Employers faced particular difficulty implementing limited-provider network products. Contributing factors included employees' established preference for broad provider choice, the rate-setting system's prevention of hospitals offering volume-based discounts, and state requirements for approval to tier physicians by performance.

Commercial Market Dynamics

The Baltimore commercial insurance market had consolidated considerably over 25 years, with national carriers entering primarily through acquisitions of local plans. Major transactions included Aetna's purchase of NYLCare, United's acquisition of MAMSI (2004), CIGNA's purchase of Great West (around 2010), and Aetna's pending purchase of Coventry. CareFirst was the clear dominant player, while United concentrated on large and small groups, CIGNA on the large-group segment, and Kaiser and Aetna competed in the individual market alongside CareFirst.

Carriers differentiated themselves through administrative features and product design. United emphasized sophisticated IT, wellness programs with member incentives, and its Premium Designation Program ranking physicians by cost and quality. Kaiser promoted its integrated delivery system. CareFirst marketed its Healthy Blue product rewarding healthy behaviors and launched a patient-centered medical home (PCMH) initiative. An estimated 80 to 95 percent of primary care physicians in CareFirst's network participated in the PCMH program, which paid increased fee-for-service rates plus bonuses for meeting cost and quality goals.

Medicaid Managed Care Competition

With managed care mandatory for all Medicaid enrollees except those dually eligible for Medicare, about 75 percent of Maryland's Medicaid population participated in HealthChoice, the state's managed care program. Seven health plans served Baltimore-area Medicaid enrollees, with no single plan dominant. Amerigroup (later part of WellPoint) and Priority Partners (owned by Johns Hopkins and community health centers) each held roughly 25 percent market share, followed by United at about 18 percent. Coventry, MedStar Family Choice, Maryland Physicians Care, and Jai Medical Systems rounded out the field.

Plans competed primarily by offering supplemental services -- particularly dental care, which the state no longer covered for adults. The state issued annual quality report cards to help enrollees select plans and to assign unselected enrollees. After the Medicaid expansion, some plans faced significant per-member cost increases as new enrollees used more services than expected. One plan saw organ transplants jump from one to five in the first year. Over time, however, most new enrollees proved similar in health status to existing populations, and utilization and finances largely stabilized.

Reform Preparations and Exchange Uncertainties

Maryland's exchange would follow a clearinghouse model, permitting any insurer meeting minimum federal requirements to offer products. The state required all but the smallest nongroup and small-group insurers to participate. Funding would come from an existing 2 percent tax on health insurers. While individual exchange enrollment was set to begin October 1, 2013, the state delayed small-group enrollment until January 2014.

Health plan executives faced considerable anxiety over setting premiums for exchange products. Reform introduced multiple sources of uncertainty beyond typical provider cost trends: how sick the newly insured would be, how much pent-up demand would drive utilization, how expanded benefit requirements would affect costs, and how risk adjustment would redistribute funds among carriers. Executives described premium setting as a no-win proposition -- premiums set too high would trigger medical loss ratio rebates, while premiums set too low would produce losses that the state's annual rate review might prevent them from recovering. Large premium increases were expected in the nongroup market, particularly for young, healthy individuals, as the market transitioned from minimal regulation to essential health benefits requirements and modified community rating.

The exchange also posed potential threats to CareFirst's market dominance. Because exchange products would be standardized by actuarial value and easier to compare on price, CareFirst's brand recognition might carry less weight. If sicker enrollees gravitated to CareFirst, the insurer could face significant cost increases. A new nonprofit co-op plan, Evergreen Health Cooperative, planned to enter the market with a PCMH-based product projected to carry premiums 20 to 30 percent below major commercial carriers.

Meanwhile, the traditional divide between commercial and Medicaid insurers was expected to narrow under reform. While no Medicaid-only plans would participate in the exchange initially, both plan types might eventually compete in the same marketplace. Medicaid plans had potential advantages -- experience with lower-income populations and cost control under fixed rates -- but executives expressed concern about financial risks from pent-up demand and the challenge of serving a new commercial population.

Insurance brokers in the Baltimore area faced an uncertain future. The ACA's minimum loss ratio requirements counted broker commissions toward administrative expenses, squeezing their business model. Some diversified into other insurance lines. However, Maryland was not barring brokers from selling exchange plans, and many argued that the ACA's complexities actually heightened the need for broker expertise, especially among small employers lacking human resources departments.

Issues to Track

As reform unfolded, several ongoing questions would shape the Baltimore market: How would the hospital rate-setting system evolve under a revised federal waiver, and would it push providers and plans toward ACO and bundled payment arrangements? Would limited-network products and high-deductible plans gain further traction? What impact would patient-centered medical homes have on care delivery? To what extent would pent-up demand materialize among the newly covered, and would provider capacity prove sufficient? How would premiums shift in the small-group and individual markets? Would more small employers self-insure to avoid new regulations? How would the roles of insurance brokers change? And to what extent would Medicaid plans participate in the exchange?

Sources and Further Reading

Robert Wood Johnson Foundation, County Health Rankings & Roadmaps.

Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey-Insurance Component, Table IX.A.1 (2011).

Sommers, Anna S., Chapin White, and Paul B. Ginsburg. "Addressing Hospital Pricing Leverage through Regulation: State Rate Setting." Policy Analysis No. 9. National Institute for Health Care Reform, Washington, D.C. (May 2012).

Maryland Department of Health and Mental Hygiene. "Maryland's Model Design Proposal to the Center for Medicare and Medicaid Innovation." Baltimore, Md. (March 26, 2013).

Kaiser Commission on Medicaid and the Uninsured. "Medicaid Enrollment: December 2009 Data Snapshot." Washington, D.C. (September 2010).

HSC study of commercial and Medicaid health insurance markets in eight U.S. metropolitan areas as part of the Robert Wood Johnson Foundation's State Health Reform Assistance Network initiative. Based on 19 interviews conducted in Baltimore between September 2012 and January 2013.