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REHABILITATING HEALTHCARE

Insurers push back

In reconciling different bills, lawmakers will have to address the issues of policy affordability and penalties for those who don't buy coverage.

October 14, 2009

The push for comprehensive healthcare reform started the year with such strong support from doctors, hospitals and industry groups, it seemed too good to last. And it didn't. This week, the coalition had its first defection: health insurers. As the Senate Finance Committee was poised to vote on its version of the reform legislation, the insurers' lobbying group released a sharply critical analysis by consultants PricewaterhouseCoopers. The report estimated that the bill would cause insurance premiums to rise an additional $1,500 to $4,000 over the coming decade. That's on top of the whopping increase expected if the bill weren't enacted, the report said.

It was a textbook case of checkbook research -- the insurance lobby wanted a damaging set of numbers, and PricewaterhouseCoopers delivered them in a transparently contrived way. The Finance Committee shrugged off the criticism Tuesday, approving the bill by a 14-9 vote. Despite the report's faults, though, the consultants had a point. There are flaws at the heart of the bill that lawmakers cannot ignore.

The insurance industry waited remarkably long to open fire, given that one of the goals of the overhaul is to stop insurers from doing many of the things they do to improve their bottom lines. Every one of the proposals for comprehensive reform tries to stop insurers from cherry-picking customers and denying claims on flimsy pretexts. But insurers backed the Obama administration's reform efforts at first because their interests aligned with those of doctors, hospitals and consumers in support of three interlocking aims: to extend coverage to all Americans, rein in rising costs and improve quality. Universal insurance coverage would bring millions of new customers to the companies and broaden the risk pool, raising insurers' revenue and spreading their costs over a wider base.

The Senate Finance Committee bill, however, won't deliver universal coverage. In fact, it would leave an estimated 25 million people, or 6% of those who are eligible, uninsured in 2019 (congressional analysts studied the bill's effect over 10 years). This shortfall is one of the main reasons the insurance lobby is unhappy. The House versions of the bill, by contrast, would cover all but 3% of the population (excluding illegal immigrants) by 2019. The House bills would spend significantly more on subsidies too -- $773 billion over 10 years, compared with $463 billion in the Finance Committee bill.

All of the competing bills approved by House and Senate committees would impose a new mandate on Americans to obtain health insurance, with subsidies for those earning less than four times the federal poverty level ($10,830 for an individual or $22,000 for a family of four). But the Senate Finance Committee version would provide subsidies to fewer people and, for some recipients, smaller amounts. As a consequence, millions of people would find themselves unable to afford coverage even with the subsidies. Any bills they could not pay would be passed along to those with insurance, raising their premiums.

Equally troubling, millions of others who could afford coverage would be likely to forgo it and pay the penalty set by the Finance Committee bill, which is much less than the price of an insurance policy. Many young, healthy people would have an incentive to wait until they became seriously ill before obtaining coverage because, under the bill, insurers could no longer deny coverage or base premiums on their customers' medical histories. This sort of "adverse selection" would drive up the cost of insurance, because those who obtained policies would be sicklier on average than today's insurance pool.

Senate Democratic leaders will now try to reconcile the Finance Committee bill with the more free-spending alternative approved by the Senate Health, Education, Labor and Pensions Committee. They should take the opportunity to address the affordability problem and the incentive to forgo coverage, both of which interfere with the bill's efforts to control costs. Simply pumping more dollars into subsidies and jacking up the penalties for noncompliance, however, isn't the solution. Subsidies may need to be higher than the Finance Committee proposed, but Congress should also give the market flexibility to develop more affordable options for coverage, such as less expensive policies that cover major expenses, not routine ones.

A related idea promoted by the left-of-center think tank Third Way is to reduce the minimum benefits the legislation would require insurers to provide, which should lessen the cost of coverage. Lowering the minimum benefit level would raise out-of-pocket costs for many consumers, but that's a fair trade-off for more affordable options and fewer uninsured. Making the mandatory coverage less expensive would give consumers more reason to comply. So too would allowing insurers to impose waiting periods for new policies. Such steps would help produce a meaningful individual mandate, which is vital -- not just to insurers but to the effort to deliver more accessible and affordable healthcare.

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