Explainer: NJ Healthcare Deregulation’s Impact Felt More Than 20 Years Later

1992 law’s effect on premiums inspired ACA insurance-coverage mandate intended to rein in prices

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What it is: Healthcare deregulation was a major New Jersey policy initiative of the early 1990s, and the comprehensive set of reforms enacted in late 1992 has had a long-lasting effect on both hospitals and health insurance.

How it affected hospitals: The state’s 1992 Health Care Reform Act eliminated a system in which the state set payment rates based on hospital costs and prevented cost competition, replacing it with one in which price competition was encouraged.

Until the reforms were enacted, patients with private insurance paid a 19.1-percent surcharge to subsidize the care of patients without insurance. That ended when a federal judge said the surcharge couldn’t be imposed on self-insured groups. After deregulation, the state established two funds, the Charity Care Fund and the Hospital Relief Subsidy Fund, to offset the lost revenue for hospitals that treat the most uninsured patients.

How it affected insurance: By ending statewide rate-setting and encouraging market-based competition, the reforms contributed to an increase in managed care in the state, according to Wardell Sanders, president of New Jersey Association of Health Plans and an attorney in the governor’s counsel’s office when the reforms were enacted. While managed care helped keep healthcare price increases low for several years in the 1990s, the effect faded over time.

How it affected small-group and individual insurance: The changes guaranteed that insurers would issue insurance plans to individuals or small groups, regardless of whether applicants had pre-existing conditions. This led to increased participation in the individual and small-group markets in the 1990s. However, the individual market soon began to falter, helping to lay the groundwork for a key provision of the 2010 Affordable Care Act.

Why it mattered to the ACA: In the 1990s, when New Jersey required insurers to issue health coverage to people with pre-existing conditions, , more people with health problems bought insurance. This pushed insurance premiums higher for those in the individual market, causing healthier people to drop coverage. This created a “death spiral,” in which only the sickest people were willing to pay the increasing premiums.

The people who drafted the ACA learned from New Jersey’s example and included an individual mandate that everyone must buy health insurance or pay a penalty. This is intended to result in both healthy and sick people paying into the insurance, leading to lower average premiums. When the U.S. Supreme Court heard a key court case challenging the law, U.S. Solicitor General Donald Verrilli cited the example of New Jersey as a reason why the individual mandate was necessary.

Why hospitals still care about deregulation: The early 1990s reforms laid the groundwork for the annual struggle between safety-net hospitals and hospitals with the lowest portion of uninsured and Medicaid patients over how much government subsidies they should receive.

Suzanne Ianni, president and CEO of safety-net group the Hospital Alliance of New Jersey, argues that later changes to charity care have undermined funding for safety-net hospitals.

Ianni said the “market works” for hospitals that don’t treat as many uninsured and Medicaid patients. She said charity care funding was originally intended to help those hospitals that serve the poorest people. But hospitals outside of urban areas argue that no one group of hospitals should be singled out for subsidies when all hospitals treat uninsured and Medicaid patients.

How policy experts assessed the results: For several years after the 1992 law was passed, Harvard University School of Public Health researchers studied its impact. They reported that the reforms were a financial windfall for most hospitals, although some inner-city hospitals did worse, or at least not as well as rural or suburban hospitals.