Saturday, April 13, 2013

Insurance Mandates Are The Culprit for Higher Premiums

Yesterday, I had a conversation with my socialist neighbor.  He and I have been friends for years, so I’m used to his incoherent ravings about corporations and capitalism.  The topic turned to Obamacare and the individual mandate and insurance companies.  My neighbor insisted that the high cost of insurance is due to corporate greed.  He wants a single payer system.  In other words, he wants a complete government takeover so the “rich” will be forced to pay for his health care.

I tried to explain to him that the high cost of insurance is due to federal and state mandates.  I then referred to a 2004 CATO Institute study, but that didn’t make a difference.  Incidentally, Carolina Journal Radio published an interview with an economist from the University of Louisville explaining just that:

RALEIGH — Much of the debate about the 2010 federal health care reform law involved the so-called “individual mandate,” the notion that the government could force everyone to buy health insurance. But that’s not the only troubling mandate tied to health insurance. Stephan Gohmann, BB&T professor of free enterprise at the University of Louisville, discussed health care mandates during a 2012 speech at Campbell University. Gohmann shared themes from that speech with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)

Kokai: First of all, why do we have health insurance mandates?

Gohmann: Well, now, there [are] two types of mandates, so there’s the mandate everybody must have insurance, and then there are health care mandates that require insurance companies to cover various illnesses or various types of physicians or treatments. And the reason those physicians or those treatments are covered by mandates is somebody has lobbied for it, and there’s always somebody who’s going to benefit from having a mandate.

And so, it sounds pretty good, like, well, if somebody is disabled and needs a wheelchair, insurance should cover people with wheelchairs. And that sounds pretty convincing. It’s like, well, we wouldn’t want somebody not to be able to have a wheelchair if they need it. And so the state will come in and mandate, well, all insurance companies have to cover people who need wheelchairs and give them wheelchairs. And so the argument sounds very sentimental, but what it does is it raises the cost of the insurance to the regular consumers who don’t need wheelchairs.

Kokai: What types of things are mandated?

Gohmann: In the new law, … there are nine areas of health care that they call “essential health benefits,” and these nine areas have to have some coverage in every state. And a lot of these the states have already mandated these, such as certain things for women’s health and heart disease monitoring, things like that. So certain things have been mandated. Other states have mandated that you need a natural therapy, which is some holistic type of therapy. Well, that’s a little out there, I think. But somebody has pushed for that to happen.

Kokai: You argue that when government mandates coverage, there’s likely to be some negative effect?

Gohmann: The negative effect of any of these mandates is that somebody has to pay for them, and the consequence is premiums for everybody go up, and when premiums go up, people who are at the margin decide not to buy health insurance. And so the healthier people will probably opt out. But if it’s an employer paying for it, employers might decide not to give their employees health benefits, or they might reduce employment because health insurance premiums have gone up.

From an employer’s perspective, any time they hire a worker, if they’re willing to pay $50,000 for that worker, they’re not too worried about where that $50,000 goes. If $10,000 has to go to health insurance, then the worker gets to take home $40,000, assuming there [are] no taxes. And so, if health insurance premiums go up to $15,000, then the worker only takes home $35,000. If that’s the case, then some workers might quit, and the companies might lose their better workers because the better workers might have options to go somewhere else.

And so there are these negative consequences that people — the politicians and policymakers — don’t think about when they put in these mandates.

Kokai: Let’s talk about how these mandates affect particular groups of people. First, employees who get their health insurance coverage from their employer. You say that if mandates push up the cost of health care premiums, then this plays an important role in determining how much money these employees get to use themselves?

Gohmann: Absolutely. And, actually, employees have been told, “You’re going to be able to keep your health care.” But with these new mandated essential health benefits, if your plan doesn’t have those benefits in there, your plan will be required to have them. So now your premiums will go up, which means your wages may go down. So you’re not keeping the same plan.

[President] Obama said that he would reduce health care premiums by $2,500 by this time, since he became president, and actually they’ve gone up by $3,000 in the last three or four years. So government can’t keep the price of health care from rising. In fact, many of the things they do are probably causing it to rise, because they’re not allowing the market to work.

Kokai: How about a person who doesn’t have health insurance connected to her job? How do the mandates affect her?

Gohmann: Well, these plans will be mandated soon, so everybody will presumably be covered, but what employers will do, if they’re 50 employees or more, they’ll opt out and probably pay the penalty, which I think is $2,000 per employee, and then the employee will go to the health exchanges and get whatever benefits they have there. And they’ll be mandated to purchase those benefits. Now, we’ve been told that based on your income you’ll get subsidies from the government, but somebody has to pay for that, which will be taxpayers. And if premiums are higher, that means we’ll just be covering people’s health care premiums through tax dollars.

Kokai: So if we didn’t have these mandates, how would this situation be better for consumers?

Gohmann: You think about your homeowner’s policy, and so, we’ve got the option to have earthquake insurance and flood insurance. I live on a hill; we live by the New Madrid fault, so we could have an earthquake. It’s pretty far away, but we can opt in or opt out of that. Now, we can’t buy the insurance after the fact. But actually with the health care plan, you can wait and get insured after you get the condition, and so the rest of society will pay for that. It would be like people paying for my house being knocked down with an earthquake.

But this is an option, and so the market works, and what happens is the insurance companies, if they want to get my business, they’re going to have to find a way of providing this service at the lowest possible cost. But when it’s mandated, there’s not a lot of incentive to be a low-cost provider because people will have to use the service. And so the consequence is the price of all these mandates go up.

If we look at areas that aren’t covered by insurance — cosmetic surgery and LASIK —it’s expensive, but relatively inexpensive compared to health care. The increase in prices of LASIK surgery, I think it’s actually dropped in price in the last 10 or 15 years, whereas [the] increase in heart surgery [has] been going up dramatically. What’s the difference? The LASIK surgeons have an incentive, and the companies that produce the equipment for LASIK surgery have an incentive to find a low-cost way to improve quality but also to keep cost down. It attracts more patients. They make more money.

But when it’s covered by insurance, that incentive is no longer there because I get paid no matter what, so I don’t have to worry about quality, and I don’t have to worry about cost. And so we have both of the things that the market incentivizes people to do well disappear with the insurance market.

Kokai: You’re saying if a service is mandated there’s not much chance it will get much better or much less expensive?

Gohmann: Right. And we can probably expect, if that’s the case, then the government is going to intervene and say, “OK ,we are not going to pay more than this amount for this service,” which then makes the incentive for quality to go down even more because I’m not getting paid much as a physician. And so things will get even worse, and we might end up with rationing. It might take longer for you to get this service. And so I don’t see any good side of the mandates. It sounds good, and so it sounds very heartwarming to be a nice person, nice legislator, and say, “Yeah, we want to help out these people.” But we have negative consequences, and it actually hurts instead of helps.

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