An Experiment in the “Social Laboratory” on Health Insurance

27 April 2010 |

Louis D. Brandeis, an associate justice of the U.S. Supreme Court, once theorized that the various states in the United States could serve as laboratories to “try novel social and economic experiments without risk to the rest of the country.”

Brandeis’s vision of the states as social laboratories has been realized throughout history, most recently in Massachusetts. In 2006, the state legislature enacted and Governor Mitt Romney signed into a law a package of health insurance reforms that served as a template for the health care legislation recently passed by Congress. The experiment in Massachusetts is yielding empirical results. I am not surprised by the outcome. In fact, I predicted many of these in the course of the national the health insurance debate.

For example, I wrote that the regulations forcing health care insurance companies to provide coverage to people suffering from preexisting medical conditions would raise premiums for everyone. After all, the bedrock principle of insurance is the concept of shared risk. If greater risks to the insurance pool are mandated by law, then everyone will have to share the risk and absorb the costs. The money to pay for the chronically, gravely, and even terminally ill must be borne by someone.

This is occurring in Massachusetts right now, reports Robert Weisman of The Boston Globe. To spread the costs of insuring those who have pre-existing conditions, Massachusetts health insurance companies asked for a major rate increase. The state, in a vain attempt to conceal the true cost of insuring those with preexisting conditions, denied proposed increase. Facing a deficit of millions of dollars and possible insolvency, six of the largest health insurance companies filed a lawsuit against the state, asking the courts to allow their rate increases. Reporter Robert Weisman explained:

A half-dozen health insurers yesterday filed a lawsuit against the state seeking to reverse last week’s decision by the insurance commissioner to block double-digit premium increases — a ruling they say could leave them with hundreds of millions in losses this year.

The proposed rate hikes would have taken effect April 1 for plans covering thousands of small businesses and individuals. Insurers wanted to raise base rates an average of 8 percent to 32 percent; tacked on to that are often additional costs calculated according to factors such as the size and age of the workforce.

Yesterday’s legal action sets the stage for a showdown between state regulators and the health insurance industry.

Governor Deval Patrick has made reining in runaway health care costs a centerpiece of his administration and his campaign for reelection — contending they are stifling the capacity of small businesses to create jobs. At the same time, health insurers argue that government is forcing them to sell policies at a loss that is unsustainable as the costs of medical services climb.

Another prediction that I made was that the fines that Congress called upon the IRS to collect from those who fail to buy health insurance will not be severe enough to force the uninsured onto the insurance rolls. On the contrary, the law mandating that insurance providers have to accept people with preexisting conditions takes away the major incentive for people to sign up for health insurance: fear that they will be deemed uninsurable, should they get sick or injured. Without that fear, I wrote, people will game the system, waiting until they need medical attention before signing up for health insurance. The social experiment in Massachusetts is proving this prediction to be correct as well.

Staff Reporter Kay Lazar wrote in The Boston Globe that many Massachusetts residents are paying the small fines rather than buying health insurance, only signing up for health insurance when they need the benefits to pay for an illness or injury. Since Massachusetts law prevents the health insurance companies from denying care to the scofflaws, the insurers must pay for the necessary treatments. Lazar writes:

Thousands of consumers are gaming Massachusetts’ 2006 health insurance law by buying insurance when they need to cover pricey medical care, such as fertility treatments and knee surgery, and then swiftly dropping coverage, a practice that insurance executives say is driving up costs for other people and small businesses.

In 2009 alone, 936 people signed up for coverage with Blue Cross and Blue Shield of Massachusetts for three months or less and ran up claims of more than $1,000 per month while in the plan. Their medical spending while insured was more than four times the average for consumers who buy coverage on their own and retain it in a normal fashion, according to data the state’s largest private insurer provided the Globe.

The typical monthly premium for these short-term members was $400, but their average claims exceeded $2,200 per month. The previous year, the company’s data show it had even more high-spending, short-term members. Over those two years, the figures suggest the price tag ran into the millions.

“These consumers come in and get their service, and then they leave because current regulations allow them to do it,” said Todd Bailey, vice president of underwriting at Fallon Community Health Plan, the state’s fourth-largest insurer.

I am not a seer or economic wizard. Anyone with common sense knows that insurance companies must collect enough money in premiums to cover the benefits they pay. If the law allows people to refuse to pay into the system yet forces companies to provide full benefits when needed, that system cannot endure. Either the government will bail it out, and thus take control of it, or it will simply go bankrupt. The same thing is about to happen on a national scale. The laws of actuarial science cannot be changed, as the Massachusetts experiment has shown. The only hope is that the results of this social experiment will be heeded by the next Congress, fueling the kinds of changes to the law that will preserve the private health insurance system that has worked so well for so many for so long.


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What’s Next for Health Insurance?

6 April 2010 |

Congressional leaders used the process known as reconciliation to circumvent a second vote in the Senate and managed to pass the health insurance reform bill by a slim 219-212 margin in the House of Representatives. President Obama signed the bill into law on March 23. Since then I have been bombarded by questions about what it all means to the average health insurance consumer.

Uncertainty surrounds the bill.

First, sixteen states have filed challenges the constitutionality of the health care insurance reform bill in the courts, arguing that the portion of the law that requires individuals to purchase health insurance exceeds the authority of the commerce clause of the Constitution. They point out that the Supreme Court has upheld the authority Congress to regulate commercial contractions even if they do not cross state lines, including what crops a farmer can grow on a private farm, but it has never found that Congress can force someone who is not engaged in a commercial transaction to do so. Whether Congress has the authority to do so is a valid question that needs to be resolved by the courts.

Second, there will be two congressional elections and one presidential election before the majority of the bill goes into effect in December of 2013. The Republicans are saying that repealing the health insurance reform bill will be a major platform of their fall 2010 campaigns. If the message is successful then, look for it to remain a theme in 2012. Right now, the latest Rasmussen poll—taken two weeks after the health insurance reform bill was signed into law—shows that 54 percent of voters want the bill repealed.

Democrats are assuming that number will come down by November, but they also thought the number would come down after President Obama signed the bill into law. It actually has risen since then. Only a fool would predict the outcome of the debate, but it is worth noting that the more the issue was discussed, the more public opinion turned against the plan.

As I pointed out in an earlier post, supporters of health insurance reform did not win the debate; they lost the debate but forced the legislation through anyway. The sentiment embodied in the popular phrase of the American Revolution, “Don’t tread on me,” still runs deep in the United States, and Republicans plan to tap into it.

I always advise those without health insurance to purchase at least “catastrophic” coverage, and I still do, considering that the government plan for insurance exchanges will not go into effect for some time. As far as those who already have insurance, I suggest that if they have been waiting to see the doctor about something that they should not put it off any longer. If the bill remains on the books, waiting lines and the rationing of care can be the only result of forcing 30 million new people into the healthcare system.

If you have health insurance, do not be dismayed if premiums increase. As I have written before, premiums are based an actuarial science, and if health insurance providers are forced by Congress to cover people with serious preexisting conditions, the money to cover their care will have to come from somewhere.

That someone is the insurance consumer. 



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