Myth Busters #11: Mandated Benefits

As I said in my last “Myth Busters” post, the health policy community came to view risk pools as being a big pool of money to be allocated according to need. In that sense, there was little difference between insurance companies and government agencies. Both collected vast sums of money from a large number of people and spent it however their governing bodies determined.

The only problem, in this view, is that the governing bodies of insurance companies are unelected and unaccountable. They tend to be wealthy white males who are driven by greed and prejudice. Therefore, they deny benefits to certain classes of people — women, the mentally ill, the addicted. And they have little appreciation for the role of certain providers like nurses, psychologists, massage therapists, and so on.

It was, therefore necessary for state legislatures, or in some cases the Federal Congress, to intervene on behalf of those who needed protection from short-sighted insurance company executives.

Never mind that there was a contract in place, which was voluntarily entered into by the buyers and sellers of the insurance product. The contract said we will pay you $X premium and you will provide Y benefit. The legislators decided that the contract should be revised to provide Y+Z benefits.

Someone who is a better Constitutional scholar than I will have to explain whatever happened to the Contract Clause, which reads:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

States are forbidden from “impairing the obligation of contracts.” That seems pretty clear and unambiguous to me. Yet somehow states today have the authority to tear up existing contracts and add any provision they feel like.

That is a legal question, but there are also large political, economic, and policy issues at play here.

I won’t go into the thousands of state mandated benefits currently in effect. The Council for Affordable Health Insurance has done a fine job of tracking these required benefits.

Perhaps the biggest issue is the added cost of these mandates. In 1997, the National Center for Policy Analysis (NCPA) commissioned a study by the actuarial consulting firm, Milliman and Robertson (now just known as Milliman), entitled “The Cost of Health Insurance Mandates,” which found the total number of mandates in effect at the time added as much as 30% to the cost of premiums. At the time, there were fewer than 1,000 such mandates on the books, and the most expensive ones were for mental health and fertility treatment, especially in vitro fertilization. Since then, over 1,000 more have been added, so the costs are proportionately that much higher.

Obviously, these requirements have made coverage less affordable for small employers and added greatly to the number of uninsured and the fall-off of coverage in the small group market.

But more than simple “affordability” is the perceived value of the coverage to the insurance buyer. Not many people will ever take advantage of in vitro fertilization coverage and a large segment could never benefit from it because they are beyond their childbearing years. It is of no conceivable (pun intended) value to them. They may look at the price and the coverage and wonder why they should be expected to pay for something they are guaranteed to never use.

In that sense, these mandates are really hidden taxes, not insurance benefits at all. State government decides it would be good social policy to have someone pay for the fertility treatment of infertile couples, so it assesses a fee on a group of citizens who will never themselves benefit from the service. If you buy insurance coverage you are required to pay a tax that is dedicated to the treatment of a small number of people. The only option left for people who prefer not to pay that tax is to not purchase health insurance at all.  So they don’t, in large and growing numbers.

State lawmakers had an opportunity to enact social policy on the cheap — at no direct cost to the taxpayers. And so they did, heedless of any consequences such as the growing numbers of uninsured. No one ever stopped to ask if it is worth depriving ten families of insurance coverage in order to provide free fertilization coverage to one. Insurance companies were viewed as giant cash cows. No one ever stopped to think that every penny an insurance company has comes from someone who pays premiums.

But mandated benefits never became a big political issue because only a small part of society was harmed by them — small employers. Bigger employers who self-fund their benefits were not subject to them because they are regulated by the federal ERISA law (the Employee Retirement and Income Security Act of 1974), which exempted them from any state laws “relating to” employee benefit plans. Large employers had no reason to resist the imposition of these mandates. If anything, they had plenty of reason to support them, because they added costs to their smaller-company competitors.

Naturally, with rising costs and greater complexity, consumers became increasingly angry at insurance companies. This has become all too familiar. We are seeing it today. Banks are forbidden by the Dodd-Frank law from charging merchants for the use of debit cards, so they add a monthly fee to debit cards consumers. The banks end up being blamed for the actions of irresponsible politicians. It is as predictable as autumn leaves.

So as mandated benefits drove up costs and made people angry at insurance companies, there were ever greater demands to “do something” to fix the problems in the small group market. Next time we will look at how those efforts turned out.


Comments (13)

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  1. Buster says:

    Advocates for disease constituencies often lobby for mandated benefits in the name of the greater good. But, it’s not actually good for consumers to pay for benefits they wouldn’t buy if allowed to decide. Moreover, it is also not in consumers’ best interest to be coerced into paying for benefits they have very little chance of ever using.

  2. John R. Graham says:

    Greg, I appreciate what you’ve written, and agree that mandates may make health insurance prohibitively expensive for some people. Certainly, the principle that parties should be able to voluntarily contract for whatever benefits they want, without state government dictating what’s in the package, should be acceptable to everyone.

    However, I think we also have to appreciate the difference between the total cost of a coverage mandate and the marginal cost of the mandate. For example, cancer coverage is surely an expensive part of health insurance, but few people would buy health insurance that excluded cancer coverage.

    The fact that self-insured, ERISA-harbored, employers’ benefits (which are exempt from state coverage mandates) almost universally cover the state mandated benefits is evidence that the marginal cost of the coverage mandates is not great. Also, when states allow “barebones” or “mandate-lite” coverage, the uptake is very small.

    I did a pretty thorough review of the literature on this in 2008 ( (Please note that I’m only addressing coverage mandates, not community rating and guaranteed issue.)

  3. Uwe Reinhardt says:


    I am not a constitutional scholar so therefore I can’t answer your question.

    My recommendation: Ask sen. orrin Hatch, longtime member or chair of the judiciary committee. He now says that the mandate is unconstitutional and an impingement on the individual’s freedom. Yet he co-sponsed the late Sen. Chafee’s bill of 1993 which called for a mandate.

    So Senator Hatch must really be a cognocente on this topic.


  4. Devon Herrick says:

    Several years back I debated health reform at Susquehanna University. An academic from Harvard took exception to my claim that mandates are mostly the result of lobbying by special interests. She argued mandated benefits are consumer protections.

  5. Ken says:

    Good post.

  6. Joe S. says:

    Save us from the people who are trying to do good for us.

  7. Greg Scandlen says:

    @John Graham

    Thanks for the link. Somehow I missed this study when it came our. I do not find your citation of ERISA plans and the experience of bare bones plans persuasive. Employers who are large enough to self-fund, are also large enough to afford more generous benefits. And bare bones plans were always sort of a gimmick and I expect employers saw them that way.

    But I think your comment misses the essential point, however. The impact of these mandates goes well beyond the cost of paid benefits. There are also substantial compliance costs for both the health plan and the buyers. And there is a cost in confidence between buyer and seller, as each year the health plan has to announce benefit changes that the buyers did not request and do not want. These are usually shortly followed by an announcement of a rate increase. Buyers get annoyed and the plans get blamed and the legislators who created the situation escape any responsibility.

    Even more essential is my main point that the involvement of social engineers means that health insurance is no longer “insurance” in any meaningful sense of the term. It is no longer a contract between buyer and seller and it is not “insurance” if it requires people to pay for a service that is impossible for them to use. It is biologically impossible for me to ever use in vitro fertilization, so why am I “insured” for it? I am not. I am being taxed for a service that only other people will ever use.

    Mandated benefits are not a discrete issue. They are simply another phase of a decades long effort by the social planners to control health care. That is the point of this whole Myth Busters series.

  8. Frank Timmins says:

    @John R. Graham

    John, I think I get your point if you are making the case that a true “comprehensive health insurance plan” should cover just about any major medical expense, and perhaps any plan operating under that definition should be compelled to standardize in that regard, and can imagine that any reform legislation would probably address that issue.

    On the other hand, “mandated benefits”, certainly the state legislated variety, are really not about this sort of discussion. Some of them are really off the boards and obviously politically inspired. They actually can be very costly in both claims as well as administrative expense.

    I can’t give you statistical proof but I can assure you that in my experience almost all sponsors of self-funded ERISA programs purposefully by-pass at least some state mandated benefits when establishing their plans.

  9. Health Insurance says:

    These are tough time to start any new enture,especially in the health insurance.

    This kind of benefits on a fully-insured basis to small and mid-size groups was irresistible.

  10. John R. Graham says:

    @Frank Timmins: Thanks for your reply. I’m not saying that a comprehensive plan “should” cover anything other than what the beneficiary and insurer agree to. I’m just saying that a mandate to cover cancer is like a mandate for homeowner’s insurance to cover fire. For most people, it would be redundant because they would not buy a policy that didn’t cover fire.

    Also, there are some mandates that make headlines, but are not really that big a deal. Every once in a while you read about a large employer (usually public, like the City & County of San Francisco) that covers sex changes, for example. Because so few people actually undergo the treatment, it doesn’t add much to the cost of benefits for the entire population.

    However, when I wrote the study that I cited above, it was prompted by the wave of autism mandates that was crashing over the states. In this instance, I certainly thought that the mandate was drifting into forcing health plans to cover what was effectively special education, and innapropriate. So, the trend of mandates has been moving in the wrong direction.

    @Greg Scandlen: If a large employer can “afford” more generous benefits it could also “afford” to raise employees cash wages. Yes, there is a tax wedge, but if the state-mandated benefits were worthless, the employer would not provide them, but cash instead.

  11. Greg Scandlen says:


    I’m not saying the mandates are worthless, just that they may not be the best use of limited resources.

  12. Karl Stecher says:

    “Governing bodies of insurance companies have little appreciation… for the roles of certain providers like nurses, psychologists…” True. But they also have little regard for the role of the doctor. The intent of the insurance company is to make money..If they can ratchet down what they pay a doctor, their bottom line is better. And doctors cannot negotiate, nor band together, nor unionize…they are so forbidden by rules under the Federal Trade Com.
    Lack of adequate compensation, by insurance companies, but worse, by the Government (Medicare and Medicaid), has been a factor in stopping many of the best and brightest from entering Medicine for the last two decades. And it is continuing to get worse.
    Doctors despise being called the generic term “providers.” Like calling a woman a “carbon unit.” (remember that movie?) Or equally derogatory terms.
    Your column is very good. One approach, if your/our goal of removing essentially all mandates is achieved, would be to have each buyer of a healthcare insurance policy be shown a laundry list of possible options to purchase on top of a basic care policy.

  13. Dr. Don says:

    From the view point of an alternative health provider (chiropractor), I see how the justification for mandating coverage would be if it is proven to reduce costs for treating musculosketal conditions as opposed to medical treatment of the same condition.

    Currently, an uncomplicated back condition which I could treat for very little is often taken over by an MD who knows little about conservative care who will with useless diagnostics and $6,000 injections to drastically raise the cost of care with no added value to the patient.