Dear Mr. Joyce:

I am writing to share my thoughts about Caroliance with you as a follow-up to my brief presentation to the board last month. I have already shared this analysis with the Eastern Region and thought it might be of interest to all program executives.

Let me first note that several regional representatives I spoke with at the meeting about the problems facing Caroliance also articulated various aspects of these observations. The premiums in the alliance are higher than outside, and agent commissions are lower, which, when combined with the guarantee issue requirement in the alliance has produced very small groups of predictably higher risk. Needless to say, the carriers are wary of your market and withdrawing or pricing their product ever higher. Caroliance has become a dumping ground, and even renewals and non-guarantee issue business will likely non-renew once they determine that Caroliance is not competitive.

Given that alliance administrative fees are $50 per group, the statewide program will require a 500% rate of growth this year merely to cover Caroliance's roughly $1.5 million in annual expenses ($50 x 600 groups = $30,000; assumes each region's cost at $250,000/year). At this point, unless the program receives indefinite and substantial taxpayer support, Caroliance will only survive with legislative reform.

I duly noted the State Board leadership's apparent obliviousness to these profound problems. Most of the lengthy discussion at the meeting was positive and focused on monthly growth figures of ten and twelve percent in the last two months, with no acknowledgement of the critical foundational problems.

As I mentioned in the meeting, Kennedy-Kassenbaum is not likely to resolve the problems facing Caroliance because it does not impose rating restrictions and will not resolve Caroliance's residual adverse selection problems of the last year. Although the guarantee issue requirement for the entire small group market will alleviate a significant aspect of the selection problem (while also taking away a selling advantage of Caroliance), unless parity is established in commission rates, flexibility of product offerings, ability to negotiate with carriers, and perhaps some form of pooling of experience in and out of the alliance, among other reforms, the program is unlikely to reach self-sufficiency or even sustainability.

The Board's consultant mentioned reinsurance as an option they are considering which may make sense, but is in effect an expensive way of subsidizing small employers' insurance, and is not enough alone to address the structural problems.

I hope this brief summary memo is of assistance to you. As I mentioned, we would be happy to work with you on a limited basis in considering appropriate reforms. I look forward to talking with you again soon.