Saturday, July 24, 2010

Individual insurance across state lines. Some thoughts to ponder.

In a truly free market for health insurance, crossing state lines to purchase the best possible insurance product makes a lot of sense. That’s why so many smart, well-studied conservatives support it.

Competition is the key to holding down prices.

But I caution you on this, and not because I oppose it, but because there are serious downsides that must be addressed. Let me mention three:

First. The issue of individual state mandates, and how that translates into better pricing. Minnesota ranks second in the country with insurance mandates – 67 of them (RI is first at 70).

If you purchase an Iowa insurance product that might only have 55 mandates (I do not have the real number in front of me), which state’s mandates will prevail? If Minnesota’s, then a good deal of the competitive nature of the plan is gone. If Iowa, it begs the question of how will Minnesotans get their fertility treatments paid (for instance).

Or, a regional pact can be negotiated that allows at least limited competition within the region, with identical mandates (whose will prevail, and would Linda Berglin or Tom Huntley allow this?).

Second. The issue of networks. As you doctors painfully know, the insurance companies can play hardball on network negotiations in part because there are so few competing in Minnesota. On the other hand, doctors are loathe to sign contracts with more networks. How will non-Minnesota insurance companies overcome the inability to create workable networks?

Networks can be rented, of course, but what advantage would one company have over another? If all have the same mandates, and all, but a few have the same networks and contracts, I fail to see the advantage.

Third. Many who favor cross state lines sales do so because they do not support employer-based health insurance. The assumption is that individuals will be better able to shop for their own plan if freed up to do so, in a market of many plan choices.

Setting aside the issue of the individual mandate, and if we can overcome the issue of state mandates and networks to design competitive products, there are still serious considerations in unraveling the employer-based insurance system.

Today, depending on whose numbers one uses, some 140-150 million Americans receive private health insurance through employers (more than the entire Russian population, by the way). If our goal is to achieve near universal coverage, this gets us halfway there.

Let us assume that Congress eliminates the tax deduction for employers to provide health insurance. And let us assume that in so doing, Congress transfers that deductibility to individuals. Would 150 million Americans continue to receive their insurance from private markets?

The presumption is that employers would simply pay their workers the difference. That is, instead of spending $12,000 on insurance, they would spend $12,000 on payroll. The tax implications for the employer are nearly neutral, save for the extra payroll taxes generated by increased wages and salaries. An option would be paying an additional $10,000 and consider the payroll taxes part of the total compensation, but again, these are business expenses that will be allowable as deductions, and not subject to taxation.

Will the outcome, then, be increased pressure on tax revenues from the neutrality of the employer tax deductibility, and the increased deductibility of insurance premiums? If so, what will Congress tax to replace this lost revenue?

More of a concern than transferring insurance cost to wage cost is the most simple of questions: Without an employer mandate, why do we believe employers would pay the insurance savings in increased wages? This is a dangerous assumption that could leave individuals with reduced net income, and leave more on the bottom line for employers. Unfortunately, those now-liberated employees might also forgo health insurance because of the negative impact of employers not transferring those costs – unless Congress forces them to do it (and that raises numerous other issues). Hence the uninsured rate could spike higher, driving us closer to single payer or some other such scheme.

I would suggest there are other considerations, but will not dwell on them here. They do, however, include the right of employers to control their own businesses, the need for employers to retain and attract good employees, and other such issues.

Lastly, let me repeat. I am not for or against the idea of purchasing individual health insurance across state lines, but I believe these serious issues need to be fully vetted before this idea can win wide spread support.