Impact of Health Insurance Mandates and Medicare on Costs

Rapidly rising federal and state health insurance mandates are driving up the cost of insurance premiums, and below-market Medicare reimbursements are shifting costs to consumers.

Economics, Politics

Since March I have received several letters and comments [1-3] from thoughtful readers regarding my piece on health care and insurance costs, urging me to reconsider the impact of two particular issues: federal/state mandates on both health insurance and health practitioners, and the cost shifting that must be taking place from government below-market reimbursement rates to doctors and other service providers.

In my March study, I considered five systemic problems that have led to higher health insurance and care costs, in rank order: medical malpractice tort laws and defensive medicine; the dwindling role of the patient-consumer as the direct payer for health care (out-of-pocket payments hitting a record low); high cost growth of prescription drugs; state/federal mandates; and Medicare/Medicaid fraud. I believe I underestimated the impact of mandates, and did not include the impact of the practice of the Medicare/Medicaid reimbursement of doctors and service providers at below market rates.

Health Insurance and Practitioner Mandates

I was forwarded three important references recently from fellow WSJ readers that address insurance mandates [4-6]. Reference [4] includes a comprehensive list as of May 2009 on all of the mandates passed in each state, and the projected cost impact. Most are <1%, but some that have been passed by a majority of states are 1-3% impact, and with the additive cost impact of mandate after mandate it becomes clear, as Ref. [5] quotes: “state health insurance mandates could account for a significant portion of health insurance costs in any given state.” The number of such mandates has doubled from 800 to 1600 in almost a decade. Reference [5] goes further to estimate impact for Louisiana:

A recent study found that a single additional state health insurance mandate would result in a 0.4 percent increase in the uninsured population. Given that each state had an average of eleven state health insurance mandates at the time of the study, the study concluded that approximately 4 percent of the population was uninsured due to state health insurance mandates. If we applied the findings of that study to Louisiana today, where we now have forty-three mandates, it implies that up to 17.2 percent of Louisianans, or roughly 759,000, could be priced out of health coverage due to state health insurance mandates.” Also in the BRAC paper: According to LA state statistics, 18.5% are uninsured.

The rapid rise of state insurance mandates and regulations is correlated to increases in insurance premium costs, as Ref. [6] quotes several studies showing statistically significant links, including the result of the author’s own study. Premiums in states with a greater number of such mandates have been shown to be 20% higher in data to 2004 [6], and the gap may have widened since, as mandates and regulations are being passed by state legislatures at a brisk rate [4,5], even in states that traditionally have had a low mandate/regulation count.

A few federal mandates on health insurance are summarized in [5].

Federal/state mandates and regulations on health practitioners also have an impact on health costs. In all but 6 states, there exists a legal requirement for physician involvement in nurse practitioner practices, even though there is a current and projected shortage of general or internal medicine MDs according to JAMA [7]. Compliance costs to health care regulations, such as the federal HIPAA, have also had a measurable effect [8, 9].

Medicare/Medicaid Cost Shifting

Low rate, or “below-market” reimbursements from Medicare and Medicaid to doctors and hospitals are starting to show a measurable effect [10-12].

(I use the term “below market” lightly here, as we really do not have a functioning market in health care in the same sense as in retail, finance, professional services, etc., and this in itself is a major problem.)

Cost shifting from the practice of low government reimbursement rates is likely manifested in higher health costs for all consumers elsewhere, as well as increased private health insurance premiums paid by Medicare Advantage (Part C) consumers. There are several past studies that I was able to easily find [13-16]. Reference [16] estimates that nearly $90 Billion per year is cost shifted from Medicare to health consumers, translating to approximately $1,800 per year in added costs for an average family. As stated in Ref. [13]: “When providers’ prices rise and neither public nor private payers’ compensation follows suit, consumers pay more. The result is that people lose coverage. This appears to be the ultimate cost shift, and the issue deserves more public and private attention and action than current politics are likely to allow, at least for now.

The Bottom Line: Actions Needed

(1) For state health insurance mandates, consumers need to take action by identifying the state legislators that are proposing and passing these mandates and either re-educate them or vote them out. The same is true for Congressional legislators and federal mandates. Certainly we ought not to forget that these mandates can be repealed. Consumers might also gain traction by contacting their insurance companies to ask them to provide a statement on how the state mandates have affected rates.

(2) Health compliance and occupational regulations need to be revisited and reviewed as a consumer cost-benefit equation. The shortage of internal medicine MDs can be addressed with a greater substitution of nurse practitioners, but onerous state laws slowing this market-based solution need review and possible repeal. Unfortunately, there may be stiff resistance from physician groups (e.g., the AMA), given the market competition from NPs. Consumers can apply pressure to groups and legislators regarding this issue.

(3) Medicare/Medicaid reimbursement policy needs a comprehensive revision. One solution is to eliminate the reimbursement system entirely, from both Medicare/Medicaid and from private health insurance, except for catastrophic payouts. The current system removes or shields the health consumer from the direct costs of health care services and goods, when in fact the consumer ought to be engaged directly by knowing what the true costs are and paying more of those costs out-of-pocket. Health care ought to be really no different on a market basis than the retail, finance, or professional services markets, where client/consumers engage service providers (doctors, clinicians, practitioners) on a fee-for-service basis, where those fees are known beforehand (published, advertised, negotiated, etc.), and where the consumer can decide for themselves who offers the best value.

(4) Laws that prevent employers or insurance companies from giving consumers incentives for healthy lifestyles need to be reconsidered. Consumers that bear the least risks ought to enjoy the cost-benefit of a low-risk pool, instead of assuming the higher costs from the cost spreading, shifting or leveling that occurs from the high-risk patients.

(5) Large companies have started to consider ‘self-insurance’ for their employee groups, so as to avoid the effects of state insurance company mandates and government program cost shifting. Safeway’s CEO published a recent Op-Ed regarding his company’s success in this regard [17]. I think this trend will only continue, but the danger of mandates and cost shifting still remains as a threat to costs for everyone, especially if legislatures begin to target self-insured groups. Some have suggested that self-insurers might then adopt some form of the 1974 Employment Retirement Income Security Act (ERISA), which exempts self-insurers from state law (mandates, but also tort laws and state courts), but requires them to adhere to federal health insurance mandates [5].

(6) Consumers need to fight efforts to pass a federal mandate requiring employers and/or individuals to purchase health insurance. Wal-Mart and the SEIU came out July 1, 2009 in support of employer mandates, and this is nothing more than a ploy for Wal-Mart to squeeze competition, as several of its major retail competitors and many small businesses do not offer insurance to their associates. Mandated employer or individual insurance opens the door for even more widespread regulation of the health care industry and political interference in personal health care decisions [18].

“It is taken for granted that workers should receive their pay partly in kind, in the form of medical care provided by the employer. How come? Why single out medical care? Surely food is no less essential to life than medical care. Why is it not at least as logical for workers to be required to buy their food at the company store as to be required to buy their medical care at the company store?”

– Milton Friedman writes against Hillary Clinton’s health care plan: WSJ, Feb.13, 1993

“What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really lack of belief in freedom itself.”

– Milton Friedman, Wall Street Journal, May 18, 1961

References and Endnotes

[1] Teri J. wrote: “Somewhere between 1999 and 2001, doctors stopped taking Medicare patients because the government reimbursement was too low. It seems to me that is when healthcare premiums started increasing dramatically. My mother ended up with one doctor group for her selection of a primary care physician. My mom died in June 2004 but her primary care physician said that they took Medicare patients only because the government increased the payments to doctors for retired military personnel as otherwise her coverage would have been a hospital ER.” Teri asked me if I had considered the role that low Medicare reimbursements have had on costs.

[2] Benjamin R. wrote: “I am a physician previously in private practice now working for the federal gov’t. I am also a fiscal and political conservative and so far have heard nothing in the current administration comments that sounds like anything more than a sound bite for the evening news. Your article was interesting but ignores several key points. First if you look at U.S. vs Western Europe comparing costs and care in care, we are very comparable albeit at much higher costs. If you further look at standards such number of days in hospital post operatively by procedure we are clearly far more efficient than they are – medically. However our costs are not. You accurately define the tort mess for its contribution. There are also compliance costs. Ask any nurse how much time he or she spends taking care of patients vs. charting and the charting consumes half the time and thus the efficiency. But that is only the beginning. In any given nursing station they are more reviewers reading the charts than there are people caring for patients. These are government-mandated policies. I personally have come to favor the German model. It is good and much cheaper. It lets professional be professionals although they are not paid as much and it is safe. Besides lower salaries they lack the massive health administration bureaucracies and there is no med mal issue there.”

[3] P.D. Norman wrote: “Now here is my observation based on [Kaiser and NHED] information:

“In 2004, the United States spent $1.9 trillion, or 16 percent of its gross domestic product (GDP), on health care. This averages out to about $6,280 for each man, woman, and child. Half of the population spends little or nothing on health care, while 5 percent of the population spends almost half of the total amount.”

The elderly (age 65 and over) made up around 12 percent of the U.S. population in 2004, but they consumed 34 percent of total U.S. personal health care expenses. The average health care expense in 2004 was $14,797 per year per elderly person but only $4,511 per year for working-age people (ages 19-64).

However, in 2004, Medicare paid under $6400 in total medical expenses per beneficiary. If cost was $14,797 and Medicare paid $6400 who paid the rest? HINT: Think cost shifting – medical providers pass the cost, along with other unpaid bills from the uninsured, to those that can afford to pay – private health insurance customers. Average 2004 annual premiums for private health insurance were ~ $16,771.

Now here is my opinion: Unfortunately our current government are taking advantage of the public’s distrust of the free market, and are using private health insurance companies as a scapegoat in attempt to correct a flawed and failing system – Medicare. I pray that the American public wises up before its too late.”

[4] “Health Insurance Mandates in the States 2009,” Council for Affordable Health Insurance (CAHI), May 2009.

[5] “The True Effects of Comprehensive Coverage: Examining State Health Insurance Mandates,” Baton Rouge Area Chamber (BRAC) Issue Brief, May 2009.

[6] “The Effect of State Regulations on Health Insurance Premiums: A Preliminary Analysis,” M. J. New, Heritage Foundation, October 2005.

[7] “Factors Associated With Medical Students’ Career Choices Regarding Internal Medicine,” Journal of the American Medical Association (JAMA), September 2008. See also “Critical Shortage of Internal Medicine MDs Foreseen,” Reuters, September 2008.

[8] “Health Care Compliance Act Costs Millions,” Jacksonville Business Journal, October 2002.

[9] “The High Cost of HIPAA,” August 2005.

[10] “Low Medicare Reimbursement Rates Hurt Hospitals In Iowa And California,” Medical News Today, June 2009.

[11] “Low Reimbursement Rates Contributing To Physician Shortage,” Medical News Today, April 2009.

[12] “When Doctors Opt Out,” M. Siegel, Wall Street Journal, April 17, 2009.

[13] “Medicare Payment Policy: Does Cost Shifting Matter?” J.S. Lee et al., October 2003.

[14] “Confronting The Medicare Cost Shift,” Managed Care Magazine, December 2006.

[15] “Cost-shifting increases family spending by almost $1,800 annually,” A. Zieger, December 2008.

[16] “Consumers and Employers Paying Almost $90 Billion Due to Under-Payments to Hospitals and Physicians by Medicare and Medicaid,” AHIP, December 10, 2008.

[17] “How Safeway Is Cutting Health-Care Costs,” S.A. Burd, Wall Street Journal, June 12, 2009. “Mr. Burd Goes to Washington,” K. Strassel, Wall Street Journal, June 19, 2009.

[18] “Individual Mandates for Health Insurance: Slippery Slope to National Health Care,” M. Tanner, CATO Policy Analysis, April 2006.

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