Health Insurance Reform Pitfalls

Commentary by John C Goodman

Ron Anderson normally has sensible views on most topics, especially issues involving health care. But his recent endorsement of the Kassebaum-Kennedy bill currently pending before the U.S. Senate is way off base.

The bill purports to solve a problem that desperately needs a solution: Allowing people to switch jobs without losing health insurance coverage. But despite the noble purpose, the bill has been shaped and molded by special interests - more concerned with their own pocketbooks than with the welfare of ordinary citizens. Unless substantially modified, the bill will create far worse problems than the one it attempts to solve.

In today's mobile labor market, people can expect to switch jobs many times before they reach retirement. But because we have an employer-based system of health insurance, a change in jobs means loss of coverage from the previous employer and no guarantee that any new insurance plan will accept them.

This problem arises not because of any malfunction in the free market, but because of government policy. Our income tax laws exclude employer-provided insurance from our taxable income, but provide very little tax relief to people who purchase their own insurance. About 90 percent of people who have private health insurance get it from their employer because the tax system encourages us to purchase insurance that way.

By contrast, consider Switzerland, which probably has the most egalitarian health care system found anywhere in the world. Most Swiss families buy insurance directly from an insurer, and they keep their coverage for most of their lives, regardless of how they earn a living.

In the United States, a government-created problem requires a government solution. People who have been paying into the insurance system should not lose coverage simply because they lose their job. What's the best way to prevent that?

The Kassebaum-Kennedy bill says that people who have been paying premiums through one employer should be able to get immediate coverage (without a waiting period or preexisting condition limitation) from any new employer. So far, so good. But the bill also says that people who leave an employer's insurance pool should also be able to buy an individual policy directly from insurers who sell them. To see why this is a problem, consider three facts.

First, most people who get really sick will eventually end up in the individual market. People with cancer, AIDS or some other debilitating illness may work for a while; but eventually they will have to quit work and turn to individual coverage. Under Kassebaum-Kennedy, then, the individual market will become the insurer of last resort.

Second, most large insurance companies - the ones that sell group insurance and manage the plans of large companies - do not even sell individual policies. The individual market tends to be dominated by smaller insurers with narrower profit margins. So under Kassebaum-Kennedy, the large insurers would collect premiums from the employees during the healthy, working years. Smaller insurers would be stuck with their health care bills after people become sick.

To meet these extra costs, insurers in the individual market would have to raise premiums for everyone - by some estimates as much as 200 to 300 percent. Why should we care? Because here's the third fact: If the 39 million Americans who are currently uninsured were to decide to buy coverage tomorrow, almost all of them would have to obtain insurance from the individual market.

Despite all of the abuse heaped upon it by the large insurers and their allies in the health policy community, the individual market is where people who are not covered by an employer buy insurance. Therefore, the individual market is the market that actually insures the uninsured. Any reform that raises premiums in this market will further discourage people from buying insurance and increase the number of (mainly healthy) people who decide to remain uninsured.

So, what's the alternative? The best solution is risk pools, which currently operate in more than half the states. Sick people who lose employer coverage should be able to obtain insurance at subsidized premiums. The losses would be paid for by everyone - through general taxes or a tax on all health insurance premiums.

Kassebaum-Kennedy needs to be amended to prevent a bad situation from becoming worse. Polls show that from 25 to 30 percent of employees fear that if they lose their jobs they will become uninsurable. But Census Bureau surveys show that only 1 percent of the population is actually denied coverage because of a preexisting condition.

Although the fear is widespread, the real problem is small. Congress must be careful that in solving the problem of the l percent it does not create even greater problems for the 99 percent.