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.