Health Care Reform: Welcome to NY, America

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Massachusetts may have a universal health insurance mandate, but it is New York state that has experimented for the longest time with key components of the new federal health care package, most especially with a mandate that insurers must offer coverage to all comers, and also that insurers have limits on how much they can vary the price of a policy for different demographic groups. Whether the feds can figure out how to avoid all of the pitfalls that have plagued this system in New York remains to be seen.

New York enacted a health reform package with these two mandates - known as guaranteed issue and community rating - in 1993, making it unique among the states (only five others have both mandates but none has requirements as strict as New York's). Back when the state instituted the reforms about 752,000 residents were buying health insurance directly from insurance companies in the individual market. But premiums immediately started to soar, and as residents realized they could purchase insurance at any time, even after they got sick, New York's individual health insurance market disappeared, shrinking by 95 percent all the way down to a mere 34,000 individuals. Meanwhile, the ranks of the uninsured spiked to 20 percent by 1997.

New York's response to its vast increase in uninsured residents was to offer more state-subsidized insurance. When the price tag on these plans began to weigh down the state budget, New York slapped new taxes on residents and businesses to pay for them, including a new $275 million assessment against insurance companies on top of some $3 billion in assessments they already pay in the state. All of this so that the state's uninsured rolls would soar as costs spiraled upward and then declined again as government stepped in with subsidized coverage.

Moreover, the profile of the uninsured changed. Today, according to a recent Manhattan Institute study, about one-third of all the uninsured in New York earn $50,000 a year or more. Many would be able to afford insurance in most other states, but not in a place where a monthly premium for a single person ranges between $500 and $700, while a family policy costs between $1,400 and $2,600 a month.

The new federal legislation, of course, aims to fix the problems that New York has experienced by requiring that everyone carry insurance, which is a controversial mandate now but will be so much more so if costs spike as they did in the Empire State, or if taxes must rise further to subsidize premiums and keep them affordable. Those without insurance will face a federal fine that has been set at either $695 annually or 2.5 percent of your taxable income, whichever is greater. But that might be a small price for many people to pay for the privilege of not carrying pricey insurance.

To understand how this will work, look to another state, Massachusetts, the first to begin fining people for not having health care coverage. Massachusetts defines acceptable insurance as a policy with a deductible no greater than $2,000 a year. But policies at that level can be very expensive, so taking the fine is worth it, as Massachusetts resident Wendy Williams found. In a Wall Street Journal piece last October, she described how she and her husband were threatened with a $1,000 fine because they had given up their gold-plated and expensive health plan and were paying about $3,600 a year for catastrophic care policy that protected them from big hospital bills but didn't qualify as acceptable coverage in the state. For Williams the choice was easy. To increase her coverage to acceptable limits would have cost her about $6,000 a year more in premiums, because costs jump sharply as the deductible on a policy declines even moderately in a highly regulated place like Massachusetts. So she paid the fine instead and stuck with her "unacceptable" coverage.

Given that there is so little in the federal bill designed as incentives to restrain costs, there's no reason to believe that the nation will escape the fate of New York or Massachusetts once guaranteed issue becomes commonplace, leaving the choice to policymakers of higher taxes, higher premiums, or higher fines for those who go uninsured. Likely, you wind up with all three.

Just how much has government design produced the circumstances we now see in New York and Massachusetts? In a study of New York, the Manhattan Institute estimated that the Empire State's mandates increased the cost of health premiums by a whopping 42 percent to the highest in the nation (this was before RomneyCare spiked Massachusetts' premiums even higher). The study estimated that up to 37 percent of those who were uninsured in the state could afford coverage if the state junked its expensive mandates, especially the guaranteed issue and community rating mandates. Many of the rest of the uninsured were low-income residents already eligible for Medicaid who never signed up for it. The remaining small group of uninsured were largely those with pre-existing conditions who would have to be covered by a risk pool.

The irony of the current situation is that Congress has embedded in the new federal health care bill just such a risk pool, but only as a temporary measure to insure the uninsurable until the new federal bill goes into effect and nationwide guaranteed issue and community rating change the entire market. In other words, the designers of the federal legislation understand the problem, which is that there are a small number of uninsurable Americans who need a special solution, while what the rest need are lower premiums. But like New York, the architects of federal reform have chosen to change virtually the entire system in a way that doesn't address costs.

In New York, politicians never acknowledged the errors they made. They just seemed to hope that residents wouldn't understand that it was bad policy that destroyed the individual insurance market. Those same politicians used the problem they created to extend government control over health insurance until the costs helped bust the state's budget. Now you can hear radio ads in New York run by hospitals and other advocacy groups pleading with government not to cut health subsidies any more.

There are few things these days about government in New York that would qualify as ‘best practices' to be emulated by others. In truth, state policy makers have become a laughingstock, even among the state's own residents.

But not, apparently, in Washington.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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