State Health Insurance Regulations; E. Banfield

Health insurance is increasingly expen sive, mostly due to the rising cost of health care. Those costs are rising for many rea sons, most of which are tied to Medicare, Medicaid, Veterans Administration hospi tals, licensing restrictions, malpractice law, and other government policies. But govern ment meddling in the health insurance busi ness itself accounts for a large part of the problem, explaining over half of the unin sured population. Employer-Provided Health Insurance u.S. tax policy provides incentives for businesses to provide health insurance, de spite the fact that the average person stays with an employer on average only four years. That tax policy also triggers excess spend ing, especially on small claims. Using a tax Eric-Charles Banfield is owner of Banfield Ana lytical Services in Westmont, Ill., specializing in writing, speaking, and testifying aboutfinancial, economic, and publicpolicy issues.

25 break not allowed to individuals, companies give employees an expensive, low-deduct ible, highpremium health insurance policy instead of giving them higher wages. Low deductibles tell people to use insur ance for routine health care, even though insurance is really for catastrophic, unpre dictable expenses. Tax policy also says that employees, once past their deductible, can not keep any money they save by not using their insurance. The incentive to use-it-or-Iose-it, com bined with low deductibles, tells employees to use insurance for everything possible, making them less careful about where and how they spend that money. Most of the rising cost of health care is because of the increase in demand for health services we might not otherwise pay for, and all of the administrative costs that go with them. It can cost $50 to process a $50 claim. Tax policy makes people bid up costs aggres sively, and that accounts for much of the high rates of growth in health-care costs, which in turn· drives up health-insurance costs. Those policies price up to 10 million people out of the market, over a quarter of the uninsured population. 1 So, in a strange way, the problem is that we are over-insured, but that excess coverage occurs at the low end of the health-care scale, where most expenses fall ($100 to $1(00).

With insurance tied to employment, an 26 THE FREEMAN • JANUARY 1993 employee who loses his job would be unin sured. Legislatures in most states passed laws forcing firms to continue ex-employees on their group-insurance plans if the former employee picks up the premium payments. But those premiums are very high due to the low deductibles, far too expensive for some one whose income has just been cut off. It is difficult to select a higher deductible in order to lower the premium payments, because the plan is a group plan instead of an individual plan, and it is not permitted to change the deductible. It takes time to find and shift to a new individual or short-term policy, and the highpremiums make it difficult to afford coverage during that search period. Mandated Coverage, Special Privileges State laws also mandate that insurers pay for services determined by the political process, not by market forces. Often they have little to do with health care per see About 800 insurance mandates force insur ers to pay for such things as marital coun seling, pastoral counseling, toupees, and even sperm-bank deposits. Studies report those mandates bid up insurance prices by 30 percent or $50billion,2 pricing eight to ten million people out of the insurance market, 3 about a quarter of the uninsured population.

State legislatures are the cause of millions being uninsured and underinsured. The government has given Blue Cross/ Blue Shield (BCBS), formerly a hospital pre-payment plan, various special privileges granting them a competitive edge over other insurers. BCBS is exempt from taxes, anti trust regulations, actuarial requirements, and reserve requirements. With those priv ileges, BCBS can afford to use "community rating," giving all people in a geographical area the same premium rate regardless of risk. Risky people pay too little; low-risk people pay too much. BCBS loses custom ers as other insurers pick the healthiest customers and offer them lower rates. Fac ing shrinking premium income and having no reserves, some state BCBS plans are going broke. With their obvious political power, those state "Blues" propose laws (as in New York and Vermont) to force community rating on all insurers. But those insurers face real costs because they don't have the same privileges as BCBS. Younger and healthier people in those states, forced by law into a community rating pool, face much higher premiums, up to triple in some cases. With nowhere else to go (all insurers in the state face the same law), they drop their expensive coverage and go uninsured. When they develop prob lems in later years, they will find insurance prohibitively expensive or unavailable in those states. 4 Gag Rules and Other Distortions States have even enacted laws prohibiting insurance agents from saying anything bad about an insurance company. 5 That de prives consumers of valuable information 'from those who would know best. It cuts off the primary source of information about which insurers are slow to pay, in financial trouble, or otherwise poorly managed.

Other government factors distort the in surance market. Some states fix the prices or range of prices that preferred-provider organizations (PPOs) can offer.6 Eight or nine state insurance commissioners do not have the right to regulate insurance premi-f ums, but, according to industry classifica tions, "act as if they do" through their cumbersome filingand approval process for insurance policies.7 The government and the legal system have made insurance poli cies into one-way, standardized, take-it-or leave-it contracts, with little consumer input into what the contract says. As with federal deposit insurance, government regulation and implicit guarantees lessen consumer concern about safety and reliability. New Regulatory Threats Minnesota has passed Universal Health Insurance, and other nearby states have similar bills. Other states are considering improving community rating requirements.

STATE HEALTH INSURANCE REGULATIONS 27 A group of multi-state regulators (actuar ies working for state commissioners) is drafting legislation that would regulate the price, quantity, and profit margin of the small-group and individual insurance mar kets. The Life and Health Actuarial Task Force is considering putting ceilings on premium rate increases, forcing guaranteed renewability, and raising' 'lifetime loss limit ratios. ,,8 Economic market forces dictate that price and quantity naturally respond to each other. Artificial rate ceilings would have to be made up by reducing coverage. But forcing renewal increases coverage, and should require higher rates. But rates are fixed by ceiling. In case that's not enough to push insurers out of the market, the higher loss limit ratios mean more benefits paid and fewer premium dollars taken in, or a lower operating profit margin. Insurers will stop doing business in certain states, and some may be driven out of business altogether.

Individual Medical Accounts One solution that would go part way toward solving the health insurance problem is Individual Medical Accounts (IMAs). Also known as Medical Savings Accounts or Medical IRAs, these accounts would reduce bidding for needless services, provide for financial resources to cover medical ex penses, and provide a portable account in case of job loss. Tax policy is a major reason employers offer health insurance. That tax break means the firm takes what would otherwise have been an employee's wages and buys instead an expensive, low-deductible insurance pol icy that the individual might not choose if he had to pay the premium directly. IMAs would allow employees to select a higher deductible, say $1000instead of$200, and put the premium savings of about $800 into a tax-free, interest-bearing account that would be immediately available to cover payments up to the deductible. Insurance would kick in as usual for amounts over the deductible.

IMAs would have a "use-it-or-keep-it" feature, allowing individuals to accumulate any savings (from not using the account in a given year) over time. The insured would then have new incentive to be frugal with health care, shop more carefully, compare prices, and not use it to cover needless trips to the doctor for minor ailments or frivolous services. That would in turn reduce the bidding of prices at the routine care level and reduce the administrative costs associated with small claims. Best of all, if the em ployee loses his job, he can carry the ac count with him and use it to pay for medical expenses or buy interim or individual insur ance coverage. 9 The cost would be the same to employers, and employees would have more freedom. Reform, or Else Health-insurance regulationdrives a wedge between the consumers and those who pro vide it, weakening further their ability to choose for themselves what they want. Gov ernment involvementin insurance is primarily responsible for the reduced accessibility and increased cost of health insurance.

Government must deregulate the insur ance business. The only thing worse than the continued destruction of the insurance market would be the subsequent national health insurance system that the U.S. gov ernment would run. D 1. Federal Tax Policy and the Uninsured: How U.S. Tax Laws Deny 10 Million Americans Access to Health Insurance (Washington, D.C.: Health Care Solutions for America, 1992). 2. Joseph L. Bast, Richard C. Rue, and Stuart Wesbury, Jr., Why We Spend Too Much on Health Care (Chicago: The Heartland Institute, 1992), pp. 14, 63-66. 3. John C. Goodman and Gerald Musgrave, "Freedom of Choice in Health Insurance," Policy Report (Dallas: National Center for Policy Analysis, November 1988). 4. John Steele Gordon, "How America's Health Care Fell Ill," American Heritage, May/June 1992, p. 60. 5. Illinois Revised Statutes, Illinois Insurance Regulation, from an industry memo. 6. Why We Spend Too Much on Health Care, pp. 63-66.

7. Public Policy Survey: Individual Medical Insurance Market-An Industry Study (Brookfield, Wise.: Milliman & Robertson, Inc., January 27, 1992). 8. Exposure Draft, Guidelinesfor Filing ofPremium Rates for Individual Accident and Health Insurance Contracts, Life and Health Actuarial Task Force, 1991-1992. 9. J. Patrick Rooney, guest editorial, "Give Employees Medical IRAs and Watch Costs Fall," The Wall Street Journal, January 28, 1992.