The Car Insurance Model

Editor’s note: This essay is adapted from the Hoover Press book In Excellent Health: Setting the Record Straight on America’s Health Care (2012).

Overhauling private health insurance is inextricably linked to tax reform as essential components of an overall plan to reduce costs and increase access to affordable insurance to Americans. The first step in overhauling private health insurance and unleashing the positive effects of competition among health insurance companies is to allow a national market. It is ill-conceived, unnecessary, and self-defeating to the goal of encouraging competition that Americans are forced to restrict their purchases to in-state goods or services.

Government can rapidly lower the price of health insurance through the private insurance market by breaking down archaic, anti-competitive barriers that result in shocking variations (on the order of several multiples) in prices for equivalent health coverage among nearby states. An immediately beneficial action would be to allow small businesses to band together through trade associations to purchase coverage for their employees. If regulated by the Employee Retirement Income Security Act of 1974 (ERISA), they would be exempt from state health insurance mandates and regulations.

   
 Illustration by Barbara Kelley

Just like large businesses, America’s small businesses need this capacity now, so their employees can save money by buying the coverage they actually want, rather than bloated plans they don’t desire. Since small business employees make up the biggest proportion of uninsured workers, this one change would have high impact.

Americans in the individual insurance market would also benefit from a national market. We already know that existing regulations have created near monopolies, which interfere with competition, reduce choice and propel prices higher. The American Medical Association’s 2008 Competition in Health Insurance study showed that almost 90 percent of the 314 metropolitan areas (MSAs) have a single health plan with a market share greater than 30 percent. In 44 percent of MSAs, one health plan has a share greater than 30 percent. In two-thirds of those, one health plan has more than 50 percent share, and in just under one-fourth, one health plan has a share greater than 70 percent. For example, two health plans have a 76 percent share in Burlington, Vermont; two plans hold a 91 percent share in Cedar Rapids, Iowa; and two plans hold an 88 percent share in Columbia, Missouri; in Alabama MSAs, the share is as high as 97 percent for one plan.

Already, most markets within the United States are dominated by one or two large health plans, leaving little opportunity for meaningful competition. Government action can immediately lower the price of health insurance and increase choice through the private-insurance market by breaking down these anti-competitive barriers. A national market would be one that competes for business from shoppers looking for good value and coverage deemed appropriate by the consumer, rather than by government-induced hyper-regulation.

Second, insurance coverage mandates—laws that decree specific coverage requirements for all health insurance policies in any given state—have an extremely deleterious impact on the ultimate cost of an insurance policy, for obvious reasons. While mandates certainly make health insurance more comprehensive, they also make it more expensive. Government mandates requiring an insurance company to cover specific healthcare providers, benefits, or patient populations have grown from only a handful in the 1960s to 2,156 as of 2010. These coverage requirements can be responsible for more than 50 percent of health-insurance costs, depending on the state, and account for a significant part of the disparity of health-insurance prices between states. New federal mandates in the Patient Protection and Affordable Care Act (PPACA) require insurers in the group or individual markets to provide coverage, without any cost sharing, for certain preventative health services, such as certain immunizations and screening tests.

Mandates make health insurance more comprehensive, but also more expensive.

While government should regulate the insurance industry to protect consumers from fraud, that regulation does not need to force thousands of mandates on Americans, for coverage that many simply do not want. It should not be a surprise that 10 million Americans who might afford insurance choose to go without it when they are forced to pay for insurance that covers acupuncture, massage therapy, social workers, in vitro fertilization, wigs, and chiropractic care, services not necessarily desired by more than a small minority of American families.

Government can put a halt to this counterproductive abuse of its power and start stripping back on costly, ill-advised regulations that specifically dissuade healthier Americans from prioritizing their dollars to insurance. It might make sense to let Americans themselves decide what sort of coverage and benefits they want for their families, rather than invoking even more mandates by declaring a government-defined level of appropriate and necessary coverage via a new Health Insurance Exchange as in the PPACA.

Third, government should expand the availability and simplify the rules and regulations of lower cost health plans, particularly high deductible plans for catastrophic coverage, and expand health savings accounts. High deductible plans are cheaper to purchase and therefore attractive to healthier people. Insurance plans with health savings accounts (HSAs) give consumers incentives to manage their own healthcare costs by coupling a tax-favored savings account used to pay medical expenses with a high-deductible health plan. This forces individuals to exercise price considerations because they pay directly for medical care amounting to less than the deductible. A 2011 RAND study of 800,000 families documented that when people shifted into health insurance with high deductibles of at least $1,000 per person, their health spending dropped an average of 14 percent.

Sensitivity to cost is a key to reducing the limitless demand for medical care without any concern for value. Duarte found that high-income individuals are five times more price sensitive than low- income individuals, and that individuals are more sensitive in their demand for elective care (home visits, psychologist, and physical therapy evaluations) than for acute care (appendectomy, cholecystectomy [gallbladder removal], and arm casts) when out-of-pocket payment is such that price is considered. 

The government needs to let Americans decide what sort of health coverage they want.

By 2009, about 20 percent of Americans with employer-sponsored health coverage were enrolled in such plans. A 2010 survey found that more than 54 percent of large employers offered at least one high-deductible health plan to their employees. According to 2011 data, the number of people with HSA/HDHP coverage has further exploded, rising in popularity far faster than any other type of health plan among all sizes of companies offering benefits as well as in the non-group market. Totaling more than 11.4 million in January 2011, the number of people with these plans has almost quadrupled since their introduction five years earlier and almost doubled from 6.1 million in January 2008 in the past three years.

In some states, HSA/HDHP insurance has reached almost 15 percent of all private insurance plans for adults under 65. Also noteworthy is the fact that HDHP coverage with HSAs accounted for 11 percent of all new health plans purchased, 13 percent of all new enrollees in the large group market, and 13.5 percent of all newly-insured in the small group market; i.e., HSA/HDHPs were viewed as good values by people who were previously uninsured. In the face of this burgeoning popularity and increasing consumer demand, HSAs are more heavily taxed and made less consumer friendly under the PPACA reforms, while being further threatened by new actuarial and benefits requirements.

HSAs need not simply be adjuncts to HDHPs. Expanding HSA eligibility, regardless of linkage to a minimum deductible insurance plan, is a good idea for many reasons. They expand individual ownership and control over health spending, promote price visibility to allow value-based purchasing, increase choice for consumers, and provide incentives for savings to prepare for future healthcare needs. This makes insurance and medical care an attractive purchase—a decision based on value—for the millions of Americans who can afford insurance but currently (and wisely) choose to forego buying bloated policies with coverage for unwanted services.

Plans with HSAs are ahead of the curve regarding consumer education and transparency, important attributes of plans designed to assist with disease management and prevention. About 85 percent of responding insurance companies reported offering online member access to HSA accounts, health education, physician-specific information, and personal health records as consumer decision support tools for their members.

Instead of adding regulations and further limitations to HDHP/ HSA plans like those in the PPACA, Congress should permit higher limits on HSA accounts, add more flexibility in employer contributions to “disease management accounts” in lieu of traditional third party benefits, support proposals to allow HSA balances to transfer tax-free to an individual’s children, and allow holders of HSA plans who relocate because of a job change to purchase health insurance across state lines without being subject to state mandates. In an era purported to be focused on consumer-directed and personalized healthcare, personalized choice of health insurance coverage is logical and appropriate.

Community rating is essentially a price control.

Fourth, “community rating,” the concept that insurance rates should cost the same for all people, regardless of all factors, including lifestyle choices and voluntary behaviors that dramatically increase disease and medical care utilization, is counterproductive and should be modified. Community rating is a price-control edict which strictly regulates the amount insurance companies can charge regardless of health status.

Under community rating, an insurer charges all people covered by the same type of health insurance policy the same premium without regard to age, gender, health status, occupation, and other factors. The insurer determines the premium based on the health and demographic profile of the geographic region. “Adjusted community rating” is a method in which an insurer charges a particular group an amount that is derived by modifying the community rate for some specific demographic factors. 

Ten states now require insurers to use community rating or adjusted community rating for all small group policies, and two others require their largest insurers and HMOs to use adjusted community rating. “Guaranteed issue” laws require insurers to accept all applicants regardless of a preexisting medical condition. Community rating and guaranteed issues laws were passed with the idea that access to affordable insurance for people with high-risk health conditions would increase, but unintended consequences have occurred. 

Some scholars suggest that implementing these regulations makes high-risk people more likely to obtain coverage and pay lower premiums than without regulation, but this increase occurs at the expense of pushing low-risk people to be uninsured. In fact, community rating laws have led to excessively high premiums on average and an exit of healthy individuals from the market, those very people for whom the new health law’s insurance mandate is intended.

While guaranteed issue and community rating of health insurance help equalize rates, the fact is that states with those regulations are typically those with the least affordable health insurance. The young and healthy—typically those who earn the least and are most likely to be uninsured—are forced to subsidize the rates of older and often wealthier individuals, which also interferes with risk pools.

Instead of following the decrees in the PPACA that repeat the mistakes of states, health insurance should follow the precedent of life insurance and automobile liability—that is, the price should hold individuals accountable for voluntary and reckless behavior that worsens health and markedly drives up healthcare usage and costs. It seems both illogical and counterproductive that society, rather than the individuals responsible, should pay for destructive decisions like cigarette smoking and overeating to obesity, lifestyle behaviors that are proven to be the two main drivers of health expense in the United States.

Indeed, markets reflect differences in consumer preferences throughout the spectrum of goods and services. As observed by one scholar, while everyone surely wants good health, and everyone in the United States knows that smoking and obesity worsen health, millions of Americans engage in these behaviors. 

Since millions actively quit smoking, exercise more and lose weight, it is reasonable to conclude that some people have decided to continue the behavior and accept the potential adverse long-term effects. As opposed to penalizing people who are unfortunate enough to have become afflicted with serious disease, insurance rates that reflect the higher risk of disease and more frequent use of medical care as a consequence of voluntary behavior are totally appropriate and sensible in terms of costs, accountability, fairness, and as incentives for more healthful lifestyles.

No one doubts that America’s healthcare system needs change; urgent reforms are required to ensure access and availability to the world’s best medical care for the long term. We know that existing flaws in the tax system and the ever-increasing burden of government mandates contribute greatly to the unsustainable rise in costs to the American taxpayer and interfere with individual choice. Substantive tax reforms, including government-provided assistance for those in need, essential overhauls to private insurance, and a minimization of the role of government as the direct insurer form the three pillars of successful reform.

Government can also be important for its positive impact on America’s healthcare system by forcing transparency about price and quality and by removing the harmful incentives of a liability system that is out of control and that generates unnecessary and costly defensive medicine. With reforms that increase competition in the health insurance and healthcare markets while simultaneously empowering consumers, costs come down by consumer-driven, value-based purchasing rather than by artificial government edicts. This is ultimately a true American solution, one that has succeeded in offering value to consumers in virtually every other good and service in this nation’s history.