What the Insurance Industry Got Right

Oct 19, 2009

View all previous columns »

This column is a collaboration between KHN and The New Republic.

The insurance industry did itself no favors last week when it released a report purporting to show that health care reform would cause insurance premiums to skyrocket. The report focused on only a few specific changes contained in the various reform bills, rather than the bills in their entirety. And the report came out just a day before the Senate Finance Committee, the last of five congressional panels with jurisdiction, was scheduled to vote on a bill. Most of Washington interpreted the report as an effort to delay, if not derail, the reform debate--which it almost surely was. The industry quickly found itself on the defensive. And the Senate Finance Committee pressed ahead, passing a bill just as it was expected to do.

But buried inside the insurers’ new piece of propaganda were two perfectly valid arguments--arguments that advocates of reform would be foolish to ignore.

The first of these arguments is about what’s come to be known as the individual mandate. A central element of every reform bill that’s gone through committee is a requirement that everybody obtain insurance. 

There’s a moral argument for the mandate: We want a system that includes everybody, and that means everybody paying what they can for coverage.  There’s also a more practical rationale. Without a mandate, young and relatively healthy people might decide not to buy insurance, because they figure they’re unlikely to have high medical expenses. (Insurance only works when there’s a large number of people paying in, so there are enough contributions from the majority who are healthy to offset the costs of those who are sick.) Besides, even young and healthy people can end up with high medical expenses, from an accident or a serious disease. Forcing them to get insurance is actually in their own interest.

Trouble is, individual mandates are not necessarily popular. Just ask President Obama, who exploited that fact during his presidential campaign. Remember, Hillary Clinton was the Democrat proposing a mandate; Obama attacked her for it. As the Senate Finance Committee deliberated over its version of reform, it decided to weaken its version of the mandate. It made it easier for people to opt out of the requirement, by demonstrating that buying insurance would be a hardship. It also reduced the penalty that people would face if they didn’t comply. 

Neither effort was particularly controversial, although both should have been. At some point, if the mandate becomes too weak, it ceases to be effective. People ignore it and then we’re back to the problem of young, healthy people opting out of the system. It’s not clear whether the reductions the Senate Finance Committee proposed went that far; experts offer different opinions. But the weakening of the mandate is, at the very least, risky.

The senators eager to scale back the mandate, including Democrat Charles Schumer and Republican Olympia Snowe, defended their moves on the grounds that it was unfair to make people pay for insurance that’s not affordable. And it’s hard to argue with that kind of logic. But that merely gets to the second problem that the insurers rightly cited in their flawed report: The bills in Congress don’t do enough about the cost of coverage.

In theory, reform can reduce insurance premiums in a number of ways. It can wring out waste, by creating standard methods of billing and creating electronic medical records to reduce duplication of services. It can focus payment on treatments--and methods of care--that actually make people better. It can change the tax treatment of health insurance, a move most economists believe will encourage people to seek out more efficient policies. And it can leverage government pricing power, by setting hard caps on premiums or creating a public insurance plan that could help drive down prices. 

Most of the bills in Congress take some of these steps. But they don’t take all of them. And even the cost-cutting reforms the bills do include could stand to be stronger. The Finance Committee, for example, cut a deal with both the drug industry and the hospitals under which the industries agreed to put up with relatively modest cuts in exchange for a promise to face no further reductions. Those industries, and other sectors of the health care system, could stand to give up a lot more. The House and Senate Health, Education, Labor and Pensions Committee bills both include a public insurance option. But even the House version--the stronger of the two--wouldn’t save as much money as possible. To be sure, there’s reason to think that the cost-cutting measures still in the bills will do at least some good. But it’s clear they could go a lot farther.

Unfortunately, the insurance industry hasn’t been entirely helpful in making such improvements. The insurers oppose not just a public option but, it turns out, changes to the tax treatment of benefits. They have come out for a strong individual mandate, but, of course, that’s an idea that quite obviously helps their bottom line. (The more people who have to buy insurance, the more money for them.) And while they’ve called for stronger cost control, they haven’t gone after groups like the drug makers or hospitals publicly. Instead, they’ve concentrated their fire on the public plan and, now, reform as a whole. 

The insurance industry, in short, has done nothing but look out for itself, much as it always has. But a bill that’s bad for insurers could be bad for the rest of America, as well. The insurers don’t deserve to get their way. But we might be better off if they did, at least on these two key issues.