POLICY/HEALTH PLANS: Wow, a loony libertarian unwittingly tells the truth on benefit mandates

In the mass of verbiage about the Schwarzenegger plan, you can find the odd interesting nugget. David Henderson from Hoover—writing in that bastion of reasoned clarity, the editorial section of the WSJ—admits that the impact of state mandated benefits on the costs of insurance aren’t that great.

It is important, though, not to overstate its benefits. The gain to Californians from abolishing these mandates would not be huge. CAHI compiled data from America’s Health Insurance plan (SIC—I assume he means AHIP the health plans trade group) and eHealthInsurance for the individual market and from the federal government for the small-group market and found that in 2003, although California had more mandated coverages than all but six other states, it had among the lowest insurance rates for individual health insurance policies ($1,885 versus a top rate of $6,048 for New Jersey.)

OK, so in the rest of his article he’s slagging off Arnie-care but in that part he gets it at least factually correct. That is in contrast to plenty of others who should know better, including Larry Glasscock the CEO of Wellpoint. Here’s what he said about the matter in an interview I’ve already derided:

John, while the Massachusetts plan represents a step forward in trying to find solutions for the uninsured, I have several concerns about its individual mandate. Under the new law, individuals are only required to obtain coverage if it is "affordable" for them. But the Massachusetts law, as I understand it, preserved all of the commonwealth’s existing benefit mandates, so it is difficult to see how health insurance coverage under the new program will be any more affordable once the mandate to purchase coverage becomes effective than it is today.

It’s obvious that the relatively few, though much attacked, state-mandated benefits—such as wigs for chemotherapy patients—only add a small proportion to the overall cost of health care. And because of the bizarre, but set in stone, ERISA law which prevents all state regulation of benefits for self-insured corporations, state-level mandates only apply to small businesses and individual fully-insured plans. Yet they are cited time after time as being the draconian regulations that if only small businesses and individuals could get out from underneath of, well then a Federally-regulated “association health plan” (or whatever they’re being called these days) could provide insurance plans at a rate so cheap that everyone could buy one. And the of course uninsurance would disappear.

Henderson, though, uncovers the uncomfortable “fact” that despite all those state mandates, Californian insurance rates are incredibly cheap compared to other states—or at least are in the survey he discovered (again one much derided on THCB). Of course it is state regulations that make insurance expensive in New Jersey and Massachusetts and cheap, for some people, in California. But that’s got nothing to do with benefit mandates about types of care that are covered—it’s because of the way the structure of insurance is regulated. In those expensive states community rating, guaranteed issue and the like is mandated. That cheap California coverage is only for healthy people in high deductible plans. So the argument that getting rid of state mandates for particular types of benefits would enable small businesses and individuals to buy low cost insurance is rubbish. It’s getting rid of community rating that would do it, and then of course only for the healthy people who would be attractive to purveyors of underwritten insurance.

And of course if you go down Henderson’s line you’d abolish community rating, and put everyone in the individual market with voluntary grouping—which would emerge around health status. Take that to its logical extension (which I’m afraid both the loony and the sensible libertarians are loathe to do) and you end up with a bunch of plans competing to insure the healthy people who don’t really need coverage, and a bunch of sick people who can’t get it at all. After all if the “pool” is made up of people paying $1,885 a year, and average expenditure is over $6,000 a year, then by definition that pool is not going to be able to cover the people for whom costs are above the average. Which is of course the point.

So getting to universal “coverage” by getting everyone into a high-deductible plan will leave someone else (the taxpayer, the provider or the patient) picking up the tab. Which is why Schwarzenegger and Romney’s non-explicit reliance on them is doomed to failure.

And it’s incredibly ironic that those on the libertarian right, who don’t believe in compulsory universal insurance of any kind, don’t seem to have noticed one tiny little thing. The states which allow underwriting, like Texas and California, have much higher rates of uninsurance than those like Massachusetts and New Jersey that ban it. So how extending the ability of insurers to sell underwritten insurance products in those states is supposed to reduce uninsurance overall, I’m just not sure.

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14 replies »

  1. Everyone why doesn’t the employer give a tax free allowance to buy HDHP and set up a benefit plan on his/her own and pick up the deductible until the insurance carrier pays the rest? The savings alone offsets the risk to the employer and the employer only pays for reality on the first 5k or 10k of claims. Still gets the network discount and peace of mind knowing all of the employees are covered. By the way this is what we do and every employer in America can to because there is a 50 plus tax law that allows you to do what I mentioned tax free.

  2. JD/John-
    I agree. Health care and health insurance are different animals. Though each can increase the cost of the other — greater utilization can increase insurance premiums, and more extensive coverage (whether mandated or otherwise) can increase utilization — it’s important to look at them separately whenever possible. I’m presently trying to get going a research project that would try to untagle the effects of variation in treatment intensity and variation in insurance regulations on the price of health insurance.

  3. “NOT just because people in Minnesota tend to be healthier than other states, but because even when they do get sick, the medical system delivers care in a more economical and sensible manner than other states.”
    jd, I think you have this exactly right.
    “Mandates” are about insurance, not health care. The cost of insurance is a symptom of the problem we have but this symptom arises from a deeper problem – the cost of health care. Health insurance is expensive because health care is expensive. If the cost of health care were not rising, the cost of health insurance would not be rising.
    Trying to fix the health care cost problem by fiddling around with insurance may result in some relief for the symptom, but cannot succeed in curing the disease. We would not trust a physician who fiddled with symptoms and failed to diagnose or treat the disease. Americans should not accept such similarly careless analysis and recommendations from health care thought-leaders.

  4. Michael,
    Your reference to California and Minnesota as high-mandate states is a perfect example of why mandates are not a major part of the problem for affordable health insurance (or, more generally, affordable and fair healthcare).
    Minnesota has one of the lowest per capita healthcare costs in the nation. This is NOT just because people in Minnesota tend to be healthier than other states, but because even when they do get sick, the medical system delivers care in a more economical and sensible manner than other states. In short, there isn’t as much screwing around by the provider community. I have my theories on why this is the case, but the facts speak for themselves.
    But as I think we all know around here by now, being efficient and effective doesn’t pay in American healthcare. That is a far bigger part of the problem than state mandates.

  5. “So getting to universal “coverage” by getting everyone into a high-deductible plan will leave someone else (the taxpayer, the provider or the patient) picking up the tab. Which is why Schwarzenegger and Romney’s non-explicit reliance on them is doomed to failure.”
    A high deductible is simply a high deductible, nothing more. It means more money out of your pocket, before the deep pockets kick in.
    Most taxpayers CAN afford a little more money if the deductible is higher. Hardly … “doomed” … geez!

  6. Matthew, you are undoubtedly correct that no one will notice the cost of a wig mandate. Or a hearing-aid mandate. But what about 49 mandates (CA)? Or 62 (MN)? It’s difficult to get a handle on the added cost, but it’s probably less negligible than Henderson suggests. One reason that proposals to let people buy health insurance licensed in other states are appealing is that some state might strip out all the mandates and rating restrictions. Then (clutch my pearls!) consumers would only have to buy what they want to buy, and we’d really get a handle on the cost of mandates.
    You’ve been kind enough to put me in the “sensible libertarian” category in the past, so on behalf of all of us: yes, abolish mandates, abolish community rating, and let people group and pool voluntarily. Per Pauly and Herring, you might be surprised how much pooling you get. But if you’re still unsatisfied, this Guide to Subsidies can help:
    Voluntary subsidies via insurance: good.
    Involuntary subsidies via insurance: bad.
    Involuntary subsidies via cash: less bad.
    Re Vegas: Penn & Teller?

  7. It is morally and ethically wrong, in my opinion, to deny care to the sick.
    All this talk, posturing, metaphors, it does nothing for the sick. Actually I take that back; it cruelly prolongs the very real suffering just because healthy rich people don’t think they will ever actually end up dependent on one of these “policies” controlling every aspect of their lives.
    How many people suffer every day because they can not get the medical help they need? How many people die every day because their policy didn’t “cover”? How many people die because they run out of money?
    Those who can’t afford it must become absolutely destitute, and give up any right or hope of ever getting their lives back. Congratulations you survived. It makes everybody’s insurance cheaper, though, so there’s little chance it will ever change.
    My health insurance is 62% of my income. And that’s before any labs, doctors, co-pays, x-rays. Dental? Had my teeth taken out. Visual? Hope my eyes don’t get infected plan – don’t drop my glasses. “This is not a separately reimbursable service or supply.” That’s the real world. I once had it all – and I thought it would take care of me; oh they promised they would. All that can change in a instant. Unfortunately your policy is a bitch, and then you die. Fare thee well.

  8. Eric, the myth of larger groups getting better rates is just that. GM has thousands of employees. Have you seen what their rates look like? Not pretty.
    Association plans? Same thing. You get a what… 3% discount that you never really see anyway? You just feel better because they told you you are getting a discount.
    If everyone woule wake up and realize that the benefits they want and the insurance they buy are two different things. The vast majority of people in this country have no idea what their employers are actually paying for covering them with health insurance. All they know is they pay $20 to go to the doctor, and pay $15 to geta generic drug filled at the pharmacy. They can have those benefits, but the employer shouldn’t buy them from the insurance carrier. Those $20 office visits and $50 ER visits are not discounts. They are prepaid claims.
    Barry’s last comment above is what people should think of as health insurance. Everyone is so hung up on copays for everything under the sun. The carriers make more money on administering that first $5,000 in claims than they do on the remaining $5,000,000. Why? Like was mentioned, about 4% of the population account fo half of the expense. We are mostly healthy as an entire population. But between the pharmaceutical companies advertising and telling you to “ask you doctor” for a pill for anything that seems unusual, and the marketing done by the carriers that scares them into thinking everyone needs a low deductible, the general population is under the impression that health insurance is so expensive for all sorts of various things like research, all the sick people, etc. They have everyone so brainwashed it’s sad, it’s pathetic.
    The carriers already HAVE catastrophic plans. You get a stop loss you can live with, and you get the network discounts. These are the ONLY two things you should want when shopping for insurance. That’s it. Anything else is a ripoff. Think of it like gambling, which is all insurance really is… legalized gambling.
    When you step up to the $5 blackjack table, you bet $5. You may get it back, you may not. But you had a chance of winning $5 or losing it, by betting the same amount. By buying copays from the carrier, you are paying $7 for the $5 table. Even if you win, you lose.

  9. Matthew,
    I think Governor Romney’s implicit assumption regarding the better paying employers and the public sector continuing to provide comparatively generous health benefits is probably reasonable. He assumes Medicare and Medicaid stay as is. The state and local public sector will likely continue to provide generous health coverage. Large private employers, including universities, medical centers, etc. are assumed to view decent health insurance as a necessary part of the compensation package to attract good quality employees. Employees, for their part, due to the favorable tax treatment given to employer provided health benefits, prefer to take more of their compensation in the form of health insurance than they probably would if the tax preference did not exist.
    With respect to how much money would be needed in the pool to cover the sickest people, I again say that we would have a better understanding of this if insurance pricing were unbundled into a catastrophic coverage piece (100% coverage above $5K per person of charges) and an insulation or pre-paid healthcare piece (up to $5K of charges per person, with or without a modest co-pay).
    Interestingly, the Congressional Budget Office did a study published in 2005, I believe, that looked at spending of the most expensive Medicare beneficiaries. For the five year period that it examined, they found that in a typical year, the 5% most expensive beneficiaries accounted for 41% of Medicare costs. However, over the full five year period, the 5% most expensive accounted for only 27% of cumulative five year spending. This is because some beneficiaries died along the way while others had one incident (like a heart attack) and then recovered. Comparatively few people have very high costs every year.
    If Governor Romney were able to eliminate the costly mandates and offer a CDHP for $200 per month, the net effect would most likely be that a lot of previously uninsured people would now have coverage, at least for catastrophic costs, which is what drives most of the uncompensated care at hospitals.

  10. I think what Mr. Holt is saying is that he knows that immigrants in Texas and California are probably the biggest factor in the higher numbers of uninsured there – not the evil insurance companies – but, he wishes that I wouldn’t point that out because it undermines his little tirade about “looney” libertarians.

  11. Eric. I’m not denying that mandates and other waste clearly increase the cost of care and therefore insurance. And it’s also true that the distribution channel and scale effects of selling to smaller business also increases the cost.
    But it’s clear that the overall point is that true average community rating can’t be done if the whole system went to $200 a month HDHPs. The math just doesn’t work. Romney et al assume that if they introduce non-underwritten HDHP community rated plans that the remainder of the private (e.g. higher paying employers)and public insurance market will stay as they are. If they all went to that low cost HDHP model too, then there wouldn’t be enough money in the pool to cover everyone in it due to the 80/20 or 10/50 rule that’s been much discussed over here.
    Meanwhile, I’m no longer replying to Mr. Browning directly as discussed earlier, but given the number of peer reviewed studies and variety of opinions both for and against my political positions posted on this site, I’m eagerly awaiting anything more than carefully selected anecdote appearing on his.

  12. Mr. Holt is strongly implying that high rates of uninsurance in Texas and California are due to the freedom that insurance companies have there to underwrite policies.
    Where’s the peer-reviewed study for this Mr. Holt?
    Don’t you think there might be other reasons?

  13. Matthew,
    Governor Romney, in discussing the Massachusetts plan at a conference last year, claimed that eliminating excessive mandates (such as in vitro fertilization, drug and alcohol rehab, etc.) could have made it possible to provide an “affordable” health insurance policy in Massachusetts for $200 per month with community rating as opposed to $350 per month (for single coverage) with the mandates. He was not able to convince his overwhelmingly Democratic state legislature to do so, however. The very high per capita healthcare costs ($6K or so) reflect well above average aggregate payments on behalf of Medicare patients and Medicaid patients receiving long term care. To properly analyze the issue of mandated benefit costs, one needs to look at mandates vs no mandates in a particular state or look at two states with comparable underwriting approaches (community rating or underwriting) but significant differences in mandated benefits.
    As for the lower percentage of uninsured in NJ and MA than in TX and CA, you might want to look at the differences in the percentage of the state workforces that are employed in low wage industries like retail, restaurants and hotels as well as the number of illegal immigrants.

  14. Matthew- no time to belabor this today… but the advantage of association health plans or small business health plans is this— companies with more than 1000 employees on avergae have insurance rates 18% lower than small businesses.
    The impact on mandates is only important to the organizations who desperately fought the measure in Congress last year… chiropractic orgs, and other disease-specific lobbying groups…