Subject: Pricing Health Care: Health Insurance: Date: Published: 12/17/91 (182 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. Pricing Health Care: Health Insurance: States Can Help ---- By John C. Goodman As the cost and availability of health insurance move center stage in the national political debate, candidates would do well to consider what's happening at the state level. Legislators are finding that they, not some defect in the marketplace, are the chief cause of many of our problems. Standing between an estimated 34 million Americans who lack health insurance and the opportunity to buy an affordable policy are numerous state laws -- often the result of special-interest political pressures. By one estimate, as many as one out of every four people who lack health insurance has been priced out of the market by costly state regulations. To undo the harmful effects of these policies, many states are exempting small business to one degree or another. Yet this reform movement is in danger of being sidetracked by a new group of special interests. Although the original intent was to make health insurance cheaper, the end result in many places may be to make it more expensive. Under mandated health insurance benefit laws, state governments tell insurance companies that in order to sell policies within a state they must cover certain diseases and health providers not traditionally covered by health insurance. In 1970 there were only 48 such laws in the U. S. ; they now number close to 1,000. Mandated heath insurance benefits cover ailments ranging from AIDS to alcoholism and drug abuse, and services ranging from acupuncture to in vitro fertilization. They cover heart transplants in Georgia, liver transplants in Illinois, hairpieces in Minnesota, marriage counseling in California, pastoral counseling in Vermont and sperm-bank deposits in Massachusetts. Health economist Gail Jensen of Wayne State University estimates that mandated coverage increases premiums by 6% to 8% for substance abuse, 10% to 13% for outpatient mental health care, and by as much as 21% for psychiatric hospital care for employee dependents. According to a study for the National Center for Policy Analysis by Gerald Musgrave, as many as 8.5 million people have been priced out of the health insurance market by costly mandates. Within the past several years there has been a flurry of legislation and legislative proposals to reform health insurance at the state level. First the good news. At least 24 states have now rolled back mandated benefits for small business, proving that special interest pressures can be overcome if the cause is sufficiently compelling. About a dozen other states are considering similar legislation. Take Washington state, for example. Normally, health insurance policies there would be subject to 28 mandates -- covering alcohol and drug abuse, mammographies, and the services of chiropractors, occupational therapists, physical therapists, speech therapists, podiatrists and optometrists. Under a law passed last year, however, firms with fewer than 50 employees can now buy cheaper insurance with no mandated benefits. States also have taken other actions to encourage small businesses to purchase health insurance for their employees. Several exempt small-business policies from premium taxes, and at least six states extend tax credits to employers who are first-time buyers of health insurance. Iowa, for example, exempts "bare bones" policies from premium taxes and provides a tax credit to employers who pay at least 75% of the premium for a low-income employee and half of the premium for the employee's dependents. Premium taxes also have been waived for small businesses in Nevada, New Mexico and West Virginia. Other states that give employers tax credits for the purchase of health insurance include Kansas, Kentucky, Montana, Oklahoma and Oregon. The credit is $15 per employee per month in Oklahoma and up to $25 in Oregon. In another welcome development, a number of states now prevent insurers from canceling a policy or charging exorbitant premiums just because an employee gets sick. Since people buy insurance as protection against an unforeseen illness, it's not fair to let insurers change the rules of the game after the illness has occurred. Now for the bad news. In a review of the fine print of the new legislation, Greg Scandlen (Health Benefits Letter) finds that many state reforms are less substantial than they seem. Some states have repealed some mandates but not others. Missouri, for example, has repealed only eight of its 18 mandates. The definition of a "small business" is often quite restrictive. In 14 states an employer must have no more than 25 employees. In addition, many states allow a small business to qualify only if it has been without insurance for some period of time. In seven states, the qualifying period is at least one year; in Kansas, Maryland and Rhode Island, it's two years; and in Kentucky, it's three years. In these states, small employers who currently provide insurance coverage are penalized for doing so. All the benefits from the new legislation go to their uninsured competitors. In another unfortunate trend, some states have subjected bare bones policies to new mandates while freeing them from the burdens of old ones. For example, numerous states require coverage for mammograms and well child care, even though the same laws allow insurers to skimp on catastrophic coverage. While preventive health services may be desirable on purely medical grounds, studies show that preventive medicine usually increases, rather than reduces, overall costs -- thus making premiums higher than they otherwise would be. Moreover, forcing insurers to pay for small medical bills can be extremely wasteful. By the time a third-party payer processes and verifies the bill, the processing costs can equal the physician's $25 fee -- thus doubling the cost of medical care. Perhaps the worst development is a new set of regulations governing insurance pricing. At least five states now require insurers to sell to any small business, regardless of the health of its employees (with limits on the premiums that can be charged). While the objective may seem humane, these laws encourage perverse behavior. If people know they can always get insurance after they are sick, they have an incentive to wait until they are sick to buy it. Yet if only sick people buy health insurance, the premiums will be extremely high. Another perverse development is the trend toward "community rating." Virginia, for example, requires that all applicants be charged the same premium, regardless of the likelihood that they will get sick and incur medical costs. Other states have severely limited the ability of insurers to price risk accurately, causing healthier people to be overcharged and sicker people to be undercharged. States that require insurers to take all comers and prevent insurers from charging premiums that reflect real risks usually set up "reinsurance pools" -- industry gobbledygook for forcing profitable companies to subsidize the losses of unprofitable ones. The net result is that all premium prices will be higher than they would have been. Insurance industry experts estimate that the removal of all current state mandates would reduce the cost of health insurance by about 30%. But this gain could be totally wiped out by the cost-increasing effects of new regulations. Furthermore, bare bones policies often sell at a lower price not because of reduced regulation but because of reduced coverage for basic medical risks. Annual insurance benefits may be capped at $100,000 per employee in Arkansas and $50,000 in New Mexico and Nevada. Such policies leave people exposed for truly catastrophic medical episodes and undermine the real purpose of insurance. Since the option to reduce coverage in this way was generally permissible even before insurance reform, it's not surprising that bare bones policies have not made much of an impact in the half-dozen states where they are now being marketed. The most basic problems with insurance reform are the refusal of state governments to allow a real market to develop and the refusal of the federal government to give the currently uninsured the same tax and regulatory breaks given to employees of large companies. Contrary to widespread impressions, most people who lack health insurance are healthy. Two-thirds are less than 30 years of age, in the healthiest segment of our population. Most have below-average incomes and very few assets. As a result, they are especially sensitive to price. Most of the uninsured have voluntarily decided not to purchase health insurance for a very good reason: The price is higher than that faced by other people for comparable benefit levels. Whereas 90% of insured people purchase health insurance with pretax dollars through an employer, uninsured individuals must pay with after-tax dollars. Whereas most employees of large corporations are exempt from silly state regulations, since their employers "self-insure," most of the uninsured are the victims of those regulations. What most young, healthy people need is the opportunity to buy no-frills health insurance at a fair price. Aside from giving these people the same income tax break and the same options routinely given to others, politicians can help most by repealing bad laws and getting out of the way. --- Mr. Goodman is president of the National Center for Policy Analysis in Dallas. [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]