High-Risk Pools v. Community Rating and the Individual Mandate

Here’s a little intra-mural squabble that I haven’t gotten into much on this site: Is support for an individual insurance mandate compatible with consumer-driven health care? I’ve periodically linked to Who Killed Health Care?, a book by Regina Herzlinger, a fellow at the Manhattan Institute and professor at the Harvard Business School. It does a great job of laying out how health insurance companies, Congress, hospitals, employers, and academics have wrecked havoc on our health. I also liked its business-oriented solutions such as an emphasis on “focused factories” for health care and five-year contracts for insurance.

Though the Manhattan Institute website says Herzlinger is known as the “Godmother of Consumer-Driven Health Care,” a term embraced by many analysts of conservative or libertarian leanings, she makes some significant departures from commonly held positions. In a recent book review of The Top Ten Myths of American Health Care (PDF) by Sally Pipes of the Pacific Research Institute, Herzlinger makes that point clear.

Though Herzlinger has high praise for Pipes, she adds this:

But here is where Sally Pipes and I part company. Absent community rates (charging everyone the same regardless of age or health status), I do not see how sick consumers will be able to afford the purchase of health insurance (as she notes, they account for about 80% of health care costs). And absent government mandated universal coverage, community rates will be absurdly high because only the sick will enroll. Although she does not discuss this problem, the typical Republican solution of government-funded high risk pools for the sick means their care will be overseen by the very government whose competence she has so effectively skewered.

By this light, there will be massive government involvement in any case. So which will it be: Regulations of a high-risk pool that enroll only a small number of people (perhaps aided by general tax revenues), or an individual mandate and community rating? The high-risk pool approach affects only a few people; individual mandates and community rating affect everyone. High-risk pools bring about yet another government bureaucracy and stream of government spending; individual mandates, on the other hand, take government into new philosophical territory by imposing a tax simply for living.

Given the choice, I’d prefer to have general subsidies for a high-risk pool. Then again, if the idea of health status insurance takes off, we may not have to choose between these two alternatives.

(The review is in the Winter 2010 edition of the Claremont Review of Books.)

A Cost-savings Plan that Raises Costs

During yet another speech on health care at the White House, President Obama called on Congress to give his reform package an “up-or-down vote” before the Easter recess, with or without Republican support. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid claim to have the votes to do it.

But going it alone by resorting to the controversial reconciliation process may prove politically costly for Democrats. After all, a majority of Americans oppose their health reform proposal. The latest CNN poll showed that only 25% of Americans like the president’s plan.

If the Democrats pass some version of reform — a big if — Republicans could find themselves in a position to turn public displeasure into electoral success. The GOP should seize the opportunity by pledging to repeal ObamaCare if they take control of Congress this fall.

Not only would such a strategy represent good politics, it would be good policy, as ObamaCare is poised to bankrupt the country.

After all, the tax increases go into effect this year but the benefits do not kick in until 2014 or later.

The president puts the cost of his reform plan at $950 billion over 10 years. But the eventual price tag will likely exceed $2 trillion. And that’s just the cost to taxpayers. ObamaCare will force ordinary patients to pay ever more for health care.

Take the guaranteed issue provision — a cornerstone of the Democrats’ reform plan that would bar insurers from denying coverage to individuals because of pre-existing conditions or health status. Although popular, guaranteed issue is expensive. States that have implemented this regulation have seen premiums rise 227%.

That shouldn’t be surprising. If insurance is available on demand, only people who have an acute need for it will pay premiums. Consequently, the insurance pool will be composed exclusively of sick people with high medical costs. Insurers will have to jack up premiums to cover the cost of treating these folks.

The Democrats’ plan attempts to balance the cost of guaranteed issue with an individual mandate requiring all Americans to obtain insurance. Supporters of the mandate claim that it will lower overall health costs by drawing everyone into the insurance pool. Premiums from the young and healthy — many of whom previously went without policies or might have waited until they got sick to buy them — can subsidize care for the aged and infirm.

But the individual mandate will not lower health costs — it will raise them.

People generally go without insurance because it’s too expensive — or because they’d rather spend their money on other goods or services. Simply passing a law requiring people to buy insurance won’t make policies more affordable.

By the time the mandate is in full effect, the average individual insurance policy is expected to cost about $5,000. The fines for noncompliance are far less, $695 or 2.5% of income, whichever is higher, starting in 2016.

For most healthy individuals, it would make more sense to forgo insurance and pay the fine than to shell out thousands of dollars a year for an individual policy.

Further, if they became ill, they could get a policy right away because of guaranteed issue.

With the young and healthy exiting the insurance pool, once again only the sick will remain. Premiums will spiral ever higher.

In fact, according to Milliman, an actuarial consultancy, combining guaranteed issue with an individual mandate could achieve the “the opposite of what was intended: an increase in cost for health insurance and in the number of uninsured Americans.”

When President Obama set out to reform the health care system, he named cutting costs as one of his primary goals. His proposal would accomplish just the opposite, raising the cost of care for Americans. The president may come to regret trying to force his unpopular reform package through — starting on Election Day.

If Insurance Companies are Evil …

Erick Erickson notices a great disconnect in the Senate bill between words and actions. It’s a short post, so you shouldn’t have a problem if I say read the whole thing.

Lessons from Maine

The Connecticut General Assembly  is considering SB194, which would change the process by which insurance companies obtain rate increases in the individual insurance market.  I offered some perspective before the Insurance and Real Estate committee, drawing on our experience in Maine.

Should Federal Officials Regulate Insurance Rates?

The ignorance of politicians  is underscored by President Obama’s sudden interest in having federal oversight of health insurance premiums. Once again, these people do not have the slightest idea of what they are doing. One company (WellPoint) issues rates that Obama thinks are too high. But his reaction is based on nothing. He has no idea if the rates are too high, too low, or just right. It is a political temper tantrum — period.

So he wants federal oversight and looks for excuses to justify his position. One reason cited by Kaiser Health News is that, “more than half the states allow insurers to implement rate increases without first obtaining state approval.”  Well, yes they do. But that doesn’t mean there is no oversight. There are two approaches to rate regulation. One is “Prior Approval,” whereby the regulator has to approve the new rate ahead of time. The other is “File and Use,” whereby the rate goes into effect UNLESS it is denied by the regulator. In either case the regulator has the power to deny a rate increase. The only difference is what happens if the regulator takes no action. In one case it defaults to denial and in the other case it defaults to approval.

This is public policy driven solely by crass politics. The Kaiser story says, “In the past two weeks, Obama administration officials have tried to build public outrage over recent insurance rate hikes in the individual health insurance market, especially a 39% increase sought by Anthem Blue Cross of California, the largest for-profit health insurer in that state.” They have no interest in why these rates went up 39%, they just want to use it to inflame public opinion.

The New York Times reports, “Mr. Obama is seizing on outrage over recent premium increases of up to 39%.” So, Kaiser says Obama has “tried to build public outrage,” and then the NY Times says he is “seizing” on the outrage he has built.  The Times goes on to explain, “The president’s bill would grant the federal health and human services secretary new authority to review, and to block, premium increases by private insurers, potentially superseding state insurance regulators. Officials said they envisioned the provision taking effect immediately after the health care bill is signed into law.”

Also in the New York Times, WellPoint CEO Angela Braly explains that “higher premiums were justified by soaring medical costs and added that health care providers were charging more to the private sector, “including our members,” because payments from Medicare and Medicaid did not fully cover providers’ costs.” She also explained that many younger and healthier enrollees have dropped their coverage because of the recession. They have higher priorities when finances are tight.

Importantly, she noted that premiums in New York are double what they are in California because of New York’s guaranteed issue and community rating requirements – which Congress wants to apply to the entire country.

And John Graham of the Pacific Research Institute notes that while some people in California are getting a 39% premium increase others are getting a 20% cut. It is curious how we hear about one but not the other.

Look, folks, this is all about as dumb as can be. The fact is that insurance companies set rates based on what they pay out. There is no other way to do it. Sure administrative costs may be too high and that is part of the reason to support HSAs – it is far more efficient to minimize the amount of services that go through an insurance mechanism. But even if admin costs could somehow be slashed to zero, the rate increases from underlying costs would still be substantial.

Adding federal oversight is nothing but a political stunt. How is the Secretary of HHS supposed to know anything at all about local market conditions in San Bernardino, California? If she denies a rate increase and the company goes out of business as a result, who will suffer? Not her. It will be the policyholders.

When you add in the McCarran-Ferguson repeal, things get really wacky. Currently the states have very elaborate and time-tested ways to deal with insolvent insurance companies. They go onto receivorship and the state guaranty fund kicks in to cushion the blow for policyholders. If we have federal regulation of insurance companies an insolvent company will be able to file for bankruptcy in federal court (they cannot do that currently.) That means the policyholders will get no relief whatsoever.

The gross incompetence coming out of Washington these days is simply stunning.

The Poorly Understood McCarran-Ferguson Act

It’s all enough to make you wonder if these jokers in Congress have any idea what they are doing … but then they pass another bill and remove all doubt. The most recent is the so-called antitrust bill against health insurers. The House passed HR 4626 on February 24 to exempt health insurers from the McCarran-Ferguson Act. For a while it looked like they were going to repeal McCarran-Ferguson altogether, but the property and casualty (P&C) industry informed them that it, too, was subject to Mc-F.

Oh! Well, we’re not mad at the P&C industry. We just hate those eeeeevil health insurers. A notice from the National Association of Insurance and Financial Advisors (NAIFA) expresses concern that forbidding the pooling of historical claims data would disadvantage smaller carriers and decrease competition, and that “health insurance was not defined by the bill. The upshot of that could be that long-term care, disability insurance, and medical provisions in auto insurance and even some aspects of life insurance could be construed by courts to be ‘health’ insurance.” NAIFA believes the latter concern was fixed but not the former one. It is not at all clear that there is support in the Senate for this legislation.

McCarran-Ferguson is poorly understood even by otherwise-bright people. On the MSNBC show Morning Joe, Joe Scarborough said it allows price-fixing between insurers. No, it doesn’t, as explained by National Underwriter, which writes, “the current antitrust exemption gives (insurers) no ability to join together to set prices or use acquisitions to build monopolies.” Insurers always have been subject to most federal antitrust provisions, including bans on price fixing, divvying up markets, and tying arrangements. They are also completely subject to state antitrust laws.

As NAIFA points out, the only thing that will be affected here is the ability of carriers to pool claims data for actuarial purposes. The result will be that small carriers won’t have enough historical information to project future costs. So they will not be able to determine how to price their products. So they will go out of business. So there will be less, not more, competition in the health insurance market.

These people seriously don’t know what they are doing.

Health Insurance Reform Should Promote Guaranteed Renewability

The objective of health insurance reform should be to get people to obtain coverage with guaranteed renewability before they become high risk, writes Mark V. Pauly of the Wharton School of Business at the University of Pennsylvania. One step in this direction would be to add guaranteed renewability for coverage of a worker’s family to small-group insurance. Another would be to implement strong incentives for obtaining coverage before one gets sick. Some of these could be carrots, such as larger subsidies for low-risk people to get them to buy in. Others could be sticks, such as increased premiums for people who decline coverage until they become high risk. The establishment of high-risk pools, adequately subsidized by general taxes but with higher-than-standard premiums and moderately limited coverage, may be all that is needed to get nearly everyone to do the right thing.

More On Buying Health Insurance Across State Lines

I’ve expressed a real lack of enthusiasm for the Republican proposal that Congress should pass a law allowing groups to go jurisdiction-shopping for health insurance, especially in the absence of eliminating the prejudice against individual ownership of health insurance.

One correspondent chided me for allowing states’ “geographic monopolies” to stand in the way of competition. But isn’t that a fundamental characteristic of a state — that it has a monopoly over state laws within its own boundaries? If you don’t like it, vote in a new legislature or move to another state. I live in California, where personal income taxes are way too high and harmful to our welfare. But I’ve never heard a Republican politician propose that Congress pass a law allowing individuals to choose which state’s rate of income tax they pay, so Californians could opt to pay zero income tax by choosing Florida’s tax rates.

In any case, this is irrelevant: States can just go ahead and allow interstate purchasing of health insurance themselves. Here’s a bill in Washington State to allow just that; and here’s one in Georgia. So, just get on with it. There’s no need to wait for Congress to act.

What to Do About Preexisting Conditions: 10 Ideas

“Most of the time,” says John Goodman, “the problem of preexisting conditions arises precisely because health insurance isn’t portable.” Making insurance portable is the first of ten recommendations he makes in a short commentary on what to do about preexisting conditions.

Government Partly Responsible for 39% Insurance Hike

Insurance companies have done enough on their own to invite populist vengeance, which President Obama and other politicians are all too eager to manipulate. But laws governing insurance help contribute to the need for the recent 39% increase that Anthem Blue Cross announced.