The GOP's Health Care Folly

Commentary by John C Goodman

A bill before Congress would allow the federal government to regulate the health care plan of every American citizen who has private insurance. It would raise costs, and therefore premiums, and cause millions to be uninsured. And although the bill's purpose is to raise the quality of care patients receive, in all likelihood the quality would go down, not up.

"Someone has reintroduced Hillary Care?" you might ask. No, the plan was not even written by Democrats. This is a Republican plan, supported by many congressional conservatives who vigorously fought Bill Clinton's national health care plan only a few years ago.

Devised by Rep. Charlie Norwood (R-GA), and Sen. Al D'Amato (R-NY) the Patient Access to Responsible Care Act (PARCA) purports to protect individuals from abuses by HMOs and managed care plans. This is the rank-and-file GOP answer to the president's call for a patient bill of rights. But PARCA's specifics are not the same as Clinton's. They're much worse. Whereas the Clinton proposals are mainly rhetorical, PARCA has real teeth.

Although I have always favored cost-effective medicine, I've never been a fan of managed care. But let's give the devil its due. HMOs and other managed care plans make an offer that many people find attractive - a lower premium in return for giving up the right to see any doctor or have access to any test. Is the offer reasonable? Maybe. Maybe not. But it's precisely the sort of choice people should be able to in a free market.

Increased Costs for Group Health Insurance From the Norwood - D'Amato Bill

On the surface, PARCA's reforms sound patient-friendly. For example, the bill would make it illegal for a health plan to give doctors financial incentives to provide fewer medical services. Good idea, you might be thinking. Who wants fewer services? But remember, fewer services (relative to fee-for-service plans) is what managed care is all about. And according to the actuarial firm Milliman & Robertson (M&R), that PARCA restriction can add almost 10 percent to the cost of health insurance nationwide. (See the chart.)

Another PARCA provision would allow patients to go outside their plans and force insurers to pay out-of-network doctors the same amount it pays in-network. After all, who wants to stay in a network? But remember, the out-of-network doctors include those who order all the tests and procedures HMOs avoid to hold down costs. Take away this restriction, and rates will increase about 6 percent more, according to M&R.

Adding up the cost of these and other restrictions yields a hefty sum. M&R's midpoint estimate is a 23 percent increase in health insurance costs for the nation as a whole, with a possible 39 percent increase if all the downside assumptions hold and provisions are rigorously enforced. Note: These cost hikes are an average for all plans. Premium increases likely will be higher for those now in managed care.

As bad as they are, even these estimated increases omit two big-ticket items. In general, hospitals (especially rural ones) that perform procedures infrequently have higher costs and lower quality than hospitals for which the procedures are routine. But a PARCA provision would require employers to cover facilities near the homes of rural employees anyway. Another provision exposes health plans to tort liability simply because of cost-effective decisions. Say the plan doesn't allow MRI brain scans for minor headaches. An employee whose brain tumor is not caught in the early stages because of the plan's protocol could sue for damages. A Norwood amendment protects employers from such suits, but not from the higher premium costs the lawsuits would give rise to.

Needless to say, higher costs have consequences. The number of Americans without health insurance is 41 million and rising. PARCA will make that figure even higher. The Congressional Budget Office estimates that a 1 percent increase in premiums nationwide causes 200,000 more people to be uninsured. Combine this estimate with M&R's numbers, and it becomes clear that the GOP is threatening to increase the ranks of the uninsured by at least 11 percent (4.6 million).

Even if prices do not rise as much as M&R predicts, that may not be reason to cheer. An alternative to raising premiums is cutting back on other benefits and skimping on quality. A vast amount of price-quality adjustment is occurring in the marketplace right now. The fastest-growing component of managed care is the point-of-service option, allowing out-of-network doctor visits (a fact that undermines the case for rushing to legislate). HMOs also are adding coverage for chiropractic, acupuncture, naturopathy and other alternative therapies. Oxford Health Plans, an HMO network even offers enrollees discounts on yoga classes and massages. Of course, each of these extras adds to costs. But as an alternative to raising premiums, some health plans are raising deductibles and copayments and cutting back on such other benefits as comprehensive mental health.

Given competition and consumer choice, such adjustments can work to the consumer's advantage. Let government regulate some trade-offs and not others, and consumers are likely to become worse off. The principle here is similar to the economics of the minimum wage. If employers are compelled to pay higher monetary wages, they will adjust by providing fewer fringe benefits and workplace amenities. In the complex world of health care, there's no assurance that a prohibition on one kind of trade-off will lead to higher quality or more benefits overall.

Effects on Individuals

As bad as things will be for group insurance, PARCA promises even worse devastation in markets where people buy their own insurance. That's because PARCA requires insurers to sell to everyone at the same price, regardless of health status. This provision also sounds buyer friendly. But if people can buy insurance for the same premium after they get sick, what incentive do they have to buy it when they're healthy? None. And if only sick people buy insurance, how high will premiums have to be? Stratospheric.

New Jersey shows how high costs can climb within a short time after a law like this is passed. Among 17 insurers, the average annual premium for a family of four is $18,700! In neighboring Pennsylvania, with no such law, a similar policy costs only about $3,000.

Insurers, of course, do not view all applicants the same. Healthy enrollees generate profits. Sick enrollees cause losses. So what will health plans do if they are not allowed to adjust their premiums to reflect expected costs for individual enrollees? They likely will adjusts costs instead - by underproviding to the sick and overproviding to the healthy. This, of course, was the central problem of Hillary Clinton's plan for managed competition. Norwood and D'Amato are promising managed competition GOP-style.

Real Reform

If Republicans want to do something, they can implement real reforms that address fundamental problems. The only real alternative to managed care is a Medical Savings Account (MSA). And the only real alternative to a health plan that serves the interests of the employer is personal, portable insurance owned by the employee. But while the tax law generously subsidizes third-party insurance premiums, it penalizes deposits to MSA accounts for all but the lucky few included in a current federal pilot program. And although the tax law subsidizes employer-provided insurance, it provides little relief for those who purchase insurance on their own.

Few of us can afford insurance that allows us to see any doctor or order any test and send the bill to someone else. What we can afford is a plan that follows cost-effective protocols but allows us to use our own MSA money when different options seem advisable. We could use our employers to get price discounts on insurance that we individually own, and carry from job to job.

But on these reforms - reforms that would solve important problems - PARCA is strangely silent.