Health Care Reform: Individual Mandates

Individual Mandate Healthcare Reform- Bad Idea

An "individual mandate" is when individual citizens are required to have health insurance, one way or another. While proponents of such an approach laud it as universal health insurance, this is a de jure ("by law") distinction rather than real universal coverage. History has shown that individual insurance mandates have always failed and will always fail because it is unenforceable in the real world. People simply don't buy expensive policies or they buy and drop the policy. Additionally, the constant turnover between plans makes enforcement impossible . In the state of California, there is an "individual mandate" for all drivers to purchase auto insurance, yet 25% of drivers are uninsured according to the insurance industry. That is not universal coverage. Health insurance suffers from the same problem and hence, an "individual mandate" provides cover for politicians who want to claim "universal" coverage by mandating insurance that people can't or won't purchase.

The rule is "individual mandates" are never universal and merely a disguise to cover up expanded coverage. In fact, the insurance industry has always supported individual mandates because it will vastly increase their profits. For this reason California Governor Schwarzenegger has touted an "individual mandate" as a major part of his "universal" healthcare plan. (The insurance industry provided over $4 million to his recent political campaigns.) Recently, in Massachusetts, an "individual mandate" has become law. Already it is failing to control costs. It would be more honest for politicians to call an individual mandate what it is- political pork for the insurance industry while EXPANDING health insurance coverage without any cost controls.

Because employers are dropping private health insurance due to outrageous and escalating costs, the individual mandate forces families into buying individual health insurance policies, the most profitable segment of the health insurance business. Individual policies allow maximum room for the insurers to "cherry pick" , that is, choose to insure, only healthy people and avoid insuring any individuals or families that may cost them money. As such, an "individual mandate" equates to vast increases in individual health insurance policies, which in turn increases insurer profits without any mechanism for controlling health insurance costs.

There are various ways to regulate the individual insurance market (community ratings, explicit laws to prevent certain types of cherry picking, medical loss ratio floors, etc.), but because 20% of the population is responsible for 80% of health care costs, "cherry picking" always pays the biggest dividend for health insurers. If an insurer avoids the less healthy, expensive customers, their medical loss ratio (the money insurers spend on health care versus profits and overhead) goes up, and hence greater profits for their stockholders. All rational health insurance companies will "cherry pick" as much as the law allows, since it's the proven method to increase profits.

To deal with the "cherry picking" problem, Governor Schwarzenegger has floated the idea of an 85% medical loss ratio floor to ensure that insurers will spend 85% of the money they collect in insurance premiums on medical care. While on the surface this seems like a reasonable compromise, the devil is in the details. First of all the proposal does nothing to control the overall costs of medical care since it is simply a cap on insurance policies, and like any commodity, the costs can vastly increase on the provider side and, hence, fail to control overall health care expenditures.

The enforcement of a medical loss floor is rife with potential loopholes waiting to be exploited by savvy insurance lawyers and accountants. Once again we must look at the incentive structure. Do the insurers have an incentive to limit their profits to only 15%? Is that what Wall Street wants? Of course not. Wall Street is demanding higher and higher profits and the Governor's proposal demands an 85% ratio and no incentive is created for controlling overall healthcare costs. The incentives are not aligned to promote overall health care cost controls for employers, employees or individuals but for insurers to thwart the intention of the cap.

Many methods are used to undermine a predetermined medical loss floor to such a point that a "floor" becomes meaningless. For instance, the insurers could set aside huge amounts in "reserves" to maintain the 85% medical loss ratio. Or they could get creative with how they define medical care. Or they could give vast artificial windfalls to healthcare providers in some kind of kickback scheme. Will lax regulators police the insurance industry? The list goes on and on. The point is that a floor creates the wrong incentives for controlling the costs of the private insurance bureaucracy. It doesn't create incentives for the insurers to reduce costs and, therefore , the floor will get undermined at every legal opportunity.

Of course, even if a medical loss ratio floor was created for the insurance companies, it should be at a much higher level, such as 95%, to make the private insurers as competitive as the government programs of Medicare and Medi-Cal, which have been maintaining a medical loss ratio of over 95% for years. If private insurers aren't as efficient as the government, why should they be in business? Do we believe in subsidizing the inefficiency of some our wealthiest citizens- insurance CEOs and health insurance stockholders- at the expense of denying our entire population quality, affordable health care? Should we protect a private insurance system of multiple risk pools which invariably increases overall health care costs while denying health care to our citizens? Or should we create a true universal health care system that can contain costs and provide quality health insurance for everyone?

Individual mandates is not healthcare reform. It is a cruel method for pretending that health insurance is on the way for everyone while, in fact, bigger profits are on the way for insurance companies.