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Ten Small-Scale Reforms For Pre-existing (Chronic) Conditions

January 27th, 2010
by John Goodman

Most proposals for dealing with the problems of pre-existing conditions would completely divorce health insurance premiums from expected health care costs. Yet a policy of trying to force health plans to take enrollees they do not want risks jeopardizing the quality of care they receive.

Instead of suppressing the price system, I propose ten ways of dealing with this problem that make greater use of it. In a reformed health care system, the chronically ill along with their doctors, their employers and their insurers should all find lower-cost, higher-quality, more-accessible care in their economic self-interest.

1. Encourage Portable Insurance. In almost every state, employers are not allowed to buy the kind of insurance employees most want and need: Insurance they own and can take with them from job to job and in and out of the labor market. Most of the time, the problem of pre-existing conditions arises precisely because health insurance isn’t portable. Here is an outline of how to achieve portability.

2. Allow Special Health Savings Accounts for the Chronically Ill. Cash and Counseling pilot programs in Medicaid are underway in more than half the states. Homebound, disabled patients manage their own budgets, and hire and fire those who provide them with services. Satisfaction rates approach 100% (virtually unheard of in any health plan anywhere in the world). This program could become a model for chronic illness everywhere.

3. Allow Special Needs Health Insurance. Instead of requiring insurers to be all things to all people, we should allow plans to specialize in treating one or more chronic conditions. Plans could specialize, for example, in diabetic care, heart care, cancer care, and they should be able to charge a market price (say, to employers, other insurers and even risk pools) and price and quality competition should be encouraged.

4. Allow Health Status Insurance. To facilitate the market for chronic illness insurance we should encourage a division of conventional insurance into two separate kinds of insurance, with two separate premiums. Standard insurance would cover the health needs of people during the insurance period, while health status insurance would pay future premium increases people face if they have a change in health status and then try to switch to another health plan.

5. Allow Self-Insurance for Changes in Health Status. The tax law allows employers to pay for current-period medical expenses with untaxed dollars. But there is no similar opportunity for either employers or employees to save for a future change in health status — one that will generate substantial increases in medical costs. Clearly, people need the ability to engage in contingency savings — a Health Savings Account (HSA) for future, rather than current, medical costs.

6. Give People on Their Own the Same Tax Break Employees Get. Most people who have a problem with pre-existing conditions are trying to buy insurance in the individual market. Yet, unless they are self-employed, they get virtually no tax relief and even the self-employed are penalized vis-à-vis employer-provided insurance. This should be a no-brainer: All insurance should get the same tax relief regardless of where it is obtained and individuals should get the same tax relief, regardless of how they obtain it.

7. Allow Providers to Repackage and Reprice Their Services Under Medicare and Medicaid. Most providers today are trapped in a payment system that encourages high-cost, low-quality care. By contrast, we should encourage innovative solutions to the care of diabetes, asthma, cancer, heart disease, etc. Along these lines providers should be able to offer a different bundle of services and be paid in a different way so long as they reduce the government’s overall cost and provide a higher quality of care.

8. Allow Access to Mandate-Free Insurance. Studies show that as many as one out of four uninsured Americans has been priced out of the market for health insurance by cost-increasing, mandated benefits. These are mainly healthy people. At the same time, however, these mandates raise premiums for the chronically ill and divert dollars away from their care. There is no reason a diabetic should have to pay for other peoples’ in vitro fertilization, naturopathy, acupuncture or marriage counseling, in order to obtain diabetic care.

9. Create a National Market for Health Insurance. More competition, especially among the special needs insurers (see number 3) would be a huge benefit for the chronically ill. Being able to buy insurance across state lines would encourage that competition.

10. Encourage Post-Retirement Health Insurance. If the past is a guide, more than 80% of the 78 million baby boomers will retire before they become eligible for Medicare. It is among this group that the greatest potential exists for denial of health insurance because of pre-existing conditions. Fortunately, one out of every three baby boomers has a promise of post-retirement health care. However, two out of three do not, and even for those who have a commitment, almost none of the promises are funded.

Employers should (a) be encouraged to negotiate with insurers to cover their retirees; (b) be able to pay some or all of the premium for retiree-owned insurance or make deposits to the retiree’s HSA with pre-tax dollars; and (c) both employers and employees should be able to save in tax-free accounts in anticipation of these needs (see number 5).

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9 Responses to “Ten Small-Scale Reforms For Pre-existing (Chronic) Conditions”

  1. Alan Bing Says:

    Pre-existing condition coverage is desireable and should only be available to those who have remained insured from day 1. This of course requires the portability of Point 1. This could provide the positive incentive for the “invincibles” to maintain some insurance instead of mandating the coverage.

  2. John Goodman Says:

    Ng: Perhaps Mark Pauly didn’t explain the concept to you very well. See my review of the Cochrane study where I provide a reasonably clear explanation of health status insurance and why you need it. Large pools do not solve this problem.

  3. Devon Herrick Says:

    In response to Weiwen Ng, the first CBO cite basically says the broader scope of benefits required in the health reform legislation would only increase premiums by 3%. AHIP and others dispute that figure.

    The second CBO figure (2% to 3%) is based on John Gruber. However, the page cited in the same CBO report references a study for Maryland that claims mandates are 15% of covered claims — but then discounts the study because Maryland has more mandates than most states.

    Going back a couple decades, there are several studies that have found similar results. John C. Goodman and Gerald L. Musgrave, “Freedom of Choice in Health Insurance,” Nation Center for Policy Analysis, Policy Report 134, 1988; Gail A. Jensen and Michael A. Morrisey, “Mandated Benefit Laws and Employer-Sponsored Health Insurance,” Health Insurance Association of America, January 1999; Frank A. Sloan and Christopher J. Conover, “Effects of State Reforms on Health Insurance Coverage of Adults,” Inquiry, Vol. 35, 1998, pp. 280-293; and Stephen T. Parente et al., ” Consumer Response to a National Marketplace for Individual Insurance,” University of Minnesota, June 28, 2008. Also see: Gail A. Jensen and Jon R. Gabel. “The Price of State Mandated Benefits,” Inquiry, Vol. 26, 1989, pp. 419-431.

    The Council for Affordable Health Insurance list the costs for mandated benefits. Some benefit’s costs are very small — adding only a fraction of 1% to the cost of premiums. But when taken together, they all add up.

    Gail Jensen and Jon Gabel (1989) found that about two-thirds of employers, who decided to self-insurance, did so to avoid the expense of state regulations.

    Goodman and Musgrave (1988) found that state mandates increased the cost of coverage, pricing about one-fifth to one-quarter of the uninsured out of the market. A study by Sloan and Conover (1998) found eliminating mandates would reduce the number of uninsured 18% to 14% of the non-elderly population. That estimate is relatively consistent with Jensen and Morrissey (1999).

    I believe Parente’ estimated that a national market would reduce the uninsured by around one-quarter.

  4. LizL Says:

    Goodman is brilliant. These 10 ideas are exactly what our health care system needs. The NCPA is right on!

  5. Weiwen Ng Says:

    And as to point #8, NCPA’s math is poor. CBO says that the benefits mandated by states, when averaged across the country as a whole, raise individual and small market premiums by 2-3%. Many of the mandated benefits are already covered by employer-sponsored plans – because they are good benefits to cover. Goodman’s discussion of naturopathy, IVF or marriage counseling is just blowing smoke. The NCPA analysis he cited doesn’t even say which alleged studies find that 25% of people get priced out of the market by these mysterious, expensive state-mandated benefits.

    See page 10 of this CBO document:

    and page 61 of this one:

  6. Devon Herrick Says:

    For most people, health costs are quite low (and rise very slowly) until they are well into their 50s. Many would-be reformers believe the solution is to gouge young people (i.e. community rating) so health insurance premiums for older people with greater health needs are subsidized. I’ve heard this many times… “health insurance will only be affordable when everyone has coverage.” This doesn’t actually make any sense. A cross-subsidy does not make anything more affordable; it shifts costs from one group to the next. Attempts to force young people to cross-subsidize older (and often wealthier) individuals is also counterproductive when it results in adverse selection death spirals that drive up the cost of coverage.
    Families should be able to spread their health risk across their own working lives. Similar to the lifecycle theory of investing for retirement, this is a way to pool risk over time rather than across multitudes of people. Personal and portable insurance, coupled with HSAs, would allow families to set aside money while young and healthy that they spend down once they reach late middle age. An added bonus is that families would benefit from being prudent medical consumers.

  7. Catherine Says:

    John Goodman writes: “In a reformed health care system, the chronically ill along with their doctors, their employers and their insurers should all find lower-cost, higher-quality, more-accessible care in their economic self-interest.” This is a worthwhile health reform goal for everyone’s economic self-interest and well-being. The 1st step of portable health insurance is long overdue for serious consideration.

  8. Brian R Williams Says:

    Democrats and Republicans alike seem trapped in the notion that Congress (and ONLY Congress) can solve the problems faced by people with chronic illnesses — cost, quality, access, etc. That by ignoring regular market forces, incentives and so forth, Congress can somehow legislate away the problems of chronic illness.

    However, as John Goodman shows in this post, there are at least 10 great ideas that would allow the power of markets and capitalism to work in favor of people with chronic illnesses. I’m struck by how many of John Goodman’s ideas are related to freedom (the word “allow” is used repeatedly throughout his post). In contrast, the approach taken by Congress uses regulations, mandates and taxes to surpress the free market.

  9. Weiwen Ng Says:

    I was at the CATO event where Mark Pauly presented his plan for health status insurance. It seemed a convoluted scheme – you shop for individual insurance AND health status insurance, and the latter pays you a lump sum if your health status worsens so that you can afford the former. Pauly’s debator, Brad Herring, admitted that Wyden-Bennett and similar plans produce essentially the same effect by broadly pooling risks and are MUCH simpler for consumers to administer. Health status insurance is quite frankly a hare-brained scheme, and it reminds me of this cartoon on Kaiser Health News about health insurance insurance:

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