New health insurance mandates would increase premiums

New health insurance mandates would increase premiums

At last night’s press conference the President was exactly right when he said:

If we do not reform health care, your premiums and out-of-pocket costs will continue to skyrocket. …

Right now premiums for families that have health insurance have doubled over the last 10 years. They’ve gone up three times faster than wages. So what we know is that if the current trends continue, more and more families are going to lose health care, more and more families are going to be in a position where they keep their health care but it takes a bigger bite out of their budget, employers are going to put more and more of the costs on the employees or they’re just going to stop providing health care altogether. …

One of the things that doesn’t get talked about is the fact that when premiums are going up and the costs to employers are going up, that’s money that could be going into people’s wages and incomes. And over the last decade we basically saw middle-class families, their incomes and wages flatlined. Part of the reason is because health care costs are gobbling that up.

Most of the public and Congressional debate has been about the effect of pending health care reform on the federal budget. While this is incredibly important, it may be less important than the effect of this legislation on private health insurance premiums.

As a reminder, I agree with the President’s core problem definition. Rising per capita health care spending leads to (1) slower wage growth for those with private health insurance, as premiums eat up compensation growth; (2) an increasing number of uninsured who can’t afford the higher premiums; and (3) unsustainable spending trends for state and local governments.

I wrote in mid-May about why health spending continues to grow at an unsustainable rate. Sixty-two to 75 percent of long-term health cost growth is due to the higher costs of improved technology and the increased prevalence of third-party payment. Health care keeps getting more expensive primarily because we use more and better health care each year, and because most of it appears to be paid by someone else. We have to address these sources of cost growth to have any hope of solving the underlying problem.

The President once again correctly identified the core problem, and I compliment him for his emphasis on the need to reduce, or at least slow the growth of, private health insurance premiums. Unfortunately the House “Tri-Committee” bill and the Senate HELP Committee bill move in the opposite direction. They would cause private health insurance premiums to go up, increasing the crunch on wages and the difficulty the uninsured have in affording insurance. The House Tri-Committee bill and the Senate HELP Committee bill contain insurance mandates that would make private health insurance more expensive for most Americans, and would thus exacerbate the problems described by the President.


Two different kinds of mandates
These bills contain two fundamentally different kinds of mandates:

  • “You must” mandates: Individuals and families are required to buy health insurance, and employers (over a certain size) are required to offer health insurance to their employees. Anyone not complying with such a mandate must pay a new tax.
  • “Insurers may not” mandates: Insurers may not sell policies that do not cover pre-existing conditions, or that charge very different premiums to people with different health profiles based on age, gender, or health status. These are usually described as mandates that “insurers must sell policies that do X and Y and Z,” but economically it’s actually a prohibition on selling policies that do not contain X or Y or Z. The government is not requiring companies to sell insurance, but instead prohibiting them from selling insurance unless it meets certain conditions.

Today I want to focus on the latter type of mandates, which have received little attention in the recent legislative debate. Here are four versions of an “insurer may not” mandate:

  1. Mandated benefits – A health insurance plan may not deny reimbursement for mammograms for women meeting certain medical criteria, or for a 48-hour hospital stay after the birth of a baby. Slightly less politically attractive would be a mandate that health insurance plans may not deny reimbursement for chiropractic benefits or substance abuse.
  2. Community rating - A health insurance plan may not charge different prices to different customers.
  3. Guaranteed issue – A health plan may not deny coverage to any individual who applies, regardless of whether they have a pre-existing condition. Guaranteed issue would allow, for instance, a cancer patient to newly enroll in a health insurance plan to get reimbursement for medical treatment for his cancer.
  4. Any willing provider - A health insurance plan may not exclude particular hospitals or doctors from their network.

Benefit mandates are fairly straightforward. The big question is, why should the government be deciding which medical treatments your health insurance must cover? Does it make sense for the government to mandate specific medical care practices? You can tell from my framing of the question that I’m a “no” on benefit mandates. I don’t think that’s an appropriate role for government.

Each benefit mandate raises the price of health insurance a little bit. These increases accumulate.

Community rating and guaranteed issue usually provoke the most active debate because of their enormous distributional effects. They act as cross-subsidies from the healthy to the sick, or more precisely from those more likely to be healthy to those more likely to have higher health costs.

Here is a crash course in community rating and guaranteed issue. I will oversimplify to make it useful.

  • Health care costs tend to be highly concentrated. Most people are fairly healthy and have low health costs. They occasionally get sick or injured, but on average they’re healthy. In a similar way, most houses don’t catch fire each year, but you buy homeowner’s insurance to protect against the small chance that yours will.
  • Most of the health care spending is concentrated in a minority of the population who are frequently or permanently sick or injured. These people have predictably high health costs and therefore cost more to insure in a market without government distortion. Continuing the home/fire example, a house built next to an outdoor flamethrower testing facility will catch fire more often and have predictably higher costs. We would expect an insurer to charge a higher premium for such a home. And a house that is on fire has no risk – the costs/losses are certain. The minority of homes built near the flamethrower testing facility, and those that are already on fire, would account for a large majority of the total costs/losses.
  • If a policy equalizes premiums between the usually healthy and the predictably sick, health insurance will become somewhat more expensive for most (usually healthy) people, and much less expensive for the minority who are predictably high cost. In some cases, a market without distortion won’t even sell insurance to someone who is predictably sick, just as an insurer won’t sell you insurance while your house is on fire. Assuming we want to help the person with cancer, if we do so by requiring companies to sell him insurance and to charge him the same premium as a healthy person, then the cancer victim can buy affordable insurance, cross-subsidized by a large number of relatively healthy people who will pay higher premiums.
  • This is what community rating and guaranteed issue do. They make insurance available and much more affordable for those with predictably high health costs (e.g., someone with incurable cancer, or a sixty-year old man with a family history of heart disease), while raising premiums for most enrollees who are on average relatively healthy.
  • It gets even trickier because some people who are predictably sick and need expensive medical care have inherited or random illnesses that are completely outside of their control, while others use a lot of medical care in part because of their behavior. While both types are high-cost and predictably ill, some people and policymakers come to very different judgments about whether the two cases should be treated the same. If you think someone with a family history of cancer should not be charged a higher premium than someone without, are you comfortable saying that insurance companies should charge smokers and non-smokers the same premiums? Should non-smokers subsidize the premiums of smokers? Does your answer change if the smoker already has lung cancer?

Because the House and Senate bills contain versions of community rating and guaranteed issue mandates, they would benefit those with predictably high costs. At the same time, the President wants to slow the growth of overall (total/average) private health insurance premiums, and we need to understand how much the mandates in these bills would exacerbate that problem.


We have a lot of data on the effects of these types of insurance mandates, because there are today 50 state insurance markets with widely varying requirements. This serves as a natural experiment and allows health economists to tease out whether particular mandates are associated with, and probably cause, higher insurance premiums.

We had three economists from the Council of Economic Advisers study this (internally for the Bush White House) in 2004. They are Mark Showalter, William Congdon, and Amanda Kowalski. They turned their memo into a published paper, which you can access for free here, but only if you’re in an academic institution. For the rest of us, here is the original CEA memo from which this paper was derived.

Their memo analyzed the effect of State insurance mandates on the price of health insurance policies in the non-group (individual) market. Here are three conclusions relevant to the current debate:

  1. “Mandated benefits raise the expected price of an individual policy by approximately 0.4 percent per mandate.” For family policies the increase is approximately 0.5 percent per mandate. The typical state has about 20 mandates (with a range from 6 to 48) so a reduction from 20 to 10 mandates would imply a 4 percent decrease in price for individual policies, and a 5 percent decrease for family policies.
  2. “Community Rating” laws, which limit insurers’ ability to charge different prices to different customers, raise prices by 20.3 percent for individual policies and 27.3 percent for family policies.”
  3. “The difference in price for guaranteed issue laws is $113 [per month for an individual] (233 – 120), but only a single state in our sample has such a law (New Jersey).”

The House and Senate bills both require guaranteed issue, and they both require versions of “modified” community rating, with the specifics to be determined by the States. While neither bill creates new specific federal benefit mandates, they both create a government-appointed board with the ability to create such mandates. Thus the mandated benefits effect is there but indirect.

Anticipating some of the pushback:

  • Yes, their regressions looked at the effects of State mandates, rather than national mandates, and on the individual market rather than the employer-based group market.
  • It is hard to tell how national mandates would interact with the new exchanges for individual (non-group) purchase. While I will guess that the effects would be similar to those found in the CEA study, that’s just my guess.
  • I am not aware of “any willing provider” mandates in the House or Senate bills, so those are not directly relevant.

I am not arguing that the numbers from the CEA memo directly translate into the same quantitative effects for either the House “Tri-Committee” bill, nor for the Senate HELP Committee bill. But the numbers are large enough that Congress needs to ask these same questions about the bills they are now considering.

You may think that community rating and guaranteed issue, which often go together, are fairer than allowing insurers to base premiums on expected risk. You may instead think that health insurance should be like homeowners or auto insurance, in which people with similar risks pool their resources and get charged similar premiums, and those with higher expected risks face higher premiums. This debate is value-driven and often quite intense, and I am not trying to resolve it here.

I am trying to draw your attention to a more basic analytic point. By including a guaranteed issue mandate, a mandate for modified community rating, and the ability for a new government-appointed body to create new benefit mandates, the House and Senate bills will cause total and average private health insurance premiums to increase.

How much? I cannot say precisely, because of the differences between CEA studied State mandates and because there are other interactive effects in this bill. But clearly these mandates will increase premiums, and if the numbers are comparable, the neighborhood is quite expensive: +4-5% higher premiums for another 10 benefit mandates, +20-27% for community rating, and New Jersey’s guaranteed issue is associated with 94% higher premiums compared to a similar State without guaranteed issue. Those are potentially astronomical premium increases that would make the problems the President describes far worse than under current law.

Debates and decisions about the equity effects of guaranteed issue and community rating mandates are why we elect Members of Congress. They will affect the predictably sick and the relatively healthy. These debates need to occur before Members vote on these bills. And Members need to understand the effects these mandates would have on private health insurance premiums. It would come as a harsh surprise if these bills became law and premiums for most Americans suddenly jumped 20%, 27%, or 94%.

Before voting on these bills Congress needs to ask both CBO and the HHS actuaries two simple questions:

  1. What would be the effects of the guaranteed issue and community rating mandates on average private health insurance premiums, in both the group and non-group markets?
  2. What would be the effects on average private health insurance premiums if the new government-appointed body were to add N more benefit mandates?

The answers to these questions are at least as important as the effect of these bills on the federal budget.

29 responses

  1. It’s nice to see data!

    Any data on the interaction of these type of mandates with the “you must” mandates. For example, if most of the unisured were healthy, or “you must” mandate should serve to offset the increased premiums suffered by the currently insured as a result of the new “insurers may not” mandates.

  2. What I cannot understand is why the actual cost of medical care is not being addressed. Shouldn’t the cost
    and availabiity of medical care be the problems to solve, not obscure insurance bundling schemes?
    While I agree with your assessment and it does help me understand what some of the terms are about, it
    does not seem to address the health care “problem”.

    I enumerate the problems like this:
    1. 12,000,000 people are too poor to buy insurance or pay for medical care.
    2. “Insurance” is not insurance. Health money should be sequestered into two piles: 1 for planned medical
    care that everyone always needs (checkups,pregnancy,dental cleanings). 2. Unplanned (cancer,pregnancy
    problems,arthritist). Each pile should be addressed individually.
    3. Medical prices are very high. [US has 2.4 doctores/1000 which is low; why not increase the supply
    of the service prividers to help stabilize or lower prices?] I don’t like making someone go bankrupt to
    get a cancer cure.
    4. People do not experience the price of medical care. They pay $10 co-payment and leave the office.

    I have not seen

    a. Free clinics
    b. Medical Stamps [like food stamps, but unlike food stamps, then cannot be converted into cash]
    c. More medical schools to produce more doctors to raise the 2.4 doctors/1000 population to a higher number.

    discussed as possible remedies to the real problems listed above.

    These three things would be a lot cheaper than $100B/yr and have have much more immediate effects.

    Comments?

    Ed Bradford
    Pflugerville,TX
    @egbegb

  3. Pingback: New health insurance mandates would increase premiums … - Health Web Blog

  4. These are not very helpful rhetorical questions, but bear with me, there’s a point. Why does the government have to do anything about rising health care costs? If the costs are becoming too great, then why don’t people simply do what they do: make a judgment call, make one of the many tough choices life inevitably demands we make, and decide for themselves if insurance is worth the cost? Perhaps we don’t need cheaper insurance, but less consumption of insurance.

    The debate over Obamacare has been fuddled by many fatuities of varying degree: offering testimonials as evidence, comparing the relative merits/demerits of socialized health care versus private health care, offering speculative cost figures for a proposed plan. While hardly anyone might say so, “just price” is at the heart of this debate, and I’m instinctually dubious of anti-free-market posturing in naming that mythical value. I urge you not to play coy with my borrowing an economic term from Aquinas, which hasn’t been used in earnest in as many years since. It is a foundational notion, something that appeals to our sense of fairness, and which Marx would return to by slight of hand a few centuries later. The question of “just price” is normally answered by the meeting of supply and demand in a competitive market place. In a capitalist system, the “just price” is presumed to be determined by the invisible hand of enlightened self-interest. The question now that everyone has implicitly answered is what proper health care aught to cost outside of our current market context. Granted, there is legislation currently impeding the freedom of this market, but all things equal, how can it be determined that costs are unjust? There is a certain worldview at work here determining our inability to cope with the high price of health care.

    Obama et al. believe that the current and projected future price of receiving health care/insurance is unjust. It seems to be the logic of policy makers that someone has then been charged with the divine right to rectify this error in price, and this is of course the government. Now all they have to do is prove to us that they can lower the price of health insurance to resemble more its just price. Ehh, but what about the price right now? Someone is not guilty of a crime simply because Obama says so, we have institutions and procedures for determining guilt and meting justice. In this case, it seems like a job we’ve historically reserved for the market. Why has the market failed, or has it?

    Regarding my belief that market prices are in fact the best indicators of value, the high price tag on health insurance is a reflection of the fact that health care is highly prized yet relatively scarce. Much in the way of skyrocketing education costs, it is more apt to say that the high price is a reflection of the recently amended cultural norm of “life’s necessities.” Health insurance, like education, is now viewed as a right, an obligation of the state (or someone), and a competitive concern of subsistence. It is a sign of the times and a sign of the progressive state that luxuries, fortunate blessings, and just rewards for great efforts and demonstrations of competence are now becoming a fundamental right of the living by virtue of citizenship. Hence the “problem” of rising health care costs; it is a problem because we truly demand it, yet are unable and often unwilling to pay for it. Your own proposals for reform are commendable, and would in fact push us closer towards a truly market determined price, one without the legislature’s heavy hand bearing down upon it. The Democrats see not the repeal of laws as the solution, but rather the creation of new laws. This would most certainly result a number of the ill effects associated with Socialism.

    We are all capable of evaluating our own risk preferences, or at least responding to our emotional evaluations in a relatively rational way, so why do we appear to be so intransigent on this issue of health insurance? Politicians are debating the best way to provide me with health insurance at the lowest cost, but I don’t want it; a penny spent for me is a penny lost. Some people kind of want it, but can’t afford it. And others want it at nearly any cost and they want it to be spectacular (or they’ll sue). Most of us fall into the latter category, and we resent the high cost, but pay it anyways. I wager that we get what we pay for- the best meds, the best care, and the most prompt care in the world. Stop consuming all the hoity-toity devices, procedures, and meds, and it won’t cost so much. I suppose this is the trick of Obamacare, that ultimately it will ration care, but this is unacceptable to us, and costs are therefore not the issue, but as I suggested, it’s rather our conception of justice and human rights that is driving the furor.

    The point of all this is how disturbing it is that common wisdom has come to classify health insurance as just another of life’s requisite amenities along with paying rent, replenishing worn out work clothes, and paying for a 3 dollar loaf of bread. Is insurance really that necessary? I wonder when it was that we began to think this way; I wonder where the western explorers have gone- that cowboy culture of rugged self-reliance and that determined assertion of will to carry us through pain and hardship. This is America, and I still believe that means something. It has long been my fear that we transmogrify from that “rebel colony” into just another satrapy of the Brits. As far as I can see, we’ve gone “Anglo,” and the Obamacare debate is a testament to our softness in the face of life’s inborn hardships.

    I understand some people require regular health exams and health care, and I’m lucky enough to not be one of those people, but then that’s my luck too, right? And the other guy, well that stinks. We, along with most of the developed world, have lost our taste for life. We’ve forgotten how to let babies cry, how to say “life sucks sometimes,” and how to fight through hardship with the great American qualities of manly hardiness, endurance, honor, and moderation. I have no problem with the state helping out the downtrodden, the orphans, mentally ill, and the widows, but is it really necessary for us all to be helped?

    Keith, you seem to be speaking esoterically at times, which is understandable, but I just want to make sure I understand you. When you praise Obama for nailing the pin on the head, I sense that he wouldn’t agree with you after hearing your full explanation of what you mean. “Health care keeps getting more expensive primarily because we use more and better health care each year, and because most of it appears to be paid by someone else. We have to address these sources of cost growth to have any hope of solving the underlying problem.” Does this mean we must change our insurance demand patterns, or change our expectations, since those are driving the cost increases in the first place? In other words, do you agree with me that our expectations are the root problem, and that the market is fundamentally sound (given our warped incentives due to tax exemption policies)?

    Personal Anecdote:
    As if saying, “I choose to not be free,” my peers look at me like a multi-headed hydra freak whenever I say, “I choose to not be insured.”

    When I do decide to take steps towards insuring a comfortable future, I will save. What’s so appalling about the notion that we pay for health care ourselves, and leave the insurance companies out of it? When something breaks, we either pay to have it replaced, fixed, or we let it die. We make these decisions through ad hoc cost-benefit analyses, and we man-up when we do it too, we don’t lay in bed and cry. I do the same when it comes to my health.

    While working at Starbucks, I was given the option of consuming health insurance for $40/month. Everyone thought I was crazy, but I denied coverage so I could realize the extra income. I was feeling healthy, risk prone, and most importantly I was hard-up in Southern California- burning through my life savings faster than I could make money to replenish my bank account. It is obscene to suggest that I should have been worried about health insurance at that time. I’ll be honest, I used the extra $40 to sponsor much needed quality upgrades in my consumption of cigarettes and beer. This is an irony of the underclass that I heartily embrace, as would anyone fond of these habits yet relegated to the dregs GT One and Keystone Light. Ahh, Marlboro and Budweiser, I’d give up health insurance for you two any day.

    If I’m really ill, and I think I might have a degenerative disease, I go in for a check-up, otherwise I let the chips roll and get some Airborne for $5.99 to sooth my pain [as an aside, Airborne was successfully sued for false advertisement. They could not substantiate any of the beneficial health claims made on the container…oops]. If successive care is “required,” I give due consideration to the estimated costs, weigh it against my budget and the commodities/services I alternatively demand, and then I make my decision. If I’m hypothetically refused care because there’s no way I could cover the costs, then it will probably be a painful death for me. I take these to be a realistic estimation of human life and its discontents, there is nothing unjust about it. I am in no position to mount an existential rebellion against disease and death, and if we continue to hubristically march in this direction, we will see how great is the fall from great pride.

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  6. You left out the other half of the loaf that makes mandates work – mandatory lifetime participation. The amount of money coming into the system from people who would not voluntarily pay in should at least partially offset the additional cost of covering those with pre-existing conditions at a reasonable rate. I’m willing to bear the additional cost just for the peace of mind knowing that if I ever become one of the chronically ill, I won’t be wiped out. Of course the ultimate solution to all of this is single payer.

  7. Greg said “I understand some people require regular health exams and health care, and I’m lucky enough to not be one of those people, but then that’s my luck too, right? And the other guy, well that stinks. We, along with most of the developed world, have lost our taste for life. We’ve forgotten how to let babies cry, how to say “life sucks sometimes,” and how to fight through hardship with the great American qualities of manly hardiness, endurance, honor, and moderation. I have no problem with the state helping out the downtrodden, the orphans, mentally ill, and the widows, but is it really necessary for us all to be helped?”

    Greg, all what you say may sound wonderful to you but frankly it is pure bilge. I worked for ten years in a homeless shelter and I believe most of the homeless would have expressed similar sentiments until they were ill, elderly and homeless due to bankruptcy or loss of a job or their home or all three. You will wake up from your fantasy utopia of “hardness, endurance, honor and moderation” when you experience life after fifty if, with all your beer drinking and cigarettes, you live that long.

  8. “Health care keeps getting more expensive primarily because we use more and better health care each year, and because most of it appears to be paid by someone else.”

    Bingo. Take the third party payer out of the equation as much as possible and you will have a market again. Without it, health care is not even a market by definition, because neither buyer nor seller have any impact on the price of the service.

  9. There are cerain basic assumptions:
    1. Why do we need to cover all illegal imagrants ( 12 to 16 million)?
    2. Why can’t coverage for aged seniors be available as a catistrophic coverage option, because of the demonstated high cost for end of life treatments, which I understand amount to well over 50% of total medical care in the later years? ( I happen to be 77 years old this year)
    3. Why can’t our existing health insurers form a group to perform this overall effort? They already have the mechanizms, ie: computers,data bases, contacts with both the doctors and hospitals. Obviously a transparent oversight of such a group would be required. Otherwise it will a mass duplication of effort and costs

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