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.