Cost of insurance mandates

A few months ago, the MA Division of Health Care Finance and Policy (DHCFP) released a study that showed that mandated health insurance benefits cost insurance purchasers about $1.3 billion – or 12% of their premiums – each year. Thanks to DHCFP for publishing the study. This issue is always the source of heated debate, and it’s nice to have a piece included on it that tries to inform the discussion.

Business people read the study and said, “Ah ha! Mandates cost a lot of money!” That would be correct. Health care advocates read the study and said, “Ah ha! Mandates don’t cost that much money!” That’s correct too – sort of.  As usual, where you stand depends on where you sit, how much twelve percent is worth to you for what you’re getting, and who pays the bill.

It’s also hard to tell if this kind of reporting influences the policy debate in MA or not. People here are screaming about the rising cost of health care, and the legislature responded by focusing on and enacting a cost containment bill.  But at the same time, the legislature considered many new mandates during its last legislative session, including significantly expanding the mental health benefit mandate for kids and adults.  Many in the legislature would argue – correctly – that the final bills that passed didn’t expand the benefit as broadly as many advocates would have liked, thereby significantly limiting the increase in costs associated with the new coverage requirements. Again, I think this is mostly a philosophical argument about how much is enough – and one that on the margin is hard to calculate.

But starting in January of 2009, the price for mandated coverage goes from 12% of premiums for some people to more like 30% – when the state’s mandatory drug coverage requirement kicks in. That’s right. Starting in January, Massachusetts becomes the only state in the United States that requires every privately insured person to have comprehensive drug coverage, or pay a steep penalty as part of the state’s health reform law. The cost of this requirement will add between 15-20% to the cost of an existing non-drug coverage plan.

This mandate will affect hundreds of thousands of MA residents who currently have the health insurance coverage they want. One fellow being interviewed on Channel 5 News the other night said demanding that he buy drug coverage was like telling someone who lived on the top of a mountain that he had to have flood insurance.  It’s ironic that the promise of more affordable options for individuals, which was offered as a trade off for requiring that they buy coverage in the first place, is being replaced by more mandated coverage and fewer plan options as the Commonwealth implements health care reform.

The Commonwealth Connector – which oversees the implementation of health care reform in Massachusetts – had a hearing the other day to discuss their proposed requirement. Many, many businesses and other individuals showed up to testify against this new mandate, making many of the same arguments I’m making here. It doesn’t appear that the Connector will reverse its decision and this is too bad. Mandating drug coverage is the latest in a string of public policy decisions that is making health care insurance more expensive than it was BEFORE the reform plan passed – exactly the opposite of what was promised when the bill was enacted.

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12 replies »

  1. Matthew makes the key point:
    If you want guaranteed issue and community rating, insurance will be more expensive–because insurers actually have to insure sick people, and can’t gouge them.
    Why should healty 30-year-olds subsidize sick people?
    Becuase they may become sick 31-year-olds. And almost certainly, unless they die prematurely in an accident, they will be sick at some point in time. They may even need chriopractic services.
    But if we don’t have guaranteed issue and community rating, when they actually need those services insurers can say “no.”
    And if we do have guarnteed issue and community rating we must have individual mandates. Otherwise individuals will wait until they are sick to buy comprehensiv coverage, safe in the knoweldge that insurers have to sell it to them, at the same price that they charge healthy people.
    The end result? Everyone waits until they are sick to buy comprehensive coverage, and since only sick people are in the pool, that insurance is very, very expensive–i.e. unaffordable for most middle-class and even upper-middle-class Americans.
    As for what should be included in “comprehensive coverage”–that’s a question open to debate when it comes to things like in vitro fertilization. Do we, as a society, want to subisidize this procedures, giving everyone a shot at having a baby? Or do we want to say, we’re sorry, but if you can’t conceive, you can always adopt?
    I don’t have a strong position on this–though I lean toward adoption. But it does mean that our adoption laws should be fair: couples in their mid to late 40s should be able to adopt; median income couples should be able to adopt (without paying excessive fees)etc.

  2. Vijay
    Your points are well taken. However, if one is to assume insurance is for costly, unplanned, and unmanageable events, I believe a diabetic, for example, is not merely the recipient of wealth transfer or tax. While the “house is hot, foundation is weak, and pipes are leaky,” we still insure to protect against collapse and incineration, ie, heart attack, amputation, renal fx, etc. That cant be predicted on an individual basis, relatively.
    Regardless, I get your point and it is a good one. However, can you take your post to the next level. Mainly, I know how you want to “rename” what we have, but would you eliminate the protections that these people need. That is where you lost me.

  3. I think Dr. Goel’s comments are dead right and support something I’ve been trying to say on these blogs for awhile: the very concept of “insurance” for health care is an oxymoron. Bad health is not a risk but an inevitability – unless you suddenly drop dead or are killed with no prior health history (the vast minority). We need a whole new concept and mindset to address paying for health care.

  4. I hope we can all agree mandating benefits adds to costs. The question is when a benefit is mandated is it benefiting the majority. Maybe the mandate should be the individual consumer chooses what benefits they would like and pay the premium the appropriate premium.

  5. Thanks for the clear definitions Viijay. As I’ve said, solving healthcare cost and access will not be done with an insurance model. I can live with healthcare as a “social redistribution” of money to sick people because sickness is not something people want, now can the country live with a social redistribution of wealth from main street taxes to Wall Street stock profits?

  6. There really are two parties talking right past each other in this debate. The issues keep rising because of the use of the word “insurance”. Social redistribution of money to sick people isn’t insurance…its social welfare or a tax.
    “Commercial insurance” is a risk-mitigating instrument where an individual (or company) buys a policy to offset the (largely) uncontrollable risk that some negative event will occur. To a degree, certain elements predispose that individual’s risk that the event will occur, and underwriting is meant to make the price of premium reflect the relevant known risks. This format doesn’t work where consumption of services is discretionary–the risk is uncontrollable.
    To the extent that we make people buy “insurance” to cover other people’s risks and wants, we’re creating a wealth redistribution scheme between the healthy, discretionary high users, and the sick. This isn’t insurance…but a tax. The more vague the mandate and the distribution of services paid for by others, the more likely we are to approach a tragedy of the commons.
    The problem with the “insurance” approach to social welfare is that all kinds of organizations try to benefit from the incentive distortions. Do you think pharma would be as expensive as it is and focused on chronic symptom suppression if we had different incentives? I’ve been in the planning meetings…and I can tell you that much of pricing for modern biologics is based on “benchmarks” derived from the “red in the face test”.
    Let’s call a spade a spade and make it clear which system approach we’re advocating. Each has its ethical bases that make sense, but the blend between the two is ridiculous for all concerned.

  7. > One fellow being interviewed on Channel 5 News
    > the other night said demanding that he buy drug
    > coverage was like telling someone who lived on the
    > top of a mountain that he had to have flood
    > insurance.
    The generous interpretation is that the fellow underestimates his risk.
    The less-generous interpretation is that he sees insurance as something like a membership card at Costco. When Costco hasn’t got anything you want, you don’t buy a card. But when Costco does have something you want, you buy a membership card, and then get those great discounts on great merchandise.
    Between the two phenomena (i.e. undervaluation of risk and a total misunderstanding of insurance) we have the reason community rating has collapsed. But it always strikes me odd how people understand house and car insurance fairly well: they know you can’t buy insurance after the house has caught fire and they understand what it means to buy or decline collision coverage on a car. Somehow they have a different attitude about medical insurance.

  8. The pitfalls of mandating people into an already expensive system before you get control of costs. Don’t mandate me into a broke system that rewards provider overuse and high prices. I wonder if you could calculate the offets of say mandated mental health care with tax savings in other areas, say, education, productivity, family break-ups, crime, drug use, etc?

  9. On this, Charlie is not right. Factually, the state study did not find that state-mandated benefits cost purchasers 12% of premiums. Once you take out the federally-mandated benefits and benefits that would be provided in any case, state-mandated benefits in MA add up to at most 3-4% of premium. That’s the study’s conclusion.
    One can argue pro and con about in vitro and chiropractic, as Jeff Goldsmith raises. But we frankly don’t understand the fuss about prescription drug benefits. Medications are an invaluable piece of modern medicine and critically important to the prevention and treatment of disease. Allowing plans without prescription drug coverage would be just as irrational as approving plans that did not cover hospital visits.
    Yes, the goal of insurance is to spread risk, including the risk of very high pharmaceutical costs. Allowing “choice” fragments the market, and forces those who know they will need drugs to bear the full cost, rather then spread it broadly across everyone. Allowing “choice” means many will choose the cheaper no-drugs plan, and then have serious medical consequences when their plan doesn’t cover the treatment they need.
    Excluding drug coverage doesn’t make health care any cheaper. It just concentrates the cost among the unlucky with high drug needs. It also leads to a less healthy population, as people can’t get needed care because it’s not covered. This can lead to more expensive acute care in the end.

  10. Charlie is right. Why is it OK for a lobbyist to force me to buy in vitro fertilization or chiropractic coverage I don’t need? And if you’re a legislator, who’s going to stand up for you and applaud you for the tough “no” vote that makes coverage 40c cheaper for everyone in the state. This is where our political system has broken down, in separating the strong from the weak claims, and separating the focussed needs of a specific constituency (who pays for my campaign commercials) from the broad needs of the voting public. If you’re large enough an employer, you simply self fund and let us individual and small folks who don’t have a choice pay all the bills.
    Unfortunately, the same problem exists with “guaranteed issue” and “community rating”, strategies which assure that a high percentage of young people will NEVER get coverage. Let’s be honest, Matthew. What you’re talking about isn’t insurance at all. It’s a guaranteed health service benefit plan. The term “national health insurance” is an oxymoron. The purpose of INSURANCE is to spread risk, and the more affordable it is, the broader its coverage and the better it serves its purpose.
    There is a direct tradeoff between the “generosity” of the benefit and how many people can afford it. John Kitzhaber of Oregon was the first politician brave enough to explain this dynamic to the public, who, when they saw how it worked, supported him. The benefits package is the fatal weakness of any health reform proposal- failure to make tough choices here simply assures that health reform will never happen.
    McCain’s health reform proposals are laughably inadequate, but his original insight- that we are crippled in making sound public policy until we’ve somehow neutralized the role of lobbyists in our policymaking process- is more painfully apparent in healthcare than anywhere else in our economy.

  11. Charlie’s right to point out that we should debate what’s in or out of a standardized benefits package, that we then mandate people to buy (or get from taxation). But that’s not what most people who rail about mandates are getting at. The usual propaganda against “mandates” isn’t that insurance costs 30% more than it might with no drug coverage. After all if there were no hospital coverage insurance would be 40% less than it is!
    Instead the free-marketeers say “for $90 a month a 30 year old in California can buy the same coverage that costs a 30 year in New Jersey $500”. That difference is more like 5-fold and it comes about not because of mandated benefits but because plans in California are allowed to underwrite… in other words a HEALTHY 30 year old in California can buy that cheap coverage but a sick one can’t.
    So when you hear McCain et al talk about buying health insurance from other states in order to not have to pay for those “state mandates” they aren’t talking about getting away from Massachusetts drug coverage mandates, but away from its community rating, guaranteed issue et al.
    I don’t think Charlie’s employer (Harvard Pilgrim, one of the best health plans in the nation) would be too happy if I could legally set up my fly-by-night insurer in Guam, and offer all his young healthy members coverage at $75 a month. But that’s what McCain is proposing and that’s what the argument about state mandates is really about.

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