Policy Documents

How States Can Reform Health Care

Conrad F. Meier –
November 1, 1997

Any law passed to benefit one group of people, or to achieve one social goal, will invariably work to hurt the interests of another group of people, or to frustrate the accomplishment of some other goal. I call this the "Law of Probable Dispersal": whatever hits the fan will not be evenly distributed.

Nowhere has the operation of the Law of Probable Dispersal been more apparent than in our efforts to reform health care.

The Health Insurance Portability and Accountability Act of 1996 (HIPAA) contains hundreds of new regulations and mandates that push the health insurance industry toward guaranteed issue, higher premiums, more state government subsidies, more cross subsidization across consumer groups, and less protection of medical privacy between doctors and patients. For those of us who believe the objectives of reform should be lower costs, greater consumer freedom, more competition, and the protection of medical privacy, HIPAA represents a giant step in the wrong direction.

HIPAA and Unintended Consequences

HIPAA does not operate in a vacuum. It is imposed on top of a complex system of federal, state, and local regulations and mandates, and more importantly, on a system that has been fundamentally shaped by the perverse incentive systems that past public policy decisions have created. The result is a chain reaction of negative unintended consequences, a classic demonstration of the Law of Probable Dispersal. Consider:

  • HIPAA was adopted in the name of giving low-income persons greater access to health care, yet the new law will have the effect of raising premium prices, thereby pricing still more people out of the market.
  • Most of the involuntarily uninsured are young and healthy. By imposing guaranteed issue and collective renewal, HIPAA forces members of this group to pay higher premiums to subsidize the health care costs of those who are older and less healthy, making it even less likely that they will buy insurance.
  • HIPAA was supposed to end "job lock"--the fear of leaving a job because to do so would mean losing health insurance as well. But by requiring insurers to accept previously insured people applying for individual coverage, HIPAA makes the individual insurer the insurer of last resort. This opens the door to cost-shifting by group insurers who can work with employers to carve unhealthy individuals out of their group plans. The result is to undermine the profitability of many individual insurers and almost certainly to reduce the supply of individual insurance, thus increasing rather than decreasing "job lock."
  • HIPAA tries to guarantee coverage for people with pre-existing conditions who have dropped out of the insurance market and have difficulty "getting back in" at affordable insurance premiums. But the effect of mandating guaranteed issue is to encourage people to drop out of the insurance market, knowing they can purchase insurance when they eventually need medical treatment. The result will be more people with pre-existing conditions trying to "get back into" the insurance marketplace at subsidized rates.

HIPAA leaves in place virtually all of the past policy decisions that have worked to unnecessarily raise the cost and lower the quality of health care. Except for a pilot experiment with Medical Savings Accounts (MSAs), HIPAA leaves in place the unequal tax treatment of employer-paid insurance premiums and self-insurance. Coverage mandates, anti-trust laws, certificate of need programs, restrictive occupational licensing laws, and a foot-dragging Food and Drug Administration (FDA) all are untouched by HIPAA.

Beyond HIPAA: A Proactive Agenda

In many cases, states can legitimately claim to be already meeting the portability and renewal requirements contained in HIPAA, or can meet them by adopting only minor changes to existing policies. In fact, during their legislative sessions earlier this year, most states pursued this course of action.

But state legislators should do more than find relatively easy ways to implement HIPAA. State policy makers can take the lead on pursuing an action agenda that would push health care reform in a direction opposite of that represented by HIPAA. In the long run, America's health care system and its citizens will be far better served by removing the laws and legal barriers that often unnecessarily inflate the cost and reduce the supply of quality health care.

The goal of the reforms outlined below is to ensure--and in some cases restore--a well-ordered health care system that respects the rights and liberties of both patients and doctors. These reforms achieve that goal by getting the incentives right so that the system maintains its own equilibrium, avoiding the need for new laws and the unintended consequences predicted by the Law of Probable Dispersal.

Recommended Reforms

  • Expand COBRA benefit extensions to 24 months and extend the benefits to employers with as few as two employees. Immediately and without anti-market negative consequences, this reform will help protect workers from the effects of losing insurance due to job changes or extended periods of illness.
  • Allow private ownership of an employee health certificate. If you really want to make health insurance portable, let employees own their own health insurance policy so they can take it with them when and wherever they go. We own our life insurance policies, our retirement policies, and our auto insurance. We should and could own our health policies.
  • Allow small employers to form what I call S-H-I-Ps--Small Employer Health Insurance Pools. Self-funding for small employers--usually with fewer than 50 employees--is rarely economically feasible. But, a large group of small employers could finance such a solution. This would moderate, if not eliminate, the consequences of expensive state and federal mandates.
  • Expand the federal Medical Savings Account (MSA) program created by HIPAA, as well as state-based MSA programs, to provide relief from the high cost of low-deductible health insurance. If only 20 percent of the 40 million Americans without health insurance who are eligible to buy an MSA actually did so, 8 million people would disappear from the ranks of the uninsured without heavy-handed federal intervention.
  • Expand the use of state-based high-risk health insurance pools to include not only the uninsurable, but those who are medically diagnosed as high-health risk consumers. Removing high-risk consumers from the standard risk insurance pool will stabilize the individual and small group markets and allow insurers to better forecast their claims liability, encouraging them to lower premiums.
  • Repeal Certificate of Need (CON) programs. The goal of the CON program was to encourage consolidation of small and supposedly inefficient hospitals and to reduce duplication of medical services. But CON laws work to prevent rival, lower-cost outpatient surgical clinics from entering hospital markets. CON programs have increased hospital operating costs by discouraging efficient investments in capital. Over twenty states have either eliminated or revised their CON laws and the way they are enforced.
  • Abandon the notion that you can control premium inflation through community rating of insurance policies. Community rating shifts health care costs onto young, healthy workers in order to subsidize artificially lower premiums for older, less healthy people. After a few rate increase cycles, community rating increases premium costs for everyone.
  • Restore tax equity by allowing a 100 percent tax deduction on health insurance premiums for the self-employed. HIPAA allows the deduction to rise from the current 40 percent of premiums to 80 percent by the year 2006 and thereafter. Speeding up the process would help about 18 million people immediately. Meanwhile, states can pass favorable state legislation that allows 100 percent state-tax deductibility.

The aforementioned solutions address only half of the trillion-dollar health care market. Unfortunately, the other half is managed or influenced by the same folks that run Amtrak, the Post Office, the IRS, and Social Security.

Until Medicare, Medicaid, and perhaps eventually "KiddieCare," are privatized, whatever anti-market device the federal government invents in the name of improvement will certainly hit the fan, with its negative effects unevenly distributed across the private half of the health care industry.

Competition and choice, not more regulations and price controls, are the most promising way to lower spending and improve the quality of health care delivered in the United States.

Conrad F. Meier is a health policy advisor for The Heartland Institute. This article is based on a presentation he delivered to the annual meeting of the American Legislative Exchange Council on August 14, 1997.