A Modest And Effective Health Reform

Notwithstanding the election outcome in Massachusetts last month, efforts inside the Beltway to “reform” the health insurance system — that is, to centralize the rules and outcomes of health coverage — will continue, and still may prove successful if the drumbeat for “compromise” with fatally flawed ideas is heeded.

This centralization would be a disaster because government does not have patients. It has interest groups, an eternal truth that casts a shadow long and dark in the context of a federal takeover of the health insurance market.

Decentralization — a reduction in the role of government — is the only path that can lead toward reduced cost pressures and increased choices for patients with vastly heterogeneous needs and preferences.

One straightforward reform that could be adopted quickly is the implementation of a nationally available “entrepreneurs” health coverage policy freed from the many benefit mandates imposed upon the health insurance market.

State governments, responsible for regulating health insurers, for years have required health insurance policies to cover particular services and categories of providers. This means that individuals must pay for such mandated coverage even if they otherwise might choose not to do so.

The average state imposes about 35 such mandates, and a conservative estimate of the marginal cost of each is about 0.3% of premiums. Premiums thus are forced up by about $1,294 per year in the average state for a group (employer-based) family policy, ranging from $260 per year in Idaho, the state with the fewest mandates (8), to $2,486 per year in Rhode Island, the state with the most mandates (62).

The specifics of coverage policies freed from such mandates would be determined by competition in the market. But premiums incontrovertibly would fall.

A new study from the Pacific Research Institute shows that these policies 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 many benefit and provider mandates now imposed by state laws, entrepreneurs’ coverage would reduce the degree to which consumers treat health insurance as a way to shift known costs onto others, rather than as a way to pool the risks of future adverse health events.

This would be an important step toward restoring health insurance as protection against catastrophic events rather than prepayment for anticipated medical services, and so would strengthen incentives to economize on the use of health care resources.

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.

Because representative democracy is the art of wealth redistribution, and because resources are limited always and everywhere even (or especially) for the federal government, a system of health coverage centralized in the Beltway 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.

Merely consider the tempest over breast mammograms that erupted late last year. Mammograms, of course, are hardly the only medical service for which there is a constituency, and enactment of centralized “reform” legislation would be the beginning rather than the end of such interest-group competition.

Thus would insurance coverage — and therefore the delivery — of various medical procedures increasingly come to be politicized over time.

A new public policy allowing individuals and groups to escape the constraints imposed by state benefit mandates would have the opposite effect, and thus would represent real reform.

Other important reforms include:

• Elimination of the tax preference that now favors coverage purchased in the group (employer) market over the non-group market.

• A rollback of the rules and tax preferences that induce groups and individuals to purchase expensive coverage with low deductibles, co-payments and out-of-pocket maximums.

• An end to 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, thus improving the efficiency of resource use in the health care sector, and restoring the doctor-patient relationship as the final authority with respect to medical decisions.

• Zycher is a senior fellow at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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