Without any idea what it is doing, Congress is about to
pulverize the American medical system, put the health insurance
companies out of business, and set the federal budget on a
runaway course that may end up wrecking the entire
economy.
So if you’d like to know why all this is happening, here’s
a brief review:
The “crisis” in health insurance exists because the
government is already mismanaging the system. The problem began
in 1945 when Congress passed the McCarran-Ferguson Act. Even
though insurance had long been sold across state lines, the
states were allowed to regulate, with the benign neglect of the
federal government, under the fiction that insurance was not
“commerce.” This ended with a 1943 Supreme Court decision that
ruled insurance was indeed “commerce.” The Court said Congress
could delegate its interstate commerce powers to the states,
however, and Congress did just that, exempting insurance from
federal anti-trust law and giving the states precedence. As a
result, there is no national insurance market, only 50 state
markets, each with its own licensing and regulatory
procedures.
Now there is plenty of reason to regulate insurance. One of
the most common scams is for a company to come into a
neighborhood, start selling insurance, pay the first claims on a
Ponzi basis, and then skip town when the real claims start coming
in. It happened again just last month on Long Island. Someone
must carefully monitor reserves and make sure companies are
capable of backing up their responsibilities.
Given this authority, however, the states have reverted to
the old game of favoring big players by setting up barriers to
competition. In many states, Blue Cross/Blue Shield holds 80
percent of the market and can set prices pretty much at will.
Aggravating the situation is the enthusiasm of state legislatures
for writing their own insurance policies through mandates. Health
providers of practices such as chiropractic, nutritional therapy
and pastoral counseling pressure the legislature to require
coverage in all policies, even when consumers don’t want it. By
the time the lawmakers are through, insurance usually costs
anywhere from 20 to 40 percent more than without mandates.
Thus, the “insurance crisis” would have emerged long ago
except that a large portion of the population — more than 60
percent, in fact — has been able to get around the restrictions.
Nearly all the major corporations and their unionized employees
have done this through the Employee Retirement Income Security
Act of 1973 — “ERISA.”
ERISA says that if large employers
self-insure, they are
exempt from state regulations. This is only possible for
corporations with 300 or more employees, since you need a large
pool to spread health risks. ERISA plans grew rapidly during the
1970s and 1980s, encouraged by an IRS decision that such benefits
should be tax-free.
Pumping up benefits became a much more efficient way of
compensating employees than raising wages.
As a result, the healthcare system was soon flooded with
union members carrying “first-dollar” coverage from their
employers and wildly spending other people’s money. This drove up
demand. On the other hand, ERISA plans had an easy time in
kicking people out if they got really sick. Their responsibility,
the law said, was to the plan,
not to individuals.
Hillary Clinton got word of all this and declared a
“healthcare crisis” but never really diagnosed the problem. She
told ERISA horror stories to convince people the
insurance companies were
acting irresponsibly. But insurance companies were prevented from
acting arbitrarily by state laws. ERISA plans could be highhanded
because they were exempt from state laws.
The ERISA system, however, created other problems:
1. You couldn’t take your insurance with you if you left
your job.
2. Smaller companies couldn’t self-insure because they
didn’t have enough employees to spread the risk.
Misinterpreting all this, Clinton nevertheless decided to
“solve” the problem by mandating that smaller
companies also provide insurance for their
employees. When told that many small
businesses and start-ups couldn’t afford this, she responded, “I
don’t have time to be concerned about every underfunded
entrepreneur in America.” That was indeed the problem.
Clinton’s effort failed from public opposition. In the
meantime, many smaller companies began buying insurance for their
employees anyway, swallowing the costs. This created a secondary
market for private insurance, although employers assume much of
the cost. According to experts, the market for the 85 percent of
people now covered by insurance or health benefits is now evenly
split in three parts:
• One-third are in ERISA
plans.
• One-third are covered by
Medicaid or Medicare.
• One-third have private
insurance, the vast majority having their policies bought by
their employers.
The number of people who actually buy insurance on the
private market is minuscule. Only 6 percent of the
non-elderly population buys its own
insurance. The remainder is in a market shaped by government
regulations. This leaves 15 percent of the population without
coverage. They are uninsured either because:
a) They don’t get coverage
from their employer, or
b) They can’t or won’t buy
in the private market.
These numbers have remained essentially unchanged since
1994.
After the Clinton effort, many states tried to extend
coverage with two sledgehammer provisions:
a) “Guaranteed issue,” which
says that companies must
offer insurance to everyone who wants to but it, and
b) “Community rating,” which
says that everyone must be charged the same price, regardless of
their health condition.
Among these people are likely to be freelancers,
employees of very small firms, and young people who feel they
don’t need insurance because they are relatively healthy. Also
among them, however, are people who are too sick to work or have
chronic conditions and high medical expenses. Guaranteed issue
and community rating tries to load
all the costs of paying
for these very sick people onto that small portion of the
population that doesn’t get its coverage through
employment.
New York has done a beautiful job of showing how this
works. In the 1990s, under Governor Mario Cuomo, New York adopted
both community rating and guaranteed issue. The result was that
premiums soared to $9,000 a year for individuals and $22,000 for
families. The portion of New Yorkers who buy their own insurance
shrank from 5 percent to 0.2 percent. Unsurprisingly, the
percentage of uninsured remained the same.
The Baucus bill is also relying on guaranteed issue and
community rating.
Baucus is an improvement over Clintoncare in that it at
least tries to round up more than the 6 percent in the private
market to shoulder the costs of high-cost customers. Baucus
proposes draconic cuts in Medicaid and Medicare — although it
also requires the states to expand their Medicaid coverage. It
also taxes the “Cadillac” plans, defined as policies valued at
more than $8,000 for individuals and $21,000 for families.
(Notice you can only buy “Cadillacs” in New York.) Apparently,
Congressional Democrats do not yet realize that the people who
own these Cadillac policies are their oldest and most reliable
constituency, the labor unions. As we discovered when GM was
going under, every car that rolls off the assembly line carries
$3,000 in employee and retiree health benefits.
Last spring the insurance companies, shepherded by industry
lobbyist Karen Ignagni, struck a “grand bargain” with the White
House. The companies would accept guaranteed issue and community
rating in exchange for a mandate that everyone has to
buy insurance. This would ensure them
wide enough pools to cover high-cost customers. The Baucus bill
originally included a $1,700 penalty for being uninsured but this
has been whittled to $750, which ensures that nobody will buy a
$4,000 policy to avoid it. So the insurance companies were to be
left holding the bag. When they fought back with a study claiming
the Baucus bill would drive the cost of policies up to $9,700 for
individuals and $26,000 for families (the exact levels achieved
in New York), President Barack Obama called them “liars” and
threatened to cancel their antitrust exemption under
McCarran-Ferguson. Thus, by stumbling around long enough, he has
finally hit on an effective solution.
The problem is that both insurance companies and their
customers try to game the system. It’s unavoidable. The insurance
companies “cherry pick,” attempting to avoid high-cost customers
while signing up those who are in good health. They want to
exclude “prior conditions” and put small print in their policies
allowing them to drop coverage if people get really sick. This is
what makes them so unpopular. As the regulatory vice has
tightened, however, they have reverted to these practices more
and more to try to preserve their slim profits. (The industry’s 3
percent margin is one of the lowest in any industry.)
At the same time, customers game the system by waiting
until they get sick to sign up. I’m embarrassed to I say did this
as a young father-to-be. My wife was pregnant and we had just
been offered coverage through her new employer. She wasn’t due
until January, so we decided to forego the last three months and
sign up after the first of the year. In December, our first son
arrived prematurely. He spent a week in an incubator and we ran
up hospital bills of over $10,000. It would have been a financial
disaster — except that someone at the company pulled some
strings and got us signed up retroactively. It amazes me now that
we would take these risks to avoid making a few $100 premiums,
but that’s the sort of thing you only learn with hindsight —
even though insurance salesmen are constantly warning us about
it.
So health insurance represents a system of faulty
regulation waiting to be resolved. Unfortunately, Baucus is a
badly cobbled-together, Rube-Goldberg attempt to patch things up
building on a flawed system. What should we do instead? Here’s a
four-point proposal:
• Repeal McCarran-Ferguson or at least allow insurance to
be sold across state lines, as Senator Jon Kyl has repeatedly
suggested.
• Give everyone the same tax benefits as ERISA employees —
the ability to buy insurance with tax-free money.
• Offer coverage to those who still can’t afford it by
setting up high-risk pools, just as states now have high-risk
pools for dangerous drivers.
• Pass national tort reform
by two simple steps: a) limit non-economic damages (“pain and
suffering”) to $250,000, and b) put a 3-to-5-year statute of
limitations on claims.
You’d think with so much at stake, Republican
Senators and Congressmen could unite around such a simple
platform. National Review, the Weekly
Standard, and
the Spectator have all suggested
almost identical “one-pagers” as a Republican alternative that
would erase the GOP’s image as “The Party of ‘No.’”
But no, the legislators can’t seem to find this possible.
“We’ve got 40 Senators and 40 healthcare plans and no one can
agree on anything,” says one Congressional insider. “We’ve
actually had screaming fights over whether people should get a
tax credit or a
tax exemption for buying
their own insurance.” It makes you appreciate what Newt Gingrich
did in 1994 in uniting the party around the Contract With
America.
And so, facing a terminally disorganized opposition, the
Democrats will probably be able to pass some version of Baucus,
with Olympia Snowe representing the Republican Party. We’re
likely to spend the next twenty years trying to fend off the
consequences.
