By Joseph R. Antos and Jeet Guram Thursday, August 27, 2009
Filed under: Health & Medicine, Government & Politics
“A public option…will give people a broader range of choices and inject competition into the healthcare market.”
— President Barack Obama, speaking to the American Medical Association, June 15, 2009
The fate of private health insurance in this country depends on what Congress decides to do with the president’s proposal for a new public plan that is supposed to bring affordable health coverage to millions of uninsured Americans. The key debate among Democrats, played out in the House Energy and Commerce Committee during the days leading up to the summer recess, is whether the public plan should tie payments for medical services to the Medicare pricing formulas.
Conservative Blue Dog Democrats fear that rural doctors and hospitals would lose out if even more of their business was paid at Medicare rates that do not cover the cost of providing services. Progressive Democrats—who used to be called liberals when that term was still politically correct—fear that the cost of universal coverage would be too much for the public to accept if they did not peg payments at levels just above Medicare rates. Temporarily, the Blue Dogs have won that argument. In a last-minute compromise, the Energy and Commerce Committee approved language letting healthcare providers negotiate with the government, but it is doubtful that this will be the final word. According to one report, senior congressional aides said that the leadership would not necessarily support the deal once a bill advances to the House this fall.
The Democrats seem to have overlooked a more fundamental question. Can they make a public plan work? At a minimum, that means any American who does not have access to employer coverage should be able to enroll in the public plan, no matter where he lives in the United States. And, to make good on the president’s promises, those individuals should also be able to select a competing private plan if they like. Those two requirements appear simple but are surprisingly difficult to meet.
Democrats are about to find out that Republicans have been correct on at least one aspect of our health insurance system. Unless they cut through the thicket of burdensome and conflicting state insurance regulations, the new public plan cannot be offered on the same terms to everyone. However, unless Congress grants the same regulatory relief to private insurers and refrains from giving the public plan special advantages, competition and choice in insurance markets will quickly become a distant memory.
The Regulatory Maze
Health insurance is subject to a maze of federal and state regulations. The states have broad authority to regulate the business of insurance, as formally recognized in the 1945 McCarran-Ferguson Act. As outlined below, states often set standards determining who is eligible for coverage and under what conditions, the types of benefits that must be offered, and the premiums that may be charged. States also regulate the market conduct of the insurer and set requirements for financial solvency.
Regulations on eligibility and access include guaranteed issue laws, which prohibit insurers from denying coverage based on an individual’s health status. In states with guaranteed issue, insurers must offer coverage to any comer without regard to his risk of illness—individuals can thus wait until they face large impending medical expenses to seek coverage. Another type of regulation on access is guaranteed renewability, which prohibits insurers from dropping coverage on the basis of an enrollee being diagnosed with an illness. Regulations on access increase premiums paid by healthy people to subsidize the additional costs of insuring people who are more likely to incur medical expenses.
Benefit requirements outline the specific treatments that must be covered in all plans offered in a state. For example, 27 states require coverage for cervical cancer screening and 32 require coverage for well-baby care (childhood immunizations and visits to pediatricians). Mandating a richer benefit package raises the cost of health insurance.
Premium regulations determine the extent to which insurers can vary premiums based on an enrollee’s risk of illness. These regulations specify whether insurers can raise premiums for enrollees with higher risks of future medical claims and reduce premiums for healthier enrollees. The most restrictive of these regulations is community rating, which prohibits insurers from varying premiums at all based on an enrollee’s health status, age, gender, or geography. Under community rating, premiums paid by healthy people are higher than they would be otherwise, and premiums paid by sick people are lower.
States differ widely in extent and type of regulations. In Utah insurers must guarantee the issue of some products, but neighboring Nevada has no such requirement. Rhode Island mandates that 70 benefits be covered while Idaho only requires 13. In Arkansas a plan need not cover dental anesthesia, in-vitro fertilization, or telemedicine, but cross the border to Louisiana and plans must include all three. Hawaii has no restrictions on how insurers can vary premiums based on risk of illness, but New York imposes community rating.
The federal government exempts employers who offer health benefits from state insurance regulation under the 1974 Employee Retirement Income Security Act (ERISA), but only if the employer self-insures. Instead of purchasing insurance, self-insuring employers manage their own benefit (often with the help of an insurer acting as a third-party administrator).
Employers who self-insure face a nationally consistent regulatory structure. In contrast, individuals purchasing their own coverage and employers who do not self-insure must buy health insurance that satisfies the requirements of their state’s regulatory regime. The freedom from state regulation conferred by ERISA has contributed to the growing dominance of self-insured employer-based health benefits. Christina Park, a researcher at the National Center for Health Statistics, found that firms were more likely to self-insure in states that enacted more small-group insurance requirements, including community rating, guaranteed issue, and guaranteed renewability. In other words, tight insurance regulations drive many firms into self-insured plans just to avoid higher costs imposed on them by state controls.
Pricing Insurance Out of Reach
The financing principle behind health insurance is simple. Charge people higher premiums than their expected use of medical services when they are healthy, and subsidize the premiums they pay if they become sick. All health insurance works this way, including insurance sold in states that regulate lightly. States that adopt guaranteed issue and community rating create a legally enforceable requirement on insurers intended to expand the pool of individuals who can be covered by health insurance.
However, the inflationary effects of regulations make insurance too expensive for many consumers—especially those who are healthy. President Obama has portrayed insurers as standing in the way of citizens gaining access to coverage, arguing that “Your health insurance should be there for you when it counts.” But a major reason insurance is not there for some people when they need it is that government regulations have driven up its cost beyond affordable levels. Health insurance regulations are sometimes called “consumer protections,” but they harm people who need insurance and can no longer pay for coverage once regulations are imposed.
State insurance regulations redistribute income in perverse and nontransparent ways. A study of the California insurance market by Rand economist Dana Goldman and colleagues found that the state’s community rating policy led to “large unintended transfers of wealth from poorer, rural communities to urban, wealthier communities.” People in high-income urban areas spend more on healthcare than those in low-income rural areas, and premiums would adjust accordingly in the absence of rating rules. Under community rating, though, premiums are not permitted to reflect variations in the use of health services across local markets, so the extra costs incurred in high-use areas are borne equally across the pool of insured individuals. Tighter rating rules—even if they permit some premium variation across geographic areas, as proposed in bills currently before Congress—shift more cost to young, healthy individuals, who become even less likely to buy insurance unless they are forced.
Bradley Herring of the Johns Hopkins Bloomberg School of Public Health and Mark Pauly of the University of Pennsylvania’s Wharton School found some evidence of increased numbers of uninsured in states with both community rating and guaranteed issue compared with states having no such regulations. The loss of low-risk individuals who drop coverage in response to regulation-induced higher premiums is greater than the gain of high-risk individuals who buy coverage made less expensive by the regulation.
Mandated benefits also raise the cost of insurance, making coverage prohibitively expensive for some consumers. With additional mandates, individuals purchasing their own insurance face higher premiums or coverage that requires greater out-of-pocket payments. Workers who receive coverage through their employers pay the cost of mandated benefits through lower wages. An analysis by Gail Jensen of Wayne State University and Michael Morrisey of the University of Alabama School of Public Health concludes that “there is clear evidence that the increase in numbers of uninsured Americans can be partly tied to mandates.”
Contradictory Promises
Advocates claim that anyone would be able to enroll in the public plan no matter where he lived, but individuals could also select a competing private plan if they liked. However, those two objectives are in fundamental conflict. We can have a public plan or we can have competition, but we cannot have both.
Creating a public plan that offered the same coverage on the same terms to everyone in all states would require federal pre-emption of virtually all state-based insurance regulations. Otherwise, the public plan would have to satisfy the strictest standards imposed by any state in the country, including nationwide community rating and coverage of every benefit mandated by at least one state. This would drive up costs, making the public plan unaffordable and unattractive to many consumers.
The “tri-committee” health reform bill reported out of three House committees on July 14 creates a health insurance “exchange” that bypasses state regulations altogether. The exchange is like a farmer’s market for insurance plans but with a newly anointed health choices commissioner regulating transactions and imposing standards for everything that is bought and sold. Unlike a real farmer’s market, insurers would not be able to sell what consumers demanded without the commissioner’s approval.
All health plans offered in the exchange would offer at least the “essential” benefit package, an extensive and expensive list of services that would make every choice a “Cadillac” plan. The bill’s demand for the inclusion of “such services, equipment, and supplies . . . as appropriate” in all exchange plans should strike fear in the hearts of patients and taxpayers. Who decides what is appropriate? How much do “appropriate” benefits cost? Would you have purchased that kind of insurance if it were really up to you?
As a sop to state regulators, the tri-committee bill allows states to impose additional benefit mandates on insurers beyond the “essential” benefit package, but only if the state reimburses the all-powerful health choices commissioner for any additional costs created by the state mandates. The bill also imposes guaranteed issue, guaranteed renewability, and modified community rating. Standards within the exchange set a floor for health insurance regulation that is well above that now seen in most states.
It is not surprising that the House bill ups the regulatory ante for insurers. The rules were written to force private insurers to operate like the public plan, rather than allowing them to innovate with different benefit structures, payment approaches, and premium levels. The uniform set of federal rules outlined in the bill raises the cost of insurance and dampens, rather than enhances, the scope of competition in the market. Worse yet, what competition is left between the public plan and private insurers would not be fair.
By the very nature of its “public” status, that plan would have serious advantages over its private competitors. Because it would be backed by the federal government, the public plan would be viewed by many consumers as safe and secure. Individuals could trust the public plan to “be there for them when it counts.” The plan would benefit from billions in federal subsidies not offered to private plans. At first, there would be federal “seed” money to force the public plan into established insurance markets. Later, Congress could be counted on to prop up the public plan if it faltered. The plan would be too important to fail regardless of the debt it accrued, since failure would mean millions of people losing coverage from a highly visible government program.
The ultimate and inevitable threat to competition would be giving the public plan the authority to pay below-market prices to healthcare providers. Those lower prices would not be the natural realization of monopsony power that accrues when one buyer is dominant in the market. Make no mistake: if the public plan is to succeed, it will need an act of political will. Without price controls to help reduce premiums, the public plan would not be an attractive alternative to private plans and would have difficulty competing against already well-established insurers.
The price of making the public plan work is too high even for some Democrats. Moderates oppose tying the public plan’s reimbursement rates to Medicare price schedules—fearing that low payments would reduce access to care, particularly in rural communities.
The public plan can survive only with mounting subsidies or the ability to dictate prices significantly below those paid by private plans. In either case, consumers would lose meaningful choices as private insurers were driven out of the market.
A Better Path to Reform
The president’s rhetoric on choice and competition is closer to the mark than his policies. Consumers do need meaningful health insurance choices—rather than a one-size-fits-all plan dictated by a federal insurance commissioner. Competition would promote efficiency and innovation—but trading 50 sets of state regulations for federal regulations that are even more restrictive would eliminate the private competitors. Instead of letting a thousand flowers bloom, the president wants to uproot the garden.
Let’s level the playing field in health insurance, but let’s do that by lowering the regulatory barriers to meaningful competition. That means less government, not more. Voters are extremely leery of a further extension of government control into their lives, and healthcare is as personal as it gets. That is the unmistakable message coming from congressional town hall meetings this summer. Policymakers would be well advised to listen.
Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute. He is also a commissioner of the Maryland Health Services Cost Review Commission, a health adviser to the Congressional Budget Office, and an adjunct professor at the Gillings School of Global Public Health at the University of North Carolina at Chapel Hill. Before joining AEI, Antos was assistant director for health and human resources at the Congressional Budget Office. Jeet Guram is a former AEI intern.
Image by Darren Wamboldt/Bergman Group.
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