Senate's Solution: Consumer Choice Is Dead on Arrival

According to the health care reform bill being debated in the U.S. Senate, there's an easy way to solve the problem of the uninsured in this country:

  • Force Americans to buy health insurance just like we do with auto insurance. 
  • Make insurance companies accept everyone who applies, including those who buy insurance only when they're sick. 
  • Don't let insurance companies sell plans that don't cover everything. 

These three forms of health insurance regulation-individual mandates, guaranteed issue and coverage mandates-have been attempted in a number of states, including California, Massachusetts, New Jersey, New York and Washington.  The results are described below.

Individual mandates: "You'll buy it or else."

A popular theme in the healthcare reform debate is "shared responsibility."  Attempting to increase individual responsibility, a number of states have enacted a mandate that all citizens must purchase health insurance.

The theory behind individual mandates is that insurance becomes more affordable when purchased by a larger, healthier group of applicants.  Adding individuals to the risk pool who are less expensive to insure (and currently the least likely to buy it) would theoretically lower the cost for all those insured.

But in practice, individual mandates have had a different effect on what people pay for health insurance.  The impact of mandates on insurance premiums is in large part a consequence of "Guaranteed Issue" described below.

Part of the problem with individual mandates is enforcement.  Voters have consistently rejected mandates that would use the tax code or wage garnishment to ensure compliance.  

Without "teeth," mandates provide no compelling reason to purchase expensive, unwanted insurance policies before an individual becomes ill.  And even harsh penalties would miss the unemployed and non-citizens, who represent a large percentage of the growth in the uninsured.

This has the effect of driving up costs as less-healthy individuals requiring expensive treatment expand the insurance pool, while healthy individuals avoid buying policies.

Some proponents of individual mandates try to make an analogy to the auto insurance industry.  But this is not a logical comparison:

  • Auto insurance is mandated only for those who drive, a far smaller pool than those who would be mandated to buy health insurance.  
  • Consumers shopping for auto insurance have competition on their side; policies can be purchased from insurance companies offered in other states, driving down premiums as agencies try to compete with other carriers.  Inexpensive policies are available across state lines, unlike health insurance plans sold only within a single state.  Bostonians are prohibited from buying North Dakota health plans that cost 60% less than those sold in Massachusetts.
  • Limited coverage auto insurance policies can be purchased, offering only the liability coverage required by law rather than more expensive comprehensive plans.  Under California's Low Cost Auto Insurance Program, premiums can be less than $25 per month.  State regulations bar the health insurance industry from offering low-cost plans with limited coverage even when the consumer wants that choice. 
  • Despite the fact that all 50 states mandate auto insurance coverage for drivers, up to 25% of state residents remain uninsured.  Even with far simpler opportunities available for enforcing the auto insurance mandate (e.g., requiring proof of coverage before obtaining a driver's license and registration), the California Department of Insurance estimated in 2003 that 14.3% of all registered vehicles were uninsured.  This does not account for unregistered vehicles or those with expired registrations, of particular importance in parts of the state with a high percentage of undocumented immigrants on the road.

Governor Mitt Romney succeeded in imposing an individual government mandate on the citizens of Massachusetts.  Taxpayers in that state now fund subsidies for insurance premiums that have risen more than 30% since the Governor's plan was enacted.

Individual mandates, though popular in political rhetoric, do not address the fundamental problem people face when buying health insurance: it is expensive.

Guaranteed issue: "You'll sell it or else."

For an individual government mandate to compel the purchase of health insurance, another government requirement for something called "Guaranteed Issue" must first be enacted.

"Guaranteed Issue" forces every insurance company to sell health insurance to every applicant regardless of age, health history, lifestyle or risk factors. 

In theory, this appears sound.  If health insurance companies can't "just say no" to high-risk applicants, no one will be left without access to coverage.

Unfortunately, the law of unintended consequences trumps this logic.  Under Guaranteed Issue mandates, "access to coverage" becomes "access to higher premiums."

In New Jersey and Massachusetts, unlike in California, laws were passed to force every insurance carrier to sell plans to every individual applicant.  Individual insurance premiums in New Jersey and Massachusetts are three times higher than those in California.

Washington State tried Guaranteed Issue.  With no way to mitigate risk, insurance carriers in the state suffered severe financial losses related to high-risk patients.  They then exited the individual market; no individual health insurance plans were accessible to Washington residents at any price.

Senator Hillary Clinton was not a New Yorker in 1993.  But that was the year New York State forced Guaranteed Issue on the health insurance market.  500,000 New Yorkers then cancelled their health insurance plans; rates for a third of all those insured had increased by 20-59%.

The Heritage Foundation published a 1998 study evaluating the sixteen states in which the most aggressive health insurance mandates and regulations were passed between 1990 and 1994.  The goal of these individual, employer and insurance industry mandates-including individual mandates, Guaranteed Issue and price fixing of premiums - was to increase access to coverage and decrease the uninsured population in a given state.  The effects were then compared with the thirty-four states that had not enacted such regulations.

The two groups of states shared nearly equivalent rates of uninsured residents before the reforms. 

But by 1996, the sixteen states with the most aggressive reforms (including New Jersey, New York and Washington) experienced a growth rate in their uninsured population eight times higher than the thirty-four states without such mandates.  Additionally, the percentage of the population covered by private or individual insurance declined.

Coverage mandates: "We'll tell you what you need"

Insurance coverage mandates refer to the restrictions each state sets on which type of policy can be sold legally within that market.  For example, fourteen states require all insurance plans sold to cover infertility treatments, regardless of the patient's need or desire for these services.  Other states ban the sale of insurance plans unless they include coverage for massage therapy, obesity surgery, pastoral care and wigs. 

Needle-phobic consumers cannot buy plans without acupuncture coverage, and teetotalers must pay for plans that include inpatient drug rehabilitation.

According to the National Center for Policy Analysis, just twelve of the most common insurance mandates currently in place raise premium rates by 30%.

The State of California forces over fifty such mandates on the employer-provided (group) insurance market but not on individual plans. Consequently, it costs three times more for California employers to offer insurance than if a plan is privately purchased. 

In mandate-heavy states, consumers are denied the option of buying low-cost, basic health insurance plans to cover major illness or injury. 

They cannot choose to save money by paying out of pocket for $10 Pneumococcus pneumonia vaccines and once-a-year $90 Mammograms, reserving health insurance for significant expenses. 

In those states, insurance is not insurance-it is expensive, pre-paid healthcare.

Consumer choice or centralized decision-making?

The bill being debated in the United States Senate represents a fundamentally different approach to how Americans participate in health care coverage decisions.  Whether that approach is consistent with what Americans value remains debatable.

As Senate Majority Leader Harry Reid pushes for a Senate vote on the over 2,000 pages of legislation by Christmas, now is the time for those who wish to participate in the debate to weigh in.

Dr. Linda Halderman is a General Surgeon and policy advisor in the California State Senate. Since the September 29, 2009 earthquake and tsunami that devastated the South Pacific, she has been providing medical relief on American Samoa.
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