Guest Post: Large Group, Small Group, and Individual Health Insurance
by David Lemire
(David Lemire worked for over 30 years as an underwriter at a large, multi-state HMO.)
Now that President Obama has changed his rhetoric from reforming health “care” to reforming health “insurance,” you any be asking yourself what insurance reforms are needed.
If, like about 60% of Americans, you receive your health insurance as a condition of employment you are in a fortunate majority. And, in most states, if you work for a company with more than 50 employees you are not subject to preexisting condition limitations or rescission of your coverage.
Your employer probably bears some of the cost, and because of laws put in place during WW II, you do not have to pay taxes on this compensation. Yes, compensation; your employer deducts the dollars paid for your insurance as a business expense just as is done for your cash compensation. But because of the WWII legal exemption, you don’t pay taxes on what your employer pays. And because of the employer contribution the amount deducted from your paycheck is less than the value of your insurance.
But if you are among the other 40% of Americans, you either buy your insurance in the individual market with dollars you have had to pay taxes on or you go uninsured (unless your fellow taxpayers pay your costs under Medicare or Medicaid). So, which part of health insurance needs reforming and who should pay for the “reform?”
Let’s start with the majority of Americans. And let’s assume you work for an employer large enough to “self insure” (usually 200 or more employees). This means that the employer retains the liability for your health care costs rather than buying an insurance policy. Why would an employer do this? Well, first of all, by assuming the risk, your employer avoids paying an insurance company a “risk charge.” This lowers the overall cost of the group policy.
But even more importantly, by “self insuring,” your employer, under ERISA, a federal law, is exempt from state mandated benefits. This is especially important for employers who need to have a single plan design for multiple locations in several states. Otherwise state mandates would result in different plans depending on where you live. Here’s why. In many, if not most, states, special interest groups have lobbied the legislatures to mandate that their “services” are covered in any insurance policies issued in the state. It doesn’t matter if you want the coverage, or if your employer wants to include the coverage in your policy; if it is mandated, you have to have it and that adds to cost. ERISA exemption means your insurance costs are not inflated by these special interests.
Your problem is that if you lose your job, or want to change employers, you risk losing your coverage. That’s really your “insurance” problem.
So in the case of the majority of Americans, the needed insurance reform is to ensure that they can keep their insurance in the case of job loss or a change in employer. Their health insurance needs to be portable. Reform should delink insurance and employment. But if insurance is not linked to employment, who will pay for it? And what happens to the ERISA exemption from expensive state mandated benefits? And most important, how will individuals be protected from preexisting conditions limitations and the threat or recession? In fact, if insurance is delinked from employment, won’t we be giving up all that is favorable in the current insurance of the majority of Americans? Let’s explore the issues by taking a look at individual insurance.
Individual health insurance is underwritten one person or one family at a time, much like you purchase homeowners or auto insurance. And, just like you can’t insure your house while it is on fire, you can’t get individual health insurance if you are already ill. Insurer’s use medical information to assess whether you are a “normal” risk as contemplated in the premiums you are to be charged. This is called Medical Underwriting. Standards and practices vary among insurers, but essentially, if you have a current medical condition, are taking medication or have been diagnosed, you may be uninsurable. In addition, insurers know that some applicants will not be honest when describing previous medical conditions and that some who claim to be normal risks know they are ill. Therefore it is common practice to examine claims, especially ones submitted shortly after a policy becomes effective, in an effort to determine if there was a “preexisting condition.” If the insurer believes they have found one, they may rescind the policy, usually returning premiums paid, but leaving the person uninsured. Medical Underwriting, preexisting conditions and recession are among the biggest issues in individual health insurance.
Delinking your health insurance from employment, and forcing you into the individual market doesn’t seem very attractive given the above discussion. But here’s a new take on how to solve the problem. John H. Cochrane writing in the August 14, 2009 edition of the “Wall Street Journal” suggests: “A truly effective insurance policy would combine coverage for this year’s expenses with the right to buy insurance in the future at a set price….A ‘guaranteed renewable’ individual insurance contract is the simplest way to deliver both. Once you sign up, you can keep insurance for life, and your premiums do not rise if you get sicker.” See his full paper here (http://www.cato.org/pubs/pas/pa-633.pdf). Under Cochrane’s proposal insurance companies, rather than avoiding the sick, would compete to insure them. Combining his “insure your insurability” concept with a high deductible/HSA policy would eliminate the preexisting conditions issues with individually underwritten health insurance.
There is still the issue of “who pays.” Most people would agree that we should have the same tax treatment for those who buy their insurance as individuals as those who receive their insurance through employer contributions. This means that either you pay normal income taxes on any premiums paid on your behalf by your employer or that the folks in the individual market get to deduct their insurance costs.
Keeping employer contributions untaxed and expanding the deductibility of premiums to individuals is certainly the politically expedient thing to do since polls have shown that most people don’t want their benefits taxed. But adding a new deduction cuts tax revenue, and cutting tax revenue without cutting a like amount of spending only adds to the USA’s deficit, taxing our children and grandchildren. And we will still have the problem of the paying for the 45 million uninsured. If we, as a people, want insurance for all, we are going to have to increase taxes. The logical way to do this is to treat employer paid health insurance premiums as any other compensation. Everyone would buy insurance with after tax dollars.
So what “insurance reform” turns out to be necessary?
- Remove the regulatory burden on individual insurance market to allow market innovation as proposed by John Cochrane. (Solves preexisting conditions and medical underwriting issues plus encourages cost effective plan designs and competition)
- Allow sales of individual health insurance across state lines. (At least partially resolves state mandate burden)
- Delink health insurance from employment and tax group and individual policy premiums the same at the individual level. (Assists portability and funds insurance for all Americans)
The only issue not dealt with is that of “free riders.” These are the individuals, not eligible for Medicaid or Medicare, who do not buy insurance out of personal choice. Then when they incur medical expenses they either can’t or won’t pay. Their unreimbursed costs get built into health care providers charges just like the under reimbursements from Medicaid and Medicare. They become a hidden tax on all of the insured. Some form of individual mandate is one solution to this problem, but mandates are politically difficult to implement.
There are probably many other improvements in the way we could insure ourselves against unforeseen medical expenses. The free market would undoubtedly discover them if the heavy hand of regulation were lifted.
Update: A word about David’s area of expertise and the context of his opinion is posted above.