A "Scaled Back" Health Bill Won't Work

Scott Brown's election to the Senate has health care reform on life support. With Congressional Democrats doubting whether it is feasible (or even wise) for them to press forward and pass the bill they spent the last year developing, one idea gaining traction is a "scaled-back" health bill that includes only the most popular aspects of reform.

Intuitively, it makes sense: if the bill is too toxic to pass, pick the parts the public likes and scrap the ones that are unpopular. The polling even provides support for this approach -- while the bill itself is unpopular, many of its components are widely favored, with net approval of more than 30 points in a recent Kaiser Family Foundation survey.

Unfortunately, enacting just the popular parts of the bill (which tend to be insurance regulations) will explode premiums and make it harder than ever for uninsured people to find coverage. This isn't just speculation -- it's what happened in New York when the state enacted similar insurance reforms without the "comprehensive" approach discussed in Washington.

In 1993, New York adopted two of the most popular parts of the health care reform bill that recently passed the Senate: "guaranteed issue," or a rule that insurers must sell to anyone, regardless of pre-existing conditions; and "community rating," which prevents insurers from setting premiums based on characteristics like age and sex. (New York's reform is more radical than proposed federal reforms, as it allows no variance at all on age; the Senate bill would cap the amount of age-based difference).

New York did not require anybody to buy health insurance, nor did it give out subsidies to help people pay for it (though it did expand government-provided insurance at vast taxpayer expense.)

These reforms were supposed to make it possible for more people to get insurance coverage. Instead, what they did was drive premiums through the roof. Now, the cheapest insurance plan for a family in New York City costs $26,040, compared to a national average of around $13,000.

Unsurprisingly, few New Yorkers find these prices affordable, and the share of New Yorkers with individually-purchased coverage has fallen by 96%, to about 2 in 1000. Functionally, New York barely even has an individual insurance market anymore. As a result, New York's rate of uninsurance is in the middle of the pack nationally, even though the state ranks 4th in the share of residents on Medicaid.

New York experienced what is known as an "insurance death-spiral." Under community rating and guaranteed issue, healthy people found insurance premiums to be a bad deal and they dropped out. This increased the average risk among insureds, so premiums rose once more, again driving the healthier and poorer participants to drop. The process repeated itself until almost nobody found it worthwhile to buy their own insurance.

Contrast this experience with that in Massachusetts, whose 2006 reform ("Romneycare") combines New York-style regulations with an individual mandate and subsidies. (The Senate bill is similar to a national version of Romneycare). Experts have reasonable disagreements about whether the Massachusetts reform has been worth its price tag. But it is definitely not the unmitigated disaster we saw in New York, because the individual mandate prevents a death spiral.

Both the 2006 Massachusetts reforms and the currently-stymied Senate bill take a Rube Goldberg approach to insurance reform. You include guaranteed issue and community rating to make sure insurance is available to everyone, and then impose an individual mandate to prevent a death spiral. Then, you hand out subsidies so people can afford to comply with the mandate, and you raise taxes or cut other spending to pay for the subsidies.

These actions come as a package for a reason -- one part of reform offsets the bad side effects of another. Enact them all and we can talk about whether they are worth their substantial cost. But enact only some of them and the market will fall apart, like it did in New York.

When Americans say they want guaranteed issue and community rating but no individual mandate, they don't mean they want insurance to be so unaffordable that nobody buys it. They just don't realize this will be the effect of the reforms they favor.

When I read the polls, I see the public telling Congress it wants to eat an all-ice cream diet and not get fat. It's a reasonable sentiment. But Congress must deal in the art of the possible, and when the public finds its pants don't fit anymore, it will blame the Congress that fed it all that ice cream.