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How Simply Elegant: The Problem with Individual Insurance Mandates

by Emily Friedman

First published in Hospitals & Health Networks OnLine, October 3, 2006

The passage earlier this year of Massachusetts' nearly universal health insurance law has received massive press attention, in part because the statute requires some uninsured individuals to obtain coverage or else be penalized on their income taxes. It's an idea that health policy think tanks and consultants have been pushing for years, and other states are taking notice. What do we know about the individual insurance market, and how good an idea is a mandate of this sort?

"For every problem, there is a solution that is simple, elegant, and wrong."--H.L. Mencken

So Massachusetts passes a health insurance law that includes a provision requiring many uninsured individuals to obtain coverage or else pay tax penalties. The good news is that this event has prompted greater interest in the continuing problem of the uninsured, currently estimated by the Census Bureau to number 46.6 million people. The bad news is that the idea of an individual insurance mandate, which is being pushed very hard by conservative policy wonks, is increasingly attractive to policy-makers and to many employers, who are tired of trying to provide affordable coverage to workers in a market that is becoming impossible.

Now, why the Massachusetts experiment--which has yet to be implemented and whose funding appears dicey at best--has gotten all this press while other, equally (if not more) noteworthy efforts in Maine, Vermont, Illinois, Pennsylvania and New Mexico barely rate a mention is beyond the scope of this column, although the presidential ambitions of the governor of Massachusetts might have something to do with it.

In any event, this new enthusiasm for an individual mandate in a society that historically has relied on employment-based coverage is worth a closer look--and some hard questions.

The Individual Market

There are approximately 16 million people in the individual insurance market. They face, among other attractions, the highest costs, the most aggressive rating on the basis of health status, the skimpiest coverage, the most limited assortment of products and the most lax regulation in most states. In quite a few markets, there is exactly one carrier offering individual coverage. Abuses are rampant and consumer protection is lacking. Why on earth would anyone see this market as a model for insurance reform?

Well, there are several reasons. One is ideological: In this era of "personal responsibility," the idea is that people should take charge of their own insurance needs and handle things themselves, even if information is lacking and they are pawns in the hands of the market. Another is the risk aversion of insurers. When dealing with an employee group, an insurer must take on everyone in the group, even if some of them might be (gasp!) sick or predisposed to illness. That's not a problem in the individual market; when each person constitutes his or her own group, you can risk-rate the heck out of every single one of them and avoid the ill and disabled (and--coming to an insurer near you soon--those with genetic predisposition to illness).

A third factor pushing interest in an individual mandate is the breakdown of employer-provided coverage. As Andy Stern, president of the Service Employees International Union, wrote recently in a Wall Street Journal op-ed, "The employer-based system of health coverage is over." That's overstating things more than a bit, but certainly, after years and years of double-digit inflation in premiums, employers are stressed.

A Few Hitches

So what's wrong with switching to individual coverage? After all, it means that any individual can move from employer to employer without fear of losing coverage. It should strengthen and diversify the pitiful individual market. In the argot of the market theorists, it will "empower consumers to make more intelligent choices."

Maybe. But there are a few hitches in this giddy-up.

Cost. According to the Milliman Group, health insurance for a family of four in the United States costs $11,172, and the family must pay another $2,210 out of pocket for uncovered expenses. That's with the cushion of being members of an employee group. Toss that same family into the individual market, and the premium could rise by 50 percent to 100 percent. Furthermore, the administrative costs of individual insurance are much higher than those for employee groups. Insurers overstate this cost by far, but logic does tell us that administering, say, 1,000 different accounts as opposed to one account will cost much more. For all parties involved, individual insurance is the most expensive way to go.

Discrimination against the sick and others at risk. The Milliman estimate was for a "typical" family of four, not one that includes a disabled child or a mother with breast cancer. Pricing discrimination against the sick, disabled and potentially sick and disabled (and soon, the genetically disadvantaged) has become a fine art in commercial insurance, and it is the worst carriers--the real bottom feeders--who define the market. "Oh," you say, "but such discrimination is illegal in our state, and HIPAA prohibits risk rating on the basis of one's genetic profile." Yeah, right. I could recount many stories, but I will share only a few:

An older friend of mine recounted how she was often recruited by insurers seeking enrollees in their Medicare supplemental plan--and that the recruitment gatherings, which usually included a free meal, were always held on the second floor of buildings that did not have elevators. You figure it out.

Another friend of mine, newly retired, whose husband is a self-employed dentist who has had prostate surgery, took one look at the insurance options--of which there were none--and went back to work.

Employers seeking to protect themselves against risk are asking for genetic information on potential employees so they can weed out those with genes that predispose a person for breast cancer, cystic fibrosis or other conditions.

And Blue Cross of California--a subsidiary of Wellpoint, one of the two largest commercial health insurers in the United States--is under investigation for canceling the policies of individual enrollees who had large claims. Plan operatives scrutinized the enrollees' policies to find loopholes or omissions, even if they were inadvertent. In more than a few cases, the problem stemmed from non-English-speaking applicants being forced to sign applications in English without knowing what they were signing, and certainly without knowing that the application and policy differed from what they were told was in them in their native tongue by a salesperson.

As long as the market rewards risk aversion, insurers will be risk averse, and avoiding risk in the individual market is like shooting fish in a barrel. This leaves aside the question of why this country allows the barbarity of excluding sick people from health insurance coverage. What are these guys selling, if not health insurance?

Should the Public Pay?

Increased public spending and subsidy of the private market. Well, of course, there's an answer for everything, and one little doodad that has been added to the individual insurance holiday tree is this ludicrous proposal: Let the private insurers cover all the healthy people, and send all the sick people to Medicaid and state high-risk insurance pools. Let me get this straight: Health insurers, who spend zillions marketing their compassion for the ill, want to skim the cream of the healthy in a population--easily done in an individual market--and let the government cover all the sick and disabled people. So much for calling it insurance; I would call it something a good deal less polite.

As Howard Troxler recently wrote in the Tampa Tribune about proposals for state subsidy of disaster insurance, such a concept puts the state in a situation of "meekly following behind the private companies with a Pooper Scooper, picking up those of us the private companies don't want."

What this creates is public subsidy of the worst insurance practices, not to mention skyrocketing public costs as states absorb the costs of the sickest. But, of course, the states won't do that; most state high-risk pools have severe enrollment limits and high premium costs. So the net result is even more uninsured, very sick people for hospitals, physicians and clinics to try to keep alive. Sure sounds like a wonderful idea to me.

Crummy products. Several studies by the Commonwealth Fund and other entities have found that individual insurance policies, in addition to being the most expensive, offer the worst coverage. They have high deductibles. They have exemptions for pre-existing conditions. They have "carve-outs" for conditions such as mental illness. They have low ceilings on lifetime expenditures. And they have tiers: If you want good coverage, you will pay for it, right through your nose.

As New York Times columnist Paul Krugman wrote last year, "If reform fails again, we'll be on the way to a radically unequal society, in which all but the most affluent Americans face the constant risk of financial ruin and even premature death because they can't pay their medical bills." Hate to break it to you, Paul, but in the individual market, we're already there.

Lack of choice. So the first individual policy you looked at didn't fit your needs? Find another one. In many markets, you have a choice of one carrier and very few products. In many more markets, you have a choice of two carriers and equally few products. (Actually, most of the time, it's the same product with different deductibles and co-pays.) They are all likely to have the flaws I described earlier. Because of high administrative costs and the difficulty of marketing and enrolling individuals, most insurers have left the individual market. Of course, with insurance monopolies building in so many places, that one insurer who is left controls the market and dictates the rules, so who's going to challenge it?

No Protection

Lack of market clout. Given pricing, risk discrimination, lack of choice, insurer monopolies, and a profound absence of information about available products, it is not surprising that any one individual, trying to negotiate an appropriate policy for herself and her family, has about the same market clout as an individual investor going up against a mutual fund. Individuals have no protection--no group around them, no employer looking out for them, no attraction to insurers. They are helpless. No wonder those who hold the levers of power are so anxious to push this model.

Lax regulation and oversight (and the impossibility of improving it). Many years ago, when I was researching the unique health insurance situation in Hawaii (that's another story), I asked a state official why the state employer health insurance mandate was overseen by the state department of labor, rather than the health department. He replied, "Because we already keep track of employers and have information on them." It reminded me of why Medicaid was welded onto the welfare system--because, as one of the creators of Medicaid told me, every state had a welfare department and already had an infrastructure in place.

No such luck with an individual mandate; if commercial insurers, whose business it is to track policyholders, have sky-high administrative costs in the individual market, how is a state or the federal government supposed to cope? How will violations of protections, compliance, pricing, complaints, and everything else be monitored, evaluated and corrected? Only at a very high price--or, more likely, not at all. Which is just what the bottom-feeders are counting on.

Noncompliance and its consequences. And so we come to the question of what happens to those who do not acquire individual insurance, despite cajoling, marketing, and threats. Well, frankly, many of them won't acquire it because they can't afford it. The Massachusetts model will not subsidize families with household incomes of more than $60,000 (pre-tax). Well, let's see. A 20 percent tax hit reduces family income to $48,000. And family coverage for a member of an employee group is in excess of $13,000, and the individual market is about 50 percent more than that, and . . . has anyone seen what gasoline prices are these days?

I'm afraid that a great many people won't go for it. Some could afford it, but choose not to. If they can afford it, I wish they would obtain coverage, because I do so and I don't like subsidizing them. But most of the uninsured are low-income or nearly low-income people, and they simply don't have the money, given competing demands.

An Existing Model

We have a model we can turn to in this regard, and that is auto insurance. According to the Insurance Research Council, 14.6 percent of American drivers were uninsured in 2004, despite many state laws mandating that they acquire coverage. This included 26 percent in Mississippi, 25 percent in Alabama and California, 24 percent in New Mexico, and 22 percent in Arizona (somehow, I think the fact that these states are among those with the highest rates of residents lacking health insurance is not coincidental). What happens if they get into accidents? Well, State Farm doesn't sell uninsured motorist insurance because it thinks it's a losing product line. Somebody has to pay.

And those who will pay for the health care of uninsured sick, injured, and disabled people are the providers. As Leif Wellington Haase of the Century Foundation has written, "The uninsured driver can be fined or have his license revoked. Most Americans would find it draconian, on the other hand, to refuse medical care altogether to the uninsured. Assessing financial penalties on the uninsured who have sought health care would be similarly counterproductive."

So, as has happened so often when health policy hopped on an ideological bandwagon, it is our hospitals and other caregivers who will be left holding the bag as they contemplate an unthinkable choice: Eat the costs for large numbers of uninsured people under an individual mandate, or leave them to die. That is hardly fair.

In discussing alleged "consumer-directed health care (CDHC)," also known as high-deductible health plans and health savings accounts that are about as consumer-directed as Enron was, former Minnesota senator and current health policy analyst David Durenberger wrote recently, "Blue Cross and Blue Shield provided health insurance to millions when no one else would, and could afford to do so only because [they] had the help of community rating and a tax-exemption subsidy. To characterize this as a monopoly when the CDHC alternative is simply a way to avoid risk altogether is to redefine the nature of insurance."

Well, so is consigning the population of the United States to the not-so-tender mercies of a commercial individual insurance market.

Five Choices

As I see it, if we want to do something about the uninsured (and, of course, there are many people in power who would just as soon see them hang), we have five choices:

The stakes are, to say the least, quite high. And I do not know what will happen. But I do know that if we are fool enough to turn this country into an individual insurance mandate market, it will be the second-to-last stop on a one-way trolley to a single-payer system. If that's what you want, we are headed in that direction.

First published in Hospitals & Health Networks OnLine, October 3, 2006

Emily Friedman 2006

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