The Right Way to Reform

The collectivist, comprehensive, top-down, one-size-fits-all version of health care reform favored in much of the Beltway was defeated in Massachusetts on Jan. 19. Instead of centralizing the health insurance system, smaller reforms that address the actual sources of resource waste can now be considered.

A simple reform that could be adopted quickly and with few complications is the implementation of an "entrepreneurs" health coverage policy freed from the many benefit mandates imposed upon insurers and their customers. Although aimed at small businesses, such coverage would be available nationally to any group or individual, offered competitively by a number of insurers.

For many years state governments, responsible for regulating health insurers, have required health insurance policies to cover particular services and categories of providers. This means that individuals must pay for such coverage even if they otherwise would not have purchased it. The most recent survey data show that the average state imposes about 35 such mandates, and the extensive existing literature suggests that a conservative estimate of the marginal cost of each mandate is about 0.3% of premiums. Therefore, these mandates are likely to increase premiums for a group (employer-based) family policy by about $1,294 per year in the average state, ranging from $260 per year in Idaho, the state with the fewest mandates (eight), to $2486 per year in Rhode Island, the state with the most (62).

In greater and lesser degrees, such sensible reforms would decentralize decision-making and unleash the competitive processes that offer consumers expanded choice among myriad alternative insurance contracts.

The specifics of such insurance policies would be determined by competition in the market for health coverage, but they still would be regulated, as current policies are, for safety, soundness, good faith and other matters.

A new study from the Pacific Research Institute shows that such policies freed from benefit mandates would enroll about 13.6 million individuals now covered by private insurance and, very conservatively, about 3.2 million of those now uninsured. This represents about 8% of those insured privately or uninsured for the U.S. as a whole, ranging from about 1.6% for Idaho to about 11.9% for Rhode Island.

By eliminating the numerous benefit and provider mandates now imposed by state laws, entrepreneurs' coverage would reduce the degree to which consumers can shift costs onto others by choosing policies with specific coverage that they know they will use. Insurance instead is supposed to be a way to pool the risks of future adverse health events unknown in advance. This would represent an important step toward restoring health insurance as protection against catastrophic events rather than prepayment for anticipated medical services.

More generally, such a reform would be driven by market forces--the preferences of consumers and the costs faced by insurers--and so would decentralize and depoliticize the system. This is the opposite of the dynamic attendant upon the kind of "reform" that nearly passed Congress, in that government has interest groups rather than patients. Because of that reality, a centralized system of health coverage inexorably would be transformed into a massive tug-of-war among groups seeking both increased allocations for the treatments in which they are particularly interested, and a shift of costs onto others. The tempest over breast mammograms that we observed late last year is only one example; there exist important constituencies for many such services, a fact that would lead to an increasing politicization of the health care sector.

Some reforms include eliminating the tax preference that now favors coverage purchased in the group (employer) market over the nongroup market; rolling back the rules and tax preferences that induce groups and individuals to purchase expensive coverage with low deductibles, co-payments, and out-of-pocket maximums; and ending the regulatory restrictions that prevent interstate competition in health insurance. In greater and lesser degrees, such sensible reforms would decentralize decision-making and unleash the competitive processes that offer consumers expanded choice among myriad alternative insurance contracts. This would improve the efficiency of resource use in the health care sector, and would restore the doctor-patient relationship as the final authority with respect to medical decisions.

Benjamin Zycher is a National Research Initiative visiting fellow at AEI.

Photo credit: Tom Grill/Corbis.

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