What Difference Does A Mandate Make, Really? The Numbers Don't Add Up...

Opponents of "Obamacare" were popping champagne corks just before Christmas, when a federal judge in Virginia rules that the individual mandate, a central element of the legislation, exceeded the regulatory authority granted to Congress under the Commerce Clause.

Supporters of the plan were predictably dismissive, though they warned that, absent a mandate, an insufficient number of new, young, healthy people would be brought into the insurance system, there could be little prospect for keeping insurance costs under control in the Brave New World.

I have preached against the imposition of mandates for many years, but not out of any cockeyed notion of individual liberty. I believe that a mandate would not achieve the stated policy goal of the plan's advocates, and would, in the long run, have the opposite effect, leading to acceleration of health insurance costs and even less emphasis on quality than is the case in the current morass we call a system.

Because I don't think the numbers add up. I'm not an actuary, so maybe somebody out there smarter than I am will correct my mere layman's understanding.

Let's assume for a moment that the total number of Americans lacking health care coverage is about 50 million (an increase of about 30% from the "37 million uninsured" which led to the enactment of HIPAA, which was supposed to "fix" the markets for small group and individual insurance...And how did THAT work out?...).

For about half that group, "uninsuredness" is not a permanent state. For about 25 million uninsured Americans, the condition is transitory, lasting six months or less, because they're between jobs. So they have some short-term exposure, but the market will take care of them.

That leaves 25 million.

It's estimated that a third of that group consists of "young invincibles," workers under age 30 who have not purchased coverage, either because they think they don't need it or because they can't afford coverage; often they can't afford coverage because pre-existing health conditions have made coverage for them very expensive, if they can get it at all. Theoretically, these are the people whom policymakers want in the system, on the notion that, in general, they'll use less in medical services that they'll pay for in premiums.

Getting them into the health insurance system might easily be accomplished through health insurance exchanges, with subsidies to make coverage more affordable (Note: community rating has a big effect on these young folks' premiums. In Ohio, a healthy 25-year old can purchase coverage for about $150 per month, because of age-based underwriting. In New York the cost is about triple that).


That leaves 16-17 million people.

About half that number represents working families who currently earn too much to qualify for coverage under Medicaid, but not enough to afford insurance premiums. I think that expansion of children's health coverage, and the institution of premium subsidies, help these families get into the system.

That leaves 8-9 million people who currently can't obtain coverage at any price because of pre-existing health conditions. They've had a helluva time finding coverage, but it's not as if they're not trying. A study by the Commonwealth Fund concluded that only about nine percent of those applying for health coverage in the individual market are able to obtain it, because their health conditions either render them uninsurable, or because they rates they're offered are out of reach.

Aren't we making pre-existing conditions go away, and extending premium subsidies to these individuals through exchanges, as well?

Most of the folks I know in this category are either desperate to acquire coverage, or struggling to obtain it.

So who's left? Where are the millions of slackers who refuse to purchase coverage, even when it's available to them at a relatively affordable price?

Is it reasonable to expect that premiums generated by bringing in the "young invincibles" will come anywhere near offsetting the cost of bringing in the 7-8 million older, sicker people who now can't purchase coverage at any price?

Then there's the matter of price...or more precisely, the contention that mandating participation by everyone has the long-term effect of bringing costs down for everyone. I think this contention is nonsense. There's no evidence to support it, and in the few instances where evidence exists, it would seem to support the contrary position.

Many years ago, I had the chance to debate The Lion Of The Senate, Ted Kennedy, on the subject of making health coverage mandatory. As we discussed the issue, I asked him, "Pretend for a moment that everyone in America was required to purchase a Cadillac Sedan DeVille? Not just a car, but a big old Cadillac with all the options. What do you think would happen to the price of Cadillacs?"

The Senator answered that he thought the price would go down, because there would be so many more of them.

I suggested the contrary: not only would the price not go down, but there'd be no limit on the price of Cadillacs, because regardless of price, the government said you had to have one. And it wouldn't matter how well your Cadillac worked; the government didn't say your Cadillac had to work great, only that you had to buy one. Oh, and by the way, other carmakers? Competition in the car market? It would cease to exist.

That's the last time we spoke personally.

There is one state, Hawaii, which mandates that all citizens have health coverage. It's essentially a holdover from Hawaii's plantation days. In the early '70's, state government required that all health plans offer chiropractic services. In the ten years following enactment of the mandate, the number of chiropractors in Hawaii doubled, and the cost of chiropractic services tripled.

Think heath care costs are accelerating in hyper-drive now?...Wait till you have no choice but to buy a standard health plan, courtesy of Our Friends In Government.

I'm perfectly happy to be proved wrong. It just ain't happened yet...

As Insurers And The Government Dicker, Who's Speaking For Purchasers?

WOW!...Time flies...After a few weeks of triumph (our baby daughter's high school graduation) and my Mom's death, time to check back in for a view from the grass roots of America...

I spent some time in Ohio's state capital (Columbus, for the geographically challenged) talking with officials of the state's Department of Insurance about the implementation of federal health care reforms at the state level, where most of the really heavy lifting and ongoing work of actually covering people will be done.

They're a little busy. The first order of business is to implement the federally-mandated and (partially and temporarily) funded high-risk pool for hard-to-insure Ohioans. Ohio has had some experience with such a risk pool, and most of it has been unpleasant: largely because of very high premium rates, Ohio's current risk pool covers fewer than 1500 Ohioans. A temporary federal subsidy may make rates a little more affordable for some folks for awhile. The high-risk pool is supposed to be in place by July 1st.

By September 1st, all employer plans will be required to extend family coverage to dependents under the age of 26. While large, self-insured employers have till September to take that action, most Ohio insurers have already implemented that change for fully-insured customers (read: small groups and individuals) effective July 1st. The cost? We'll see...but it ain't free...

The REAL action, though, is going to revolve around the establishment of a statewide health insurance exchange by January 1st, 2014. Through the exchanges, individuals and companies with fewer than 50 employees are supposed to be able to shop for, compare, purchase and manage their health plans on-line. Larger employers will supposedly have the option a couple years later. And ultimately, the high-risk pool will be absorbed into the exchanges.

The exchanges are going to have a lot of work to do. In addition to packaging, marketing and managing health plans for participating insurers, they'll be tasked with means-testing applicants to determine whether they will qualify for an expanded Medicaid program (again, temporarily subsidized by Federal funds) or for a private insurance subsidy (ditto) for participation in a private health plan.

How's all this going to work? No one knows. The Federal government has yet to produce regulations which will guide the states' implementation of the exchanges.

This is, of course, a practical problem. I have a little experience with developing large-scale health plans and the infrastructure needed to support them. And three and a half years is NOT a lot of time.

Beyond logistics, though, there are policy issues to be agreed to between the Fed and the industry. Those negotiations are very likely to involve a lot of chicanery. In general, insurers are not happy at all at the prospect of having to do business in a new environment of transparency and efficiency. Here are just a few of the issues to be determined:

What incentives will be created to encourage administrative efficiency? This is a really big deal for small businesses and individuals, where between 25 and 40 percent of premiums go to cover administrative costs. The new Federal law requires insurers to hold their administrative costs to 20 percent or less of premiums for small groups, and 25 percent or less for individuals. Currently, insurers' efforts are focused on attempts to re-classify what have long been considered as administrative costs as clinical costs, including many marketing and community outreach costs.

Recently, for example, the CEO of the Ohio Association of Health Plans suggested that insurers be "incentivized" to encourage hospitals and physicians to adopt universal electronic medical records by classifying the associated costs as related to patient care, rather than administrative costs. Expect to hear much more highfalutin' rhetoric from insurers about their focus on patient care as a result of games like these.

What will happen to underwriting costs?No one knows for sure what percentage of insurers' administrative costs are attributed to the health screening imposed on every individual and small group application, but it wouldn't be unreasonable to estimate the costs at 6-7 percent of premiums. By 2014, those underwriting practices...and theoretically, their attendant costs, will be going away. Presumably, a portion of those underwriting costs will have to be re-allocated to enable exchanges to do the means testing work they'll be required to do. How will we know whether that happens?

What will happen to marketing, advertising and sales costs?Marketing, advertising and sales costs make up easily 10-12 percent of small group and individual administration costs. Insurers say that these costs are high because the process of selling small group and individual coverage is very inefficient. Theoretically, the exchanges should bring a high degree of simplicity, standardization, and administrative efficiency to the process. In Massachusetts, for example, it appears that groups using the Massachusetts Connector for their coverage pay lower premium rates when they access the Connector directly than when they do so using an agent or broker. But in most states, including Ohio, there are literally laws against rewarding marketing and administrative efficiency with lower rates. A well-run exchange has the potential to reduce marketing and sales costs by as much as half. Who'll make sure that happens?

While much ink is being spilled over the Obama health plan's relatively weak efforts to rein in medical costs, insufficient public discussion is occurring around these matters which...well, matter...so critically to the prices which small businesses and individuals pay for their health coverage. Given the ability to do so, exchanges could reduce the administrative costs portion of their health plans by as much as half.

But right now, those conversations are taking place largely in the dark, between newly-hired federal bureaucrats and seasoned and cynical insurance industry lobbyists. Which ought to make us all just a tad uncomfortable...and skeptical...that these important new vehicles really will have the flexibility to change the small group and individual insurance markets. Usually, if you take a bunch of broken stuff and jam it all together, you just get one big, REALLY broken thing.

Hope our self-styled small business advocates are paying attention to the right things...

Another Health Care "Stealth Tax" On Small Businesses And The Middle Class

Okay, so with much hoopla and hyperbole, the Senate passed its version of a health care reform bill in the wee hours of Christmas Eve, just in time for Senators to declare victory and get out of town. (And for those keeping partisan score, the total process in both Houses garnered 278 "yes" votes from Democrats, 2 from Independents, and zero votes from Republicans).

Now the process will revert to a conference committee, which will try to reconcile House and Senate bills into a single piece of legislation.

I've been saying for a couple of months that it's been extremely difficult for me to decipher any element of bills passed in either House which suggest there's any hope for reducing the rise in health insurance costs for small businesses and individuals. It's much easier to see where the bills could lead to further and faster increases in the cost of health insurance. Several of the key funding elements of the legislation could easily fall directly on the small business owners and the self-employed.

That thought is echoed by New York Times columnist Bob Herbert, who writes today about the "middle class time bomb ticking in the Senate's of President Obama's effort to reform health care.' Read his column at http://www.nytimes.com/2009/12/29/opinion/29herbert.html?emc=tnt&tntemail1=y

The culprit is the so-called Cadillac tax on high-cost health plans. While the idea was born of grass-roots anger at the bankers and financial speculators who have continued to enjoy big salaries and bonuses even as they trashed the economy, the unintended consequence of such a tax is set up to have a big impact on working people, small business owners and their employees, and on the self-employed.

You may recall that the Senate bill imposes a 40% tax on the "excess value" of health plans which cost more than $8500 per year ($708 per month) for individuals and $23,000 per year ($1916 per month)for family coverage. The tax is projected to raise $150 billion over ten years, so it's a big element of the estimated $870 billion needed to fund the Senate's healrh care reform plan.

The tax has been hailed by numerous economists and talking heads as a cost-containment measure, presumably because companies and individuals would seek to avoid the tax by purchasing lower-cost health plans...which just goes to sow that those economists and talking heads haven't shopped for health insurance lately.

That's because the only way to purchase a lower-priced health plan is to reduce the level of benefits the plans cover. That merely passes a higher level of deductibles, co-pays and other out-of-pocket expenses on to the beneficiaries. And given that much of the health insurance reform fever began to spread due to outrage over higher deductibles and co-pays, this "stealth tax" would seem to run counter to what our political leaders say they want to accomplish with reform legislation.

The Congressional Budget Office estimates that the "Cadillac tax" would effect nearly 20 percent of workers, or some 31 million people. The primary opposition to the tax thus far is organized labor, and a big chunk of those affected by the tax would be union members with generous health plans they've negotiated with their employers. I suspect that those large employers savor the opportunity to place their unions over a barrel, using the tax as a possible means to negotiate benefits concessions from their workers. To them I say, "Let the games begin."

But the folks who will really take it in the teeth will be small businesses and the people they employ. It's taken as conventional wisdom that small companies pay 18-20 percent more for their health coverage than large companies do for comparable coverage. And those higher costs are due to the 25-27 percent of premium costs which have nothing to do with health care: insurer administrative costs.

I wrote a few weeks ago about my own attempt to shop for both group and non-group health insurance coverage. At my age (a factor in setting premium rates)and with my family, the best deal I could find was for a plan with a $3000 family deductible and a 10% co-pay...hardly a "Cadillac plan"...and that was for $1880 per month. That works out to $22,560 per year...in 2008.

Assuming a modest 10% increase per year (and most folks would consider a 10% increase a good deal), that same plan would cost $3027 per month, or $36,330 per year.

So the tax on the "excess value" of the plan, or $13,330, would be over $5,000.

If I raised my deductible to $6,000 per year, my premiums might be reduced by 20% or so...but that's STILL $29,064 per year. So I could reduce the tax liability to a mere $24,300.

And even though the politicians are touting an exemption from employer mandates or payroll tax penalties for nearly 90 percent of small businesses, there's simply no way to exempt small businesses form a "Cadillac tax" and still hope to generate enough revenue to meet their targets.

The geniuses who support this tax have suggested publicly that, in the face of such a disincentive, small businesses would buy less expensive coverage. If that's the case, of course, nobody pays the tax, and there's no revenue. But small business employees would see PLENTY of new expenses in the form or higher deductibles and co-pays.

I see two possibilities: either the policy "experts" are mistaken in their suggestion that the tax would create an incentive to buy cheaper policies, or they know their observation is wrong and are saying it anyway...in other words, they're lying. They know that health costs will be so high that it'll be impossible to avoid a tax on your health benefits, whether they're Cadillac plans, or just Chevys.

Mistaken or lying. Who'll get to the bottom of that Hobson's Choice? You may want to ask your Congressman or Senators.

"Shared Responsibility" Premium Hike Effective In Ohio Today

Here's how easy it is for the government and the insurance industry to spend your money to solve their problems.

Today, the State of Ohio institutes a 4% increase in the cost of individual (non-group) health plans to subsidize the cost of similar plans for people with pre-existing health conditions.

Ohio insurers are required by law to offer "open enrollment" health plans to indviduals with pre-existing health conditions which might disqualify them from conventional health insurance coverage. The plans are quite costly; individuals covered under the plans spend an average of $800-850 per month for coverage, well over twice what healthier people pay for similar coverage.

The plans are also hard to find. Insurers are required to offer them to the public only one month per year, and there's no standard for informing the public (usually you'll find a box in the classified section).

For both these reasons, not many Ohioans participate in the plan. Only about 1,300 out of Ohio's million or so uninsured residents have signed up for them.

The State budget passed in July sought to create a subsidy for open enrollment participants by assessing a 5% rate increase on all health plans sold in Ohio, including small group health plans. That would have created a huge windfall for insurers who sell non-group plans, in exchange for solving a problem for only a relatively few people.

The Ohio General Assembly eventually abandoned that approach, choosing instead to focus the premium surcharge on individual health plans. (It's not clear that a similar effort to hike small group premiums could have stood up to constitutional review, but individual health plans are at the Legislature's mercy).

So the Ohio Department of Insurance has been given an "oversight" role, to monitor rates and report back to the Governor. Ostensibly, if overall rates in the individual market rise more than 5 1/2%, the Department will scale back on the subsidy for open enrollment plans. Translation: if so many sick people sign up for subsidized coverage that it drives rates up, the Insurance Department will use pricing to slow down the rate at which they sign up.

This is a sign of things to come. When insurers tell legislatures, as they've told the White House, that they'll gladly stop rejecting applicants with pre-existing health conditions as long as everyone must buy health coverage, what they're generally NOT saying is that the cost of that largesse will be paid for by raising rates for everyone else...all in the name of "shared responsibility." But the REAL effect is to provide insurers with a subsidy enabling them to sell more individual health policies. And eventually, the price won't matter, because the law will require everybody to buy a health plan, no matter what it costs.