The Clinton health plan is coming back from the dead. The authoritarian, one-size-fits-all approach of the Clinton plan was decisively rejected by the American people just a couple of years ago. Indeed, the congressional Republicans ran against the Clinton plan very successfully in 1994. Now the Republicans seem to have abandoned their own successful arguments.

Congressional leaders of both parties have agreed on two new health insurance mandates; these are the first direct federal controls on the content of private health insurance benefits. The mandates force insurers to cover mental health benefits with the same policy limits as other health care and force insurers to cover normal vaginal deliveries in a hospital for forty-eight hours after childbirth. As expected, President Clinton has now signed the bill containing the new mandates into law. This is unfortunate because the mandates are bad economic policy and bad health policy.

While the U.S. health care system has its shortcomings, its genius is that the type of benefits and degree of utilization control are decided by the interplay of many competing health care plans and many well-informed group health insurance buyers--mostly employers. Thus, it is the subject of experimentation, innovation, evolution, and of consumer choice. There is a great deal of variation among different groups (and individuals in nongroup insurance). Buyers choose, based on their own values and the options offered by competing insurers, what coverage they want. It is vitally important for an efficient and humane health care system that this competition and choice be protected.

In some ways, the new legislation represents a startling change in federal policy toward health insurance. Under the exemption from state law in the Employee Retirement Income Security Act (ERISA), federal policy has protected many employer groups from state health insurance mandates. There is wide agreement among health economists that state mandates reflect the lobbying of special interests (e.g. chiropractors, licensed clinical psychologists) on state legislatures to obtain off-budget regulatory transfers. Among other problems, research indicates that state mandated benefits raise the cost of insurance and thereby increase the ranks of the uninsured.

Mandates are terrible policy in themselves, but worse for the precedent that they set. Many consumers have, in fact, chosen insurance with different limits for mental health than for other health care. There are good reasons for consumers to choose insurance with different copayment and utilization review features for different types of coverage. It provides the most efficient coverage, the most value for the money.

There are two reasons for this. First, the responsiveness of demand to out-of-pocket price varies for different services and diagnoses. As a general rule, where demand is more price-sensitive, efficient insurance provides for more out-of-pocket payments to control utilization. Research shows that mental health care is more price-sensitive than other health care. Second, utilization control and even fraud control are more difficult for some services and diagnoses than others. Mental health problems are generally more difficult to verify objectively than physical health problems. These economic forces have combined to induce consumers to rationally and properly choose insurance for mental health services with lower limits, more copayments, and tighter utilization control.

This is not the result of an ignorant and superstitious attitude toward mental health care. It is the result of rational, free consumer choice in a competitive arena before the onset of illness, when rational and fair choice is possible. Of course, after the fact, consumers would rather have more coverage for whatever their problem. This is natural, but it does not call into question the decisions made earlier.

Many consumers have also chosen insurance plans with coverage for less than two days of hospital stay for a vaginal birth. This is an especially clear choice, because pregnancy is a predictable (and usually highly desired!) diagnosis. Consumers are very aware of coverage for childbirth. Again, it is perfectly rational for consumers to make such choices. This is an arena of large variation in consumer values. Accordingly, there is a great deal of variation in benefits for childbirth. Some consumers prefer, before the fact, to purchase plans with less hospital coverage for normal births. Again, the fact that consumers do not like the limited benefit after the fact proves nothing. Indeed, the exploitation of unfortunate individual cases by the proponents of these proposals is as irrelevant to rational argument as it is irresponsible.

What can we expect as the result of these mandates? First, they will raise the cost and make health insurance less attractive to many consumers. A few who were close to the margin will choose to drop out of health insurance altogether. This undermines personal responsibility and is unfair to the rest of us. The uninsured fall back on private and public charity to some extent. Second, the mandates will lead some consumers to drop mental health or maternity coverage altogether, even though they have already revealed that they prefer existing coverage to no coverage. They will be worse off and, in some circumstances, will also become a burden on private and public charity. Third, most consumers will simply shoulder the extra burden of inefficient benefits and be worse off for it. Fourth, the mandates put an extra burden--like a tax--on employment. This will reduce employment, which proved to be a major stumbling block for the Clinton Plan. Fifth, since mandates prohibit mutually beneficial contracts between consenting adults, they will corrupt the insurance business by driving the "real deal" underground. In place of clear policy limits, insurers will be forced to rely on utilization controls that are left vague for fear of offending the law.

The sixth ill effect is more subtle and requires analysis of the political economy of the precedent for federal mandates. Mandates provide a way of redistributing wealth from the general public to various special interest groups (e.g. The American College of Obstetricians and Gynecologists, The National Mental Health Association). Worse, the costs to the public are largely hidden because they are off-budget, while the benefits to the interest groups are clear.

The precedent of federal mandates creates incentives for many more of these inefficient transfers. The current legislation is the first step down a steep and slippery slope. The result will be more lobbying and more mandates with stronger effects and further subtle corruption of public life by interest groups trying to get the rules slanted in their own favor. Until now, the federal government has provided valuable protection for many group plans from this sort of political theft by state mandates. It is a sad day when the federal government switches sides and encourages political competition for mandates.

H. E. Frech III is an adjunct scholar at the American Enterprise Institute and professor of economics at the University of California, Santa Barbara. His most recent book, Competition and Monopoly in Medical Care, was recently published by The AEI Press.