State Mandates Make Health Insurance More Expensive, Matthews Claims

October 28, 2005

MatthewsState laws designed to require insurance companies to provide certain kinds of coverage are driving up the cost of health insurance in some states, said Merrill Matthews, director of the Council for Affordable Health Insurance, at an Oct. 26 Federalist Society talk.

"We believe that a market works in health care," Matthews said of his Council's stance, adding that government-provided care should only be a safety net.

Most explanations for the rising cost of health care are wrong, he alleged. Some cite new technology as the reason for increased spending, but new technology affects many fields that don't have exploding costs. Others point to prescription drugs, but most people who buy prescription drugs don't use those that are most expensive. "Something else is going on here," he said.

Surveying data from Web sites that track hundreds of thousands of policies shows surprising differences in the cost of individual policies according to what state you live in. According to America's Health Insurance Plans (AHIP), an association representing health insurers, a policy in New York will ring up at over $6,000 a year, and range from $5,200-$5,700 in Massachusetts. Yet six states average premiums of just $2,000, with $2,268 the average for all states, according to AHIP.

Matthews noted that the cost of living doesn't explain the figures — California is a state in which policies are about $2,000. Another Web site, eHealthInsurance, an online health insurer specializing in individual and small business policies, shows that New Jersey has the highest such policies, at $4,000, while Iowa and Wyoming are just $1,200-1,300.

"It's because of what the states have done in the legislation," Matthews explained.

Today there are 1,824 state mandates for insurers nationwide, while in 1965 there were only six. About 30-50 mandates are added each year, Matthews said. Mandates can range from requiring insurers to cover drug and alcohol abuse treatment to covering hair prostheses, midwives, chiropractors, podiatrists, and the removal of benign birthmarks. Individually the mandates might be inexpensive, but together they add up. Matthew's organization produced a study on what each requirement costs, "so that state legislators understand there is a cost to these mandates."

Matthews said his organization would like to ensure people have access to mandate-free policies, or be able to buy policies across state lines, an idea inspired by e-Bay head Meg Whitman, who told House Speaker Denny Hastert she wanted to offer insurance to e-Bay sellers. The legislation went before Congress in July, but was shelved, in part because some Republicans in New Jersey objected to it.

The most expensive state mandate has proven to be one that requires insurers to cover anyone seeking a policy, including those with a pre-existing catastrophic conditions. With that policy in place, "Why would you buy insurance beforehand?" Eight states passed such guaranteed-issue mandates in the early 1990s, including New Jersey.

"New Jersey's our poster child for how not to do health care reform," he said.

In the individual market, which has no third parties such as employers to help pay costs, younger people are dropping their policies. "It makes the pool smaller and sicker," he said, because the only people who can afford such insurance are those who have nowhere else to go. New Jersey's Plan D policy, which has a $500 deductible and 20 percent co-pay, costs $5,000-$6,000 — per month. The least expensive policy is $4,000 per month, Matthews said. Policies in neighboring Pennsylvania only cost a third to a fourth as much.

"States play a big role with what happens in health insurance," he said.

Arguments for government-run health care don't consider the true administrative costs of the current Medicare and Medicaid systems, Matthews argued. Proponents say 2-3 percent of Medicare costs are administrative, while private-sector insurers spend 10-20 percent. But Medicare's numbers don't factor in Congress's time in making legislative revisions and the cost of administrator salaries, as well as the building they work in. Unlike the private sector, Medicare doesn't have time to check doctor's claims because they have not increased staffing to correspond to the rapid expansion of the health care market — they just pay bills. As a result, "it looks like it's getting more efficient over time.

"The real issue behind the cost of health care is the fact that in most of the cases somebody else is paying the bill. When somebody else is paying the bill, they don't care about the costs," Matthews said. "We've created a health care entitlement mentality."

At one point individuals paid 40 percent of their health care expenses while third parties such as employers paid 60 percent. In 2005 that balance had shifted so that individuals pay only 17 percent of the costs. "Over time the out-of-pocket share for individuals has continually declined," he said. "It should not surprise you that they end up spending more."

General Motors helped contribute to the problem when, to attract employees to an HMO health plan, the company promised to pay all health insurance costs. Costs rose, and the auto maker recently renegotiated that agreement with United Auto Workers because it proved untenable.

"We're coming to a crossroads as a country," Matthews said. Many Americans are fed up with managed care, so some states have passed anti-managed care legislation. United Health, the largest health insurer in the country, recently announced it would stop denying claims, another factor in rising costs.

Matthews advocated giving Americans "reason to be value-conscious in the health care marketplace." He said health savings accounts have already slowed the rise in expenditures — costs are only increasing 2-3 percent a year for those with accounts versus those with traditional policies. Generic drug use has also increased. Those with stakes in the cost of health insurance talk more to their doctor about alternatives to tests and brand name drugs, and surveys suggest this leads to less malpractice litigation because of doctor-patient interaction, he said.

Yet "governors across the country are expanding Medicaid phenomenally" in response to concerns about rising health care costs. Even Republican Gov. Mitt Romney of Massachusetts has boasted of bringing 106,000 more into Medicaid.

"If you're putting people in Medicaid, you're putting them on the welfare roles," Matthews said.

TennCare, Tennessee's health plan for the uninsured, began in 1994 with the idea that it wouldn't increase costs, and instead "has become the biggest nightmare." The Democratic governor has cut the program more than 25 percent — by 150,000-200,000 people — but without providing a safety net to help the transition. "He didn't have an exit strategy," Matthews said. He may face the people's wrath in the next election.

Maine's Dirigo plan, which promised to have 31,000 uninsured covered by the end of 2005, only has 8,100 enrolled, and of those, only 1,800 were uninsured.

"They were paying for their health insurance premium, and now they're subsidized by the state," he said. To pay for the plan, Maine is considering a tax on hospitals and doctors.

"The states have been looking in those directions. Most of them have not been working out very well."

In contrast, Texas passed tort reform that has resulted in an 80 percent drop in medical malpractice suits. Florida Gov. Jeb Bush is proposing drastic reform to Medicaid that would bring in health savings accounts into the mix.

Health care costs have also increased because doctors bumped up prices in order to afford, and still profit from, the deep discounts they give to insurers and Medicare/Medicaid. Matthews noted that his insurer only had to pay 25 percent of the cost of a recent surgical procedure he had.

But the uninsured are often charged the full price, leading some trial lawyers to formulate a class action suit against hospitals for overcharging uninsured patients. Some states have mandated that hospitals cannot charge more than the managed-care price to the uninsured. Requirements in California that mandate hospitals to post information on profit centers shows that hospitals make more profit from the uninsured than the rest of their market combined.

"The system right now is not set up for people coming in with cash," Matthews acknowledged. Finding out the real costs of health care "is still a struggle."

"From the insurance company standpoint, they feel like there's not enough information [or transparency now] to make the [consumer-driven] system work."

Although other countries spend a smaller share of their GDP on health care — the United States is at 15 percent and Canada is at 10 — "there's a difference between saving money and spending less." It doesn't mean Canadians get the same service, he noted.

On the other hand, the idea that a consumer-driven system gives disincentives to seek care "is a stumbling block for a lot of people."

The question remains: "Who is going to be in control of the health care system? Which way do we want to go?"


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