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POLICY: Can You Really Mandate People To Buy Health Insurance? by Robert Laszewski

RobertlaszewskiThis evening THCB welcomes our newest contributor.  Robert Laszweski has been a fixture in Washington health policy circles for the better part of three decades. He currently serves as the president of Health Policy and Strategy Associates of Alexandria, Virginia. Before forming HPSA in 1992, Robert served as the COO, Group Markets, for the Liberty Mutual Insurance Company. You can read more of his thoughtful analysis of healthcare industry trends at The Health Policy and Marketplace Blog. Can you really mandate people to buy health insurance? That’s not so much a policy question as a practical question and it is what Hillary Clinton seems to be saying
is the big difference between her health care reform plan  and the health reform plan of Barack Obama. That’s why a news story this week out of Massachusetts caught my eye.

It seems that the Mass Department of Revenue is in the process of drafting new regulations to up the penalty for people who do not buy health insurance. If they are approved, the maximum penalty for those who do not buy health insurance would jump from $219 per year to a maximum of $912 in 2008. The penalty is estimated to be half the per person cost of the lowest priced health plan available.

Penalties would vary by age and the time a person was without health insurance.
A 26 year-old would have a penalty of $672 per year and those over 26
would pay $912. So, a family of two adults over 26 would pay about
$1,800 in penalties if they didn’t buy health insurance (a reader has correctly pointed out children are not covered by the mandate).

The state health plan administrator- The Connector–has
said that about 290,000 of the states 400,000, that were believed to be
uninsured when the program was launched, have purchased coverage. But
most of these people are those that get either all or most of their premiums paid by the state.
Among those who get no subsidy, relatively few have chosen to buy
insurance likely because they cannot afford the thousands of dollars in
premiums for the minimum policy with a $2,000 deductible.

At a practical level, we are talking about middle class families
being required to buy a health insurance policy costing $6,000 to
$9,000 a year (with a $2,000 deductible) or having to pay a $1,800+
penalty.

The Connector has already exempted thousands of residents from the mandate because there was no way they could buy the coverage.

It is notable that the senior Medicare Part D drug benefit is voluntary
but the vast majority of seniors have purchased it. Why? Because the
government pays 75% of the costs and it is affordable. The Part D experience shows that if insurance coverage is affordable people will buy it.

The Massachusetts experience tells us if it is not affordable,
people will not–or maybe more appropriately cannot–buy health
insurance.

It’s one thing to mandate health insurance coverage, but as we are
learning in Massachusetts, the real challenge is making it affordable.

On the issue of health insurance mandates, Barack Obama, and the Republican candidates, are right.

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13 replies »

  1. Mandating Health Insurance coverage
    I am amazed as I read the various comments the number of ancillary issues that are brought up. The costs of care on a per capita basis in foreign countries, the successes or failures encountered in foreign countries are interesting but not relevant to this question. Similarly, the data being out forth in support or opposition is also not valid or relevant. Remember the old saw, “Figures don’t lie, but liars figure”.
    Put aside those issues and look at the US, an entrepreneurial free enterprise capitalistic system and build from that. We already mandate healthcare coverage for the elderly (Medicare) and for many others (Medicaid). The arguments of healthcare as a right and a privilege really are a question of cost to the individual. State it correctly, healthcare is an individual right which the individual has the privilege to pay for. Again, another old saw, “There is no free lunch.”
    Can Healthcare Insurance be mandated. The answer is yes. Are there problems with how such a mandate would be administered and managed? Just a cursory look at the Medicare and Medicaid programs will provide an immediate answer. The system must be better than the current experience which speaks to failure as a result of it poor management and administration. A single payer system is not the answer in the US but a free enterprise competitive entrepreneurial model is. The fact that competitive insurers receiving a percentage of the Medicare premium dollar are able to run very successful and profitable products (many providing more coverage than basic Medicare) speak to the validity of a competitive marketplace.
    It is simply not an easy proposition and the current Federal and State laws, regulations and mandates respecting healthcare are diverse, sometimes even in opposition to appropriate quality care and so disjointed that we must start with a base. For purposes of this discussion I would propose that basic coverage encompass that which is currently provided to the members of Congress and the Senate of the US. Now define an appropriate rate or premium for that basic plan.
    We know that the current healthcare expenditure in the US exceeds two trillion dollars and that the US has an estimated population of 306 million residents. Assuming no change in costs it translates to annual cost of roughly $6,500 per individual. Eliminating fraud we could reduce this to roughly $5,500 annually. That translates to approximately $460.00 per month. Assuming an annual income of $25,000 that figure represents 20% of the average wage earner’s income before taxes. Herein lays the issues of a mandate and how to cover the expenses. That is for a different discussion.
    Decide yes or no on mandated healthcare for all residents then begin the process or implementation with an orderly approach defining what will be a basic coverage plan nationwide, followed by defined means of collecting that premium from all. At an absolute principle, maintain a competitive free market enterprise to deliver the product.

  2. The thing I worry about with mandated insurance is that the subsidy threshold might be set too low, particularly if the affordability index (income thresholds) were nationwide: this would benefit people in low cost-of-living states and penalize those in high cost-of-living states.
    Re the Obama-style plan in Massachusetts and other states driving out the “better insurers”: well, if all 50 states had the same plan, there would be anyplace for those insurers to escape to.
    I think what we really need, though this is an unpopular idea among the general public, is to do more cost-benefit analyses and restrict care to that which is cost effective, like they do in Europe and other markets that manage to provide universal coverage on half or 2/3 of what we spend per capita in the US. This will help shift our cost structure from end-stage care (which is the bulk of costs in the US system) to preventive care and health maintenance. Many interventions are innovative, but also expensive and arguably not cost-effective (based on QALY metrics) including PET scans, robotic surgery, chemotherapy and biologic therapies for metastatic cancer, etc.
    Oh, and we need to change the rules so that Medicare can negotiate drug prices with manufacturers, like they can do in nearly every other country. Generally, the insurance companies follow the Medicare reimbursement rates for drugs, so this would lower drug costs across the board.
    Oh, and we should also ban direct-to-consumer drug advertising, since drug companies spend hundreds of million of dollars on this per year PER PRODUCT, and the US is the only country aside from New Zealand (which has a socialized system) that allows it. This would also help reduce demand for unnecessary interventions.
    And…add regulations to limit excessive denial/questioning of claims that result in high administrative costs for medical practices, patients (time off work to deal with it) and the payers themselves.
    And yes, put limits on benefits from malpractice lawsuits – again, like they do in other countries with lower health costs. Malpractice insurance premiums for an OB/GYN can be $100K a year, which means the doc has to charge nearly twice as much as they would otherwise, just to pay the bills.

  3. Health insurance should be mandate. I do not see any other way.
    And Govt should help who can not afford to pay health insurance or hospital expenses.

  4. When it come to health insurance, the plan that would hurt our economy the least is Hillary Clinton’s plan. Everyone would have health insurance. WA, NJ, NY and a few other states who have already tried Obama’s proposed health insurance plan of not mandating coverage. These states have driven out of the better insurance companies. When anybody can get health insurance without having to go through medical underwriting, people won’t get coverage until they absolutely need it. Usually because of a serious illness. This causes health premiums to sky-rocket. That’s because insurance companies are only paying claims for unhealthy people. The plans in these states tend to not be that great either. If everyone has health benefits, the premiums would be less because healthly people would factor in on determining the premium.

  5. When it comes to health insurance, the plan that would hurt our economy the least is Hillary Clinton’s plan. Everyone would have health insurance. WA, NJ, NY and a few other states who have already tried Obama’s proposed health insurance plan of not mandating coverage. These states have driven out of the better insurance companies. When anybody can get health insurance without having to go through medical underwriting, people won’t get coverage until they absolutely need it. Usually because of a serious illness. This causes health premiums to sky-rocket. That’s because insurance companies are only paying claims for unhealthy people. The plans in these states tend to not be that great either. If everyone has health benefits, the premiums would be less because healthly people would factor in on determining the premium.

  6. “Do you want to get rid of both of these things?”
    jd, yes. I know this is a wild and crazy idea that I will not see in my lifetime, but if we really want to get costs under control and produce a fair(er) system then I think that’s what needs to be done. Taxes ARE premiums, subsidies ARE premiums, premiums are premiums, as long as these payments go to insurance carriers they’re all premiums. I don’t believe an insurance model is what will save us. Why do you believe that a solution to access and affordable medical costs is to use the same insurance model that helped get us in the situation we now face? Why do you think that doing the same thing will produce a different result? We still refuse to recognize that without cost containment we face the same outcome. I see these insurance solutions as nothing more than a political move by the industry to get rid of those pesky uninsured that keep coming up to help critics make the system look bad. It’s a move to politically isolate and negate critics of the present expensive system from having an argument for cost reform, but we will still have the same underlying problem of out-of-control costs. Mandates will go up, subsidies will go up, premiums will go up, at the same rate. And the same people will still get screwed by the system with either substandard coverage, or second tier treatment or an inability to pay medical costs and mandated premiums.
    Barry, under the present system it’s all a poor deal, whether you’re a young professional on wall street or just a one of the cleaning staff on wall street. The differerence is wall street professionals get their premiums paid for by the firms they work at so the pain of health costs is hidden from them. Maybe if this recession puts a few “young professionals” out of work they’ll realize what the health system is really like. If we continue to shield people from the true costs then we won’t solve anything. And Barry even if the insurance industry does not increase margins we still do not have a way to control costs. Let’s put costs front and center for everyone, not just those caught needing medical care with no sugar daddy paying the bills, and then see what type of system everyone wants. Transparent taxes are the mechanism that will not allow costs to be hidden or passed on to the next generation and will put us all in the same boat.

  7. Peter,
    If you want there to be only taxes, no premiums, to fund a UHC scheme, then what you want is something more radical than Medicare-for-all. Medicare has premiums, of course. It also has penalties for failure to subscribe as soon as you are eligible. Do you want to get rid of both of these things?

  8. Peter,
    I think the only part of your comment that I agree with is that a taxpayer funded system should include a highly visible and transparent dedicated tax. My favorite candidate for such a system would be a payroll tax, but the rate would have to probably be somewhere between 13% and 15% of salary and bonus income depending on whether we capped the wages to which the tax applies at the current limit for Social Security taxes ($102K in 2008) or if there is no cap like the Medicare tax. Of course, those whose income comes from interest, dividends, capital gains, rent, etc. would not pay any payroll taxes. So, to insure equity, we would have to integrate payroll and income taxes. For example, we might set the combined tax rate at a flat 30% of gross income from all sources after an allowance equal to federal poverty level (FPL) income which is currently a bit over $20K for a family of four. If the deduction were a flat $20K for a family, the tax liability at the $100K income level would be $24K (30% * ($100K – $20K)). However, for those who incur payroll taxes, those taxes would count toward the total tax liability. I would even count the employer’s share of FICA and new healthcare taxes (if applicable), but the employer’s share would also count as income. As a practical matter, most people who earn their income from wages would pay lots of payroll taxes but no income taxes whereas those who have only investment income would pay nothing in payroll taxes but 30% of income (after the FPL allowance) in income taxes.
    Under this approach, young professionals on Wall Street and elsewhere would pay huge incremental taxes relative to what they pay under the current system making it a poor deal for them. As for the elderly, I think it is important to note that every age cohort has one key expense item that looms large in its budget. For young people, it’s buying and furnishing a home or paying rent for an apartment or condo. For the middle age, it’s paying for college, big ticket life events like weddings, and saving for retirement. For the elderly, it’s healthcare. A reasonably healthy elderly couple can support a comfortable middle class lifestyle on far less income than a young family because the older couple probably owns their home free and clear, their children are fully grown and on in their own, and, if retired, they no longer have job related expenses like commuting, business clothes, lunches out, etc.
    Finally, with respect to insurers, they have gotten much more sophisticated in recent years in their ability to forecast their medical cost trend within about 50 basis points a year in advance. They will all tell you that they attempt to price their product to their medical cost trend. They are not trying to increase margins ad infinitum. Besides, about 35%-40% of the health insurance market is controlled by non-profits (mostly the Blues other than the 14 Wellpoint licensees), and their profit margins generally range between 1% and 3% of premium revenues. Their health insurance rates are generally no lower than those charged by the for profit companies because their administrative costs are somewhat higher. Regarding state benefit mandates, large companies that self-insure are exempt from these. They are governed by ERISA regulations instead.

  9. Hi,
    Sorry for my bad English.
    Also in Germany is a health insurance mandatory, it also anyone interested in whether the people can afford.
    The problems with pensions and health insurance is probably a problem for the whole western world.

  10. Here’s a mandate that works and is already in place – it’s the IRS. Why are we trying to solve healthcare affordability and access with a focus on keeping private insurers flush in their present business model? We are saying the young don’t have to buy insurance because their need is small, but we want their offsetting good health along with free ride (to the insurance industry) mandated premiums to keep money coming into the system. Then we also want to charge older people up to twice what we would charge younger people because they use the system more. Why don’t we just scrap this crap and recognize that if we fund healthcare based on income affordability and not health we’ll make it fair and simple for everyone. The young would presumably pay less anyway because their income would be less, middle income more and the wealthy even more. And when older people retire and if their income drops they would pay accordingly. Why would we want to make older people pay twice the rate to help put them in a financial positon of needing higher and higher subsidies? By using the income tax system it will make people aware of the enormous cost healthcare is inflicting on this country. If we hide the cost in subsidies where will the drive for reform come from? Certainly not the insurance industry that will demand higher and higher mandates and subsidies. The tax would have to be a separate line on the forms and not subject to all the tax breaks the rich have been able to lobby for themselves.

  11. jd,
    Excellent comments as usual.
    As many have commented in the past, insurers cannot be expected to offer health insurance on a guaranteed issue and community rated basis without a mandate that everyone have insurance. At the same time, health insurance is not affordable without subsidies up to incomes well into the middle class. Moreover, as you indicate, health insurance at uniform community rates is a poor deal for young, healthy people.
    Massachusetts allows insurers to charge older people up to twice as much as the young for health insurance. They call this modified community rating, and I think it makes sense. The other useful potential strategy, which Massachusetts does to a limited degree (for 19-26 year Olds), is to have a more lenient definition of minimum acceptable coverage for younger people. I think it would make sense to allow policies with an individual deductible up to $5,000 for the under 40 population, while a more comprehensive policy might be mandated for those over 40. Medicare’s approach of charging a penalty if one does not sign up for coverage within a specified time of initial eligibility with the surcharge growing as a function of how much time has elapsed between initial eligibility and when insurance is applied for is fair and reasonable, in my opinion. At the same time, financial penalties are not fair if subsidies are not sufficient to make coverage affordable.

  12. No disrespect, but I’m surprised how much this debate about mandates seems to be no longer about policy, but politics, even in policy circles.
    Here’s why I think that.
    First, Hillary Clinton is not proposing mandates without subsidies. No one is. Has she said anything to contradict the claim that people won’t buy insurance if they can’t afford it? It’s strange to think that she wouldn’t be aware of this.
    In order to have a fair and successful mandate policy we will have to provide subsidies for the working poor and much of the middle class (so long as we have the most expensive health care in the world). That doesn’t make Obama and the Republicans right any more than it makes Clinton right, because she accepts it.
    What we should be discussing is mandates WITH subsidies, not mandates OR subsidies.
    Your analogy with Medicare (which applies not just to Part D but Parts A and B, too) breaks down because the situation of a 65 year-old is very different from a 25 year-old. The 65 year-old likely has, or knows s/he will soon have, serious health problems that will only get worse with time. The 65 year-old knows that there will be no better deal than Medicare that they could wait for. In fact, as you know, Medicare has a “soft” mandate of its own in that if you don’t get it when you are first eligible you pay a penalty that very quickly gets very harsh, and you keep paying that penalty for the rest of your life. So naturally, almost everyone eligible is going to subscribe to Medicare!
    The 25 year-old, in contrast, is probably not sick or very conscious of the possibility of developing a costly chronic disease. The attitude of the Young Invincibles as we all know, is very different from the attitude of the Old Vulnerables. It seems clear to me that you will have to subsidize health insurance more heavily to get the Young Invincibles to participate than you would the Old Vulnerables. That is, you would have to subsidize them more if you start from the assumption that premiums should be community-rated without respect to age. If the actual average cost of a 25 year-old is $1,500 instead of $6,0000 (or whatever the numbers are), then part of the solution could be to allow for greater tiering on the basis of age.
    I take the work of Kahneman and Tversky to show that a penalty will generally lead to more action than a subsidy of equal dollar value. So, if we really want to get all the YI’s into the system, we could either subsidize to 90% or more, or we could subsidize to perhaps more like 75% and offer a penalty for non-participation.
    Here is a parting question for everyone who thinks mandates are a bad idea: if the Feds were to offer Medicare-like penalties for anyone who doesn’t participate in health insurance, but didn’t call the penalties “mandates,” would you be happy? If you would, then why do you get so worked up about the financial penalties of mandate supporters?

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