Source: http://www.investors.com/NewsAndAnalysis/Article.aspx?id=530741
04/19/2010
Democrats claim their newly passed health insurance reform will eventually provide health coverage for more than 30 million uninsured people. Don't bet on it.
The key to achieving that goal, Democrats believe — along with expanding Medicaid and subsidies for buying coverage — is the individual mandate, which requires individuals to have health insurance or pay a fine. The mandate is supposed to push nearly everyone into the pool to minimize free-riding on the system. But what if millions of Americans decide it's a better deal to pay the fine and remain uninsured until they need coverage?
It appears that's exactly what's happening in Massachusetts, which passed its own ObamaCare-like reform with an individual mandate in 2006.
Last year, Charles Baker, former CEO of Harvard Pilgrim Health Care, one of Massachusetts's largest health plans, noticed some health insurance brokers posting comments on his widely read blog. They were suspicious that people were applying for health coverage after a medical condition developed, got the care they needed, and then dropped the coverage.
Coverage for an individual, noted Mr. Baker, now a Republican candidate for governor, might be $2,000 to $3,000 a year, while the penalty was only about $900. So he asked his finance people to see if they noticed any discernible patterns. Boy, did they.
From April 2008 to March 2009, 40% of the individuals who applied to Harvard Pilgrim stayed covered for less than five months. Yet claims were averaging about $2,400 a month, about six times what one would expect.
Blue Cross and Blue Shield of Massachusetts has now confirmed it is experiencing similar problems. The company says that in 2009, 936 people signed up for three months or less and ran up claims of more than $1,000.
The disparity between the cost of expensive coverage and the fine for not getting it encourages individuals buying their own coverage — i.e., those not in an employer plan — to game the system by paying the fine and remaining uninsured until they need coverage.
Insurers have long recognized this problem, known as "adverse selection," which is why every type of insurance normally restricts people from obtaining coverage after an incident has occurred. Someone can't, for example, buy a homeowners policy for a house that is already on fire. But Democrats have decided to do away with that basic actuarial principle with regard to health insurance.
That means it's all about the penalties. Under the existing Massachusetts law, Bay Staters face a penalty of perhaps a half to a third of the cost of the premium. And yet, as Mr. Baker indicates, there appears to be a lot of gaming going on.
ObamaCare, by contrast, has a minimum individual penalty of $95 in 2014, $325 in 2015, rising up to 2.5% of income (or $2,085 maximum) per family in 2016. So the first-year spread between the penalty and the cost of coverage for an individual may be 20-to-1 or 30-to-1. Think that might encourage even more gaming than they are seeing in Massachusetts?
In supporting the individual mandate, Democrats frequently cite the fact that nearly every state requires drivers to purchase auto insurance. But that mandate hasn't gotten everyone insured. Auto insurance mandates usually have fairly low penalties, and they are often sporadically enforced. And so people game that system, too.
Indeed, the problem of uninsured drivers is so bad that many states require drivers to buy uninsured motorist coverage to protect them from all of those drivers who are required to have auto insurance but don't.
The growing adverse selection problem has some Massachusetts officials considering other options; the governor has proposed legislation for a semi-annual open-enrollment period. That's where people would have a limited time to enter the system or change health plans. Open enrollments don't solve all the problems, but they help.
To be sure, the higher penalties in Obama-Care's out years will discourage some gaming of the system, but they won't eliminate it — not as long as there is a gap between the cost of coverage and a penalty. And that's only if Congress keeps the current penalty schedule.
The Congressional Budget estimates the government will collect $17 billion in penalties from individuals over 10 years. But members of Congress don't like penalizing their constituents, and there will be a lot of pressure to delay or reduce the penalties, just as there was when the 2003 Medicare prescription drug benefit was being implemented.
But then the Patient Protection and Affordable Care Act was never about creating an actuarially or financially sound health care system; it was about creating a new entitlement where everyone has coverage — when they need it.
• Matthews is executive director of the Council for Affordable Health Insurance and a resident scholar with the Institute for Policy Innovation.
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