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Health Reform: How to Make it Cheaper

There's been a lot of discussion about the pros and cons of health reform, but the make-or-break issue boils down to this: Mandates.

The type of coverage that's demanded by law--and the penalties you would face if you don't buy coverage--will have a sweeping impact on insurance rates in the future. Mandating too much, or too little, could make the whole reform effort collapse of its own weight.

You've doubtless heard this before. I wanted to see if it was true. So I conducted a mini-survey with the help of online insurance broker eHealthInsurance.com. The results were somewhat horrifying.

Before we get to that, here's what we did:

Knowing that some states already have health laws that mirror the federal reform plan, I asked eHealthInsurance to compare existing rates in states that have mandates similar to what's been proposed in federal law to rates offered in states that don't have such extensive coverage mandates. eHealth, incidentally, seemed a good choice to conduct the analysis because they do business in a wide array of states (with and without mandates) and they sell insurance, they don't underwrite it. While no one appears completely impartial in the health reform debate, this made eHealth as close to an impartial third-party as anyone else knowledgeable.

The results of their premium survey were dramatic. Combine mandatory comprehensive coverage with weak penalties to buy insurance and you could see policy prices soar 10-fold. But simply demand the sort of Cadillac coverage now required by the pending bills and prices can rise dramatically no matter what.

To test rates, we created a hypothetical family of three--two healthy parents in their late 20s and 30s, who have a small child. We priced high deductible policies ($2,000 deductible per person; $4,000 per family) in four states--California, where there are few coverage mandates; Oregon, which demands maternity coverage for everyone; Massachusetts and New York, which demand the same sort of comprehensive policies as the federal law proposes, but have differing approaches about making people buy them.

What we found:

  • In California, this couple could buy our sample health policy for $270 per month, if they chose to forego maternity coverage. (Maternity coverage is optional on most independently-purchased health policies in the state.) If they wanted to cover maternity, the cost of their policy would jump to $864.
  • In Oregon, (where every Lumberjack--and ingénue--gets maternity coverage whether they want it or not) you could buy the sample policy for $364 monthly, a whopping $500 less than California's policy that includes maternity care. Why so much cheaper? Because a whole lot of people, including dads and grandparents who aren't going to get pregnant, pay a premium as if they are. They pay about $100 more a month (compared to the $270 non-maternity policy offered in California) to subsidize the people do do need this care.
  • The cost to cover this family in Massachusetts? You may want to sit down. $1,400 per month.
  • The cost to cover them in New York: $3,400 a month.
Why so costly in Massachusetts and New York? Virtually every state has some standard of what they require an insurance policy to cover, but these states--like the proposed federal law--throw in the kitchen sink.

The difference in price between policies offered by these two states is a simple one: In Massachusetts the law is strict enough to make almost everyone buy coverage. Only about 3% of the population goes without coverage. In New York, roughly 15% of the population is uninsured.

The premiums are still far higher than they are in either California or Oregon, however. The reason, according to eHealth's consumer health insurance expert Amir Mostafaie, boils down to two things: Guaranteed access to insurance and the coverage demands.

The federal law will require that everyone be allowed to buy insurance, no matter how healthy or sick they are. The presumption is that this will drive up rates at least somewhat because insurers can now deny coverage to people who are sick or have congenital ailments in their families. But if healthy people are forced to buy polices, too, (as they are in Massachusetts) it will drive up rates far less than if they're able to opt out (like New York), leaving the insurance pool only to the sick and nervous.

Given that we've passed other laws demanding that the sick be treated regardless of whether or not they have the means to pay, such as the Emergency Medical Treatment and Labor Act, the additional cost on the healthy to treat the sick may be one that we're willing to shoulder as a society.

But there's another issue that also drives up prices and it's all about what's mandated to be covered.

In addition to the normal coverages for hospitalization, doctor's visits, prescriptions and tests, the federal law (like the laws in Massachusetts and New York) would require that everyone get maternity coverage, mental health, substance abuse and coverage to help you stop smoking.

In addition, the proposed federal laws would bar insurers from placing annual or lifetime caps on the amount of coverage you could receive. (A typical cap now says your policy will not pay more than $5 million over your lifetime.) The proposals also would restrict the amount you'd have to pay in deductibles and co-payments both on an overall basis, as well as for a variety of individual services.

Why is the government requiring so much be covered? No Congressman wants to have some pregnant, chain-smoking schizophrenic camped in his office because his bill excluded coverage for her care. (Okay, that's slightly sarcastic.) Experts have told me that legislators are loathe to suggest coverage limits for fear that they'll be branded as advocates for substandard care. (We may be partly to blame because we tell our legislators what we want and boot them from office when they don't comply with our, sometimes, childish demands.)

But by mandating so much, we may be forgetting what insurance is for. Medical insurance was never meant to cover every bandage. Long ago (when many of today's legislators were still in diapers), health insurance was designed to cover catastrophic costs--those expenses so huge and extreme that the average family couldn't afford the risk.

A typical family, for example, can afford to pay $500 a year for prescriptions and doctor's visits--particularly if they're prepared to save for those. They could probably afford significantly more--even $5,000 in costs in a bad year. What they couldn't risk was the medical costs involved in treating cancer, which can run into the hundreds of thousands of dollars. For that risk, you need health insurance.

In the evolution of this market, we have become accustomed to having every doctor's visit covered with only a modest co-payment. Our prescriptions are insured. Our purchases of over-the-counter cold treatments are deductible. But demanding that everything be covered by insurance is a two-edged sword. It means that people won't have to worry about being bankrupted by some unexpected health costs, but their premiums may soar until they cost more than a mortgage.

Here's a thought: How about creating a low cost option in health reform. Offer a bare-bones policy that only mandates coverage for the basics--hospitals, doctors visits, tests, pharmacy. This policy could have high deductibles on the front-end, but 100% coverage once your out-of-pocket costs exceed, say, $10,000. If you want therapy, you'd pay for it yourself. Checking into the Betty Ford clinic would also be on your own dime. To be sure, it wouldn't be perfect, but it might be affordable.

People who want to pay higher premiums for more coverage, of course, could. But no one would force you.