(This article was originally published on TCSDaily.com, September 21, 2007)
This month, the AMA launches a three-year, multi-million dollar campaign to spur action to cover America’s uninsured. The AMA will unveil new television and print ads and discuss other campaign activities. The initial phases of the Voice For The Uninsured campaign are timed in conjunction with the 2008 election cycle, and will bring a human face to this problem that affects millions of patients.
– Press Release of the American Medical Association (AMA)
Newsflash: Health insurance is expensive. OK, so that’s not news to anyone. But what may be news to you is why insurance premiums are so high. A common explanation is that health insurance and drug companies are greedy. This narrative is used to justify more intervention in healthcare markets by both state and federal governments. Some familiar voices are even calling for a socialized system like Cuba’s. Hilary Clinton’s recently announced individual mandate plan doesn’t go quite that far, but looks like a cross between Massachusetts’ Mittcare and European socialism.
Likewise, the well-respected AMA is urging us to “cover America’s uninsured.” But how? Socializing medicine is a good idea if you want to wait three months to mend your broken leg, get your healthcare from the physician’s equivalent of the DMV, and have your taxes go through the roof. We already subsidize club kids in Seattle to forgo personal responsibility for healthcare so they can eat out every night. (And many Americans currently on Medicaid don’t even pass the cigarette test.)
But before we do anything else to make a bad system worse, let’s step back for a moment and diagnose the problem. Consider three major health insurance pathologies:
1. Border Disorder
Ever tried to buy insurance in another state? It may be cheaper to do so, but you aren’t allowed. That’s because your state says if you buy insurance there, you must buy certain components the state government thinks you should have. In my state, these include drug-abuse treatment, pastoral counseling and mammogram. You probably don’t abuse drugs. You may have your own pastor. You, like me, may not have mammary glands… but you’re still required to purchase these coverage components. Mandates in the market for cars would be like your state forcing everyone to buy Cadillacs, even though all you may want is a Kia.
Insurance mandates where I live mean my premium could be as much as 47 percent higher than it might otherwise be if I could tailor my plan or buy out of state (which is conservative considering I live in North Carolina, as people in mandate-riddled New Jersey would kill for our rates). Health insurance is also cheaper in Idaho and South Carolina, but those markets are closed to me. And that’s why Blue Cross/Blue Shield of North Carolina (BCBS) enjoys a virtual monopoly in my state and charges virtually what they want. Because mandates are regulated by state insurance commissioners, interstate competition is impossible.
2. Employer’s Choice Problem
Question: You can get insurance through your employer and get big tax benefits from doing so; or, you can buy it on the individual market and get no tax benefits at all—which do you choose? Most rational people opt for employer benefits. And that’s exactly how the tax code stacks the deck against individual insurers and consumers. That means you not only have far fewer choices, but your insurance isn’t portable if you change jobs. Companies like the Big Blues (BCBS) or Anthem dominate the market within a state because – not only can they avoid out-of-state competition as I explain above – but they don’t really have to compete for your dollar directly. Instead, they invest largely in attracting your employer’s business. But again: lack of competition means higher premiums and fewer consumer choices.1
3. The Expense Account Effect
When you dine out on the company card, do you order the $9 chicken with rice pilaf or the $19 filet-mignon? If someone else is paying, you’d be silly not to take the steak. But this kind of over-consumption pervades our healthcare system. The incentive structure we operate within makes us rather like teenagers who leave the lights on because they’ve never had to pay the power bill. In other words, people are far more likely to go to an MD for sniffles if they are shielded from the total costs of the bill. Or what might otherwise be an out-of-pocket purchase of Viagra gets dinged to the insurance pool. Why should anyone behave otherwise? We’ve created a system that isn’t insurance at all: Claiming a throat culture on your insurance would be like claiming an oil change with Geico. Costs skyrocket—particularly since many of the new treatments we want are astronomical, whether or not they’re necessary.
These three problems introduce, and compound, a related problem: the healthcare death spiral. “Invincibles” – younger people who think they won’t get hurt – are increasingly likely to choose eating out and night clubbing over health insurance as rates go up. But having younger, healthier people in the risk pool means rates stay lower for everyone. Still, as premiums continue to rise, they leave the pool. But because older, sicker people remain, premiums keep rising, resulting in more young people opting out. The death spiral has started. (Though to be fair, why – beyond a certain price-point – would they buy insurance? “After all,” they reason, “I can always get on Medicaid2 if I have to.”)
What do all these problems have in common? They’re all caused by government regulation. That means cures will have to come mostly from changes in the law. So what is the treatment?
If we have three ailments, we need three corresponding treatments:
- Border Disorder could be cured by state legislatures simply allowing people to buy out of state, a Supreme Court challenge brought under the interstate commerce clause, or via some federal mechanism such as the proposed Healthcare Choice Act—any of which could allow cross-border purchases of health insurance. To avoid flight by customers and insurance companies to other states, governments would have no choice but to scrap some of these mandates.
- The Employer’s Choice Problem can be dissolved by changing the tax code, i.e. giving everyone the same tax benefit whether they get an employer’s or individual insurance. (Dubya presented this idea in his SOTU address of 2006. Very few people listened, however.) You might even give low-income families refundable tax credits, and then everyone can afford it. Either way, people would have every incentive to get insured no matter how they earn a crust (without individual mandates).
- The Expense Account Effect can be mitigated by employers and state governments expanding the use of high-deductible health plans and health savings accounts (HSAs). These plans mean people get catastrophic insurance, pay from a tax-protected account for routine care, then save what they don’t use and gain interest. These plans are on offer in the individual market now, but are not always offered by employers. Nevertheless, if more people started using these consumer-driven plans, doctors would have to be more responsive and competitive, which would improve both the price and quality of care and remove much of the de facto doctor/hospital/insurance subsidy. But most of all, it would curtail medical over-consumption.
Just one of these treatments would help matters tremendously. Not only might we stop the death spiral, but reduce the number of uninsured by providing greater access to affordable insurance. And that’s what we really want, isn’t it?
Allow me to close on a note of cynicism: I believe the majority party actually knows about these pathologies. In fact, I believe they are making concerted efforts at the state and federal levels to exacerbate these problems in the name of consumer protection and insuring children. Whether through expanding children’s Medicaid into the middle class (which drives up premiums), increasing the number of state mandates (which drives up premiums), or limiting competition through keeping the tax code intact (which drives up premiums), the party in power is using regulation to crank down the government vise in anticipation of a final outcry from Americans who are tired of paying these rates and who have no idea why it’s happening. And with that outcry, they will then be able to sell America a single-payer system like Castro’s.
Max Borders is a policy analyst for the Civitas Institute (blog) and a TCS contributing editor.