|Benefit mandates, “guaranteed issue,” and “community rating” are among the
regulations that unnecessarily increase health care spending.
Policymakers often are anxious to pass new laws and create new programs to “solve” the nation’s health care finance problems. But they first should repeal laws and programs that cause those problems or make them worse.
In the U.S. there are 1,843 laws mandating that insurers cover specific providers, procedures, or benefits (Bunce, Wieske, and Prikazsky 2006). These laws often are billed as being pro-consumer but they mostly are pro-producer, needlessly adding to the cost of health insurance and health care services by requiring insurers to cover easily abused services. Higher insurance premiums due to state-mandated benefits are responsible for about 25 percent of the number of uninsured (Jensen and Morrisey 1999).
Mandated benefit laws disproportionately affect those who are self-employed, unemployed, or who work for companies that are too small to afford insurance benefits for their employees. Big businesses typically self-insure and are exempt from state regulations.
“Guaranteed issue” laws Guaranteed issue laws require insurance companies to provide insurance to anyone who seeks it. The Health Insurance Portability and Accountability Act of 1996 requires insurers to offer guaranteed issue policies in the small group (2-50 insured persons) market. Some states also try to impose guaranteed issue on their small group and individual markets, with disastrous effects.
Guaranteed issue drives up the price of health insurance by creating an incentive for people to wait until they are sick before buying insurance. Insurance companies raise premiums to guard against the larger claims of the insured population that tends to be less healthy at any given time. Each round of premium increases causes a new group of healthy people to drop its coverage, causing the insured population to become still more expensive to insure. The result is soaring premiums and rising numbers of uninsured (Meier 2005a, Bast 2004).
“Community rating” laws
Community rating requires insurers to charge similar rates to all members of a community regardless of age, lifestyle, health, or gender. Because an insurer cannot adjust its premiums to reflect the
individual health risks of consumers, the majority who are healthy see their premiums rise.
Community rating means insurance premiums paid by young and healthy individuals are higher than the benefits they are likely to receive, encouraging them to drop their coverage. Like guaranteed issue, this results in an insured population with higher health care expenses than the average population, requiring higher insurance premiums. Once again, premium increases cause more people to choose to go without health insurance.
States that have adopted guaranteed issue and community rating have higher premiums and fewer insurers competing for customers than states that have not. Guaranteed issue and community rating laws have been especially harmful in states where they have been applied to the individual insurance market (Meier 2005a, NAHU 2005).
Mandated benefits, guaranteed issue, and community rating are the three most destructive regulations states impose on health insurance companies. Other regulations on insurers and health care providers that limit competition and consumer choices include:
- Individual and employer mandates. Maine, Massachusetts, and Vermont are planning to impose mandates on individuals and employers to purchase health insurance. These mandates are unlikely to raise enough money in new premiums or penalties to justify the cost of investigating employers, determining eligibility, overseeing premium collection, and identifying and collecting penalties from the uninsured (Tanner 2006).
- Certificate of Need. Many states require health care providers to obtain certificates of need before expanding facilities or opening new centers. Existing hospitals and clinics are allowed to testify against new competitors, and naturally they do. Extensive research demonstrates that certificate of need laws reduce competition and result in higher prices (Barnes 2006, Conover and Sloan 1998, Cordato 2005).
- Rate reviews and bands. Most states regulate the rates insurers charge for insurance products in the small group market either by requiring pre-approval of rates or by prohibiting insurers from offering rates more than 25 percent above or below a base rate. Sometimes rate review is also imposed on the individual market, and sometimes rate bands of less than 25 percent are proposed. Rate reviews and narrow bands stifle innovation and competition (Wieske 2007).
- Clean claims and prompt pay laws. Some states mandate that health insurers pay 95 percent or more of all claims within a certain amount of time after receipt of the claim by the insurer. Such laws can be reasonable, but if the percentage of claims is set too high or the time period too short, compliance costs can soar, causing profit margins to shrink and insurers to stop writing policies (Bunce 2002).
- Prohibitions on exclusionary waivers. Some states prohibit insurers in the individual health insurance market from offering policies with either temporary or permanent medical waivers for preexisting conditions. Such waivers enable insurers to offer affordable coverage for all but one or two known conditions, such as allergies, that would otherwise require much higher premiums (Wieske and Matthews 2007).
- Regulations on PPOs. Preferred Provider Organizations (PPOs) are groups of providers who agree to offer discounts to insurers, employers, and other plan members. Some states are considering legislation, supported by the American Medical Association, that would limit the ability of insurers and employers to negotiate terms with physician groups. This is likely to lead to higher prices for consumers.
- Impediments to interstate competition. Consumers are unable to purchase insurance from out-of-state companies because of the McCarran-Ferguson Act (1945), which grants states the right to regulate health plans within their borders. The patchwork of 50 different sets of state regulations makes it costly and time-consuming for insurers to enter new states (Bast, D. 2005a, Flowers 2007).
States that want to increase the availability of health insurance and make health care more affordable should begin by eliminating or at least reducing the many regulations that currently raise the price of insurance and health care services and limit competition and choice.
Suggested readings: Meier, C., 2005, Destroying Insurance Markets: How Guaranteed Issue and Community Rating Destroyed the Individual Health Insurance Market in Eight States, Council for Affordable Health Insurance and The Heartland Institute; Wieske, J.P., 2007, State Legislators’ Guide to Health Insurance Solutions, Council for Affordable Health Insurance.