Expanding Health Insurance Coverage

In this column, we address the challenge of expanding health insurance coverage. First, we explore why our employer-based system leaves gaps in coverage, even for people with jobs. Second, we discuss the challenge of relying on the individual insurance market, which has to fill these gaps.

Employer-based system leaves many without insurance. Sixty percent of the nonelderly population in America has health insurance through employers. Of the remainder, 18% are covered by Medicaid; 5% buy insurance individually; and 17% go without (despite the fact that 80% of the uninsured have a full time or part time worker in the family)[1].

Dependence on employer plans can be traced to a 1950s-era decision to exempt the value of health insurance from taxable income. As a result, a worker will prefer $1 in health insurance to an additional dollar in income and health insurance coverage became a popular benefit.[2]

Yet not all businesses generate enough profit to pay the cost of health insurance. Health insurance is a modest additional expense for a firm employing engineers earning $80,000. It is far more expensive in relative terms for a firm, perhaps a retailer, employing workers earning $7-10 per hour. CGR’s family plan costs about $4 per hour for a full time worker, over half the minimum wage. A Kaiser Family Foundation survey of employers reveals that 36% of firms with a high proportion of low wage workers offer coverage v. 67% of the remainder. This distinction is revealed by sector, too. Retailers tend to have lots of lower-paid workers—as a consequence, manufacturers offer coverage at twice the rate as retailers[3].

Certainly some businesses can afford to offer coverage and choose not to. Requiring employers to offer insurance coverage (or pay a penalty) is intended to close the insurance gap. Still, exemptions or tax credits for small firms and lower “take up rates” among low wage workers (because of cost) ensure that there will still be gaps, even among the employed. One caution:  Health care insurance is a form of compensation. An employer mandate would function much like an increase in the minimum wage. Some unskilled and semi-skilled workers would likely lose their jobs if employers were required to pay them substantially more.

Individual insurance market needs overhaul. Workers without employer-based coverage, are unemployed or self-employed must turn to the individual market. Suppose you decide to quit a job—with health insurance—and start your own business. You discover that it will cost more to buy coverage on your own than you and your employer were paying together before you quit your job.

How come? Insurance is about sharing risk. When Excellus or MVP sells a policy to a group, they get a mix of low cost and high cost customers—some young singles who are cheap and some older people who aren’t. The premium is calculated to cover everyone, on average. Insurers know that people who choose to buy individual health insurance probably need it more than people who don’t. A young couple may go without coverage until they decide to start a family. Individuals with a family history of heart disease are more likely to buy coverage than those from healthy families. And the insurers price accordingly.

Proposals making the purchase of insurance mandatory for individuals aim at this problem of “adverse selection.” They intend to re-create the “spread the risk” effect of employer groups for those individuals who are currently uninsured. Requiring more individuals to purchase health insurance (or pay a penalty), would reduce the likelihood that individuals seeking insurance are poorer risks than those who do not.

It seems likely that the individual market and Medicaid will both be expanded until they meet someplace in the middle. Individuals will be able to purchase health insurance at group rates through “health exchanges” that are intended to drive down cost by increasing competition. Medicaid eligibility will be extended to higher levels of income. Individuals who don’t qualify for Medicaid will be offered a sliding scale subsidy, perhaps up to 400% of the federal poverty level ($88,200 for a family of four).

Several proposals pending before Congress will also tighten the rules for individual health insurance coverage, including prohibiting denial of coverage for pre-existing conditions, restricting the ability of insurers to drop coverage, and regulating annual and lifetime caps. Such changes would increase labor mobility, which is certainly a worthy goal, but will also force insurers to increase premiums for individuals who are eligible for coverage under the current rules.

Paying for changing in health care system. Increasing health insurance coverage will not be cheap. This is why cost control is critically important. An expansion of coverage without action on cost will postpone more fundamental reform. Unfortunately, expansion of coverage is much easier politically. Nearly every proposal aimed at cost has been weakened or removed from pending legislation.

Nor is there any willingness in Congress to pay for increased coverage through an explicit increase in general taxation. Much of the increase in cost from expanded coverage is financed through reducing spending in part of the system and increasing taxes, fees and insurance premiums in another.

With car insurance, you spread risk across lots of people who share your “risk profile.” What you pay for collision coverage depends on your accident history, how much your car is worth, how much it costs to repair and where you drive it. The premium is set to equal what a member of your risk group expects to receive, on average, plus what the insurer gets for administration and profit.

Health “insurance” begins to look less like insurance if insurers are prohibited from charging premium differentials that track actual expected costs. Requiring more people to purchase insurance expands the risk pool, which is a good thing. Yet if new entrants are charged substantially more than the expected value to them as individuals, the effect is to broaden the scope of the cross-subsidies already endemic in health care.

These cross-subsidies are formalized in most of the proposals before Congress. The Senate Finance bill, for example, prohibits insurers from charging a differential of more than 4 to 1 by age, although the true variation in cost is probably much higher. Thus the young subsidize the old. The employer mandate will increase costs in some sectors more than in others, another implicit subsidy.

Next week we’ll bring this series to a close with a summary of issues and some thoughts on pending legislation.

[2] Yet the inequities of such an exemption are legion—it is worth more to people in a higher tax bracket, nothing to employees covered by a spouse’s plan, encourages more spending on health care than without the plan, etc. For a good discussion of this issue, see an article by Ezekiel Emanuel (Rahm’s oncologist brother) in the New York Times: http://campaignstops.blogs.nytimes.com/2008/10/10/the-problem-with-tax-exempt-health-insurance/

[3] Kaiser Family Foundation http://www.kff.org/insurance/7672/exhibits/index.cfm

Kent Gardner, Ph.D., President & Chief Economist with Guest Columnist James Fatula, Ph.D., Chair & Assoc. Prof., Dept. of Public Administration, SUNY Brockport

Published in the Rochester (NY) Business Journal October 30, 2009