Cutting Costs for Health Insurance

Kurt Brouwer August 24th, 2009

A quick perusal of the following chart should raise a few questions in your mind.  It shows annual premiums for a single person’s health insurance, ranked from the highest cost state to the lowest cost state [of the contiguous 48 states]:

carpe-diem-state-insurance.jpg

Source: Carpe Diem

These numbers are a bit dated, but I suspect the cost differential is at least as great now as it was in 2006-07.

Why is there such a disparity among the various states?  One obvious point is that costs to provide healthcare might be higher in Massachusetts than in some other states, but it is hard to believe costs provide much of the rationale for a difference of more than three times between Massachusetts and California.  Put another way, why is Massachusetts almost $4,000 per year higher than New York?

I think the answer lies in Massachusetts law, the so-called ‘RomneyCare’ legislation that requires that everyone in the state be covered by health insurance. The program was signed into law by Republican Mitt Romney when he was the governor.

From CNN, here is an example of state regulations in Massachusetts that undoubtedly act to increase the cost for insurance premiums:

‘Romney Care’ touted as a model for national healthcare reform (CNN, August 20, 2009, Jim Acosta and Ed Hornick)

…According to Brian Rosman of Health Care for All, a nonprofit based in Massachusetts, the requirements include:

  • Minimum benefits, such as preventive care, mental health care and hospitalization
  • A ban on gender discrimination
  • Limits on total out-of-pocket costs
  • A prohibition on pre-existing conditions as a qualifier for health coverage
  • No medical underwriting, so insurers can’t ask an individual about his or her health status in order to determine coverage
  • Limits on age restrictions, which means what is charged for an older individual cannot be more than double what is charged the youngest.
  • Analysts say “Romney care” is basically “Obama care” minus the public option…

    The Massachusetts program has many of the features we now see in H.R. 3200, the 1000+ page bill that is under consideration in Congress.  When you see what has happened in Massachusetts, it is not hard to understand why a similar law enacted nationally would be more expensive.  In fact, the Congressional Budget Office has found that the current House of Representatives legislation would increase government costs by at least $1 trillion.  This piece from Fox News gives the details of the CBO cost estimate [emphasis added]:

    Senate Panel Passes Health Bill, as CBO Predicts Cost Explosion in House Version (Fox News, July 15, 2009)

    For the House Democrats’ version, the CBO estimate tagged the 10-year cost of the plan at just over $1 trillion.

    “On a preliminary basis … the proposal’s provisions affecting health insurance coverage would result in a net increase in federal deficits of $1,042 billion for fiscal years 2010 through 2019,” the report said, citing additional expenses for Medicaid and other federal subsidies.

    One Democratic aide said the bill would add up to $1.5 trillion over the next decade. But the CBO estimate showed that even if the price tag holds to $1 trillion, more than 80 percent of the costs will hit in the last five years. This indicates that after 2019, taxpayers could be hit with a rising tidal wave of health care expenses resulting from the shift in health care coverage from the private to public sector…

    The rise in deficits of a $1 trillion is a low ball estimate I think because the costs of the proposal do not begin for a several years, so the actual deficits would be very high and rising as the 10 years ends.

    Consider car insurance run the RomneyCare way…

    Consider what would happen if car insurance companies had to insure cars the way RomneyCare requires people be insured.  There would be insurance coverage for every little thing such as windshield wipers, oil changes and so on.  Then, add to it a requirement that insurance companies could not inquire about drivers with a history of DUIs.  Add on a prohibition against charging the highest risk drivers any more than two times the premiums for lowest risk drivers.  Limit the deductible for drivers and finally, prohibit the car insurer for checking on pre-existing claims from incidents that occurred before coverage ensued.  Yikes.

    Would insurance companies feel compelled to raise premiums across the board?  Of course.  If you cannot charge high risk drivers much more than low risk drivers, then you have to raise the rates for everyone.  There really is no mystery here.

    Health Insurance Competition 

    Whatever the reason for the difference among the states for health insurance premiums, it is obvious that the differences are extreme.  Also, that state regulations play an important role in defining minimum coverages and further defining the package of benefits covered.  Essentially, many states have a ‘one size fits all’ system of regulating the type of coverage allowed.

    And, this situation is giving rise to fairly simple ideas to reduce costs and that is, to increase competition by dropping state barriers to entry for insurance companies.  The Wall Street Journal had this to say on the topic [emphasis added]:

    The Competition Cure (Wall Street Journal, August 24, 2009)

    …It is no secret that this page is all for competition in the marketplace. If indeed that’s the goal, allow us to suggest a path to it that will be a lot easier than erecting the impossible dream of a public option: Let insurance companies sell health-care policies across state lines.

    Devon Herrick, a senior fellow with the National Center for Policy Analysis who has written extensively on this subject, notes that insurance companies operating nationally would compete nationally. The reason a Kentucky plan written for an individual from New Jersey would save the New Jerseyan money is that New Jersey is highly regulated, with costly mandated benefits and guaranteed access to insurance.

    Affordability would improve if consumers could escape states where each policy is loaded with mandates. “If consumers do not want expensive ‘Cadillac’ health plans that pay for acupuncture, fertility treatments or hairpieces, they could buy from insurers in a state that does not mandate such benefits,” Mr. Herrick has written…

    As we saw above, RomneyCare in Massachusetts is loaded with very costly requirements and that has translated into much higher premiums and much higher rates of growth in premiums.  If the state wanted to ensure that all residents would have insurance, they could do so, while allowing individuals and families or even companies to purchase the type of coverage they need than than a ‘one size fits all’ policy.

    Consider state-sponsored college funding or 529 plans

    One example of how this might work comes from the world of state-sponsored college funding or 529 plans.  Each state has authorized its own version, but residents are free to use any state’s plan.  So, a resident of California might have a Utah 529 plan or an Ohio 529 plan. So, a given state has the right to set up its own plan, but residents are free to choose other plans than those of the state in which they reside.

    There is no reason why a state should mandate a very expensive type of health insurance coverage for all state residents.  Why not simply allow residents of a given state to buy health insurance from any large, national insurance carrier.  If we did so, I predict health insurance premiums would begin trending down, not up.

    See also:

    Government: It ain’t broke yet, but just wait

    Health Care Costs & Consumer Spending

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    6 Responses to “Cutting Costs for Health Insurance”

    1. DayOwlon 25 Aug 2009 at 7:08 am

      If mandates are legislated, it means that insurance companies can charge everyone more and cite the mandates as the reason why.

      Mandates work both ways. Knowing that the odds are always in favor of the house, I conclude that the insurance company still comes out better for all of it.

      Opening competition across state lines might ease some of the complexity of today’s mess. However, I’m sure that the reality would be in the form of federal regulation, i.e., mandates. Then the folks paying the low end premiums will see theirs rise more than those on the high end will see theirs lowered.

      After all, x-percent profit on $8537 is still better than x-percent on $1254.

    2. Kurt Brouweron 25 Aug 2009 at 7:52 am

      Good points Day Owl. The average profit margin — at least for publicly-traded insurance companies — is pretty modest. Much lower than many other industries such as technology. I don’t think ‘profits’ drive the cost equation. As we can see from the chart, the extreme difference between the states indicates that something else is at work.

      In most other areas of our lives, the costs for goods and services have barely kept pace with inflation. News cars have not even done that. Computers cost less each year. And get better and better.

      I would much rather have Wal-Mart in charge of my insurance than the Federal or state government.

    3. Kurt Brouweron 25 Aug 2009 at 10:55 am

      Good points Day Owl. The average profit margin — at least for publicly-traded insurance companies — is pretty modest. Much lower than many other industries such as technology. I don’t think ‘profits’ drive the cost equation. As we can see from the chart, the extreme difference between the states indicates that something else is at work.

      In most other areas of our lives, the costs for goods and services have barely kept pace with inflation. News cars have not even done that. Computers cost less each year. And get better and better.

      I would much rather have Wal-Mart in charge of my insurance than the Federal or state government.
      BTW I love your blog!

    4. Alectoon 25 Aug 2009 at 11:08 am

      I enjoyed this article. I am puzzled about the low insurance premiums in Oregon? That state has a mess of a state plan which is kind of a microcosm of the national public plan being proposed. Maybe it is anomalous because it isn’t a populous state like MA or CA?

      One question, if you can indulge me. I thought the McCarran Ferguson Act made it impossible for us to purchase these types of cross-border insurance policies? Since states have this power, how would they react to the federal government now stepping in to now permit these purchases? Would this proposal mean repealing that Act? Is there a pre-emption issue here? Ok, more than one question, my apologies.

      Thanks,

    5. obviouson 25 Aug 2009 at 11:48 am

      gee, i WONDER how this could be fixed??? maybe do what EVERY OTHER INDUSTRIALIZED COUNTRY DID STARTING DECADES YEARS AGO.

    6. Kurt Brouweron 25 Aug 2009 at 12:02 pm

      Even though I lived in Oregon for several years — long ago — I don’t know much about its various insurance programs. I believe the state subsidizes insurance for a number of citizens based on income and other issues. That may be a partial explanation for low premiums there.

      I’m afraid I don’t know anything about the McCarran Ferguson Act. Perhaps you do. Maybe you could enlighten us.

      I think there is a Federalism issue here, so it would be a problem if the Feds tried to force states to accept a given type of health insurance. In fact, there is a chance that H.R. 3200 does have some Constitutional issues.

      But it is certainly possible that the various states could allow their citizens to buy insurance from any national insurance company.

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