Excerpted From: State Briefing Book on Health Care
September 23, 1994
W23
State Mandated Health Insurance Benefits
State-mandated health insurance benefits laws tell insurers what services and providers they must cover in order to sell health insurance in a state. Although they nominally restrict the behavior of insurers, these laws have the effect of limiting the freedom of choice of consumers. They force people either to purchase a Cadillac plan " bloated with extra benefits " or to remain uninsured.
Mandated benefits laws cover diseases ranging from mental illness to alcoholism and drug abuse, services ranging from acupuncture to in vitro fertilization, and providers ranging from chiropractors to naturopaths. They cover everything from the serious to the trivial: heart transplants in Georgia, liver transplants in Illinois, hairpieces in Minnesota, marriage counseling in California, pastoral counseling in Vermont and deposits to a sperm bank in Massachusetts. As Figure I shows, in 1965 there were only eight mandated health insurance benefits laws in the United States. Today, there are more than a thousand.
"Mandated benefits raise the cost of health insurance and price millions of people out of the market."
Although the same objectives can be achieved in much less harmful ways, state mandates are pricing millions of people out of the market for health insurance:
- According to one study, mandated coverage increases premiums by 8.8 percent for substance abuse, 15 percent for dental services (the most expensive mandate) and nearly 13 percent for psychiatric hospital care. [See Figure II.]
- According to another study, one out of every four uninsured people has been priced out of the market by state-mandated benefits laws.
In addition to mandates, private insurance is burdened by premium taxes, risk pool assessments and other regulations. As noted earlier, most large corporations are exempt from these regulations because they self-insure. The full weight of such regulations falls on the most defenseless part of the market: the self-employed, the unemployed and the employees of small businesses.
Best Idea: Repeal All State Mandates.
The most straightforward way to lift the burden of state mandates is to repeal them. As noted below, a number of states have already repealed mandates for small business in an effort to make health insurance more affordable. But mandates are bad not just for small businesses but for all businesses. There is no reason to substitute the judgment of politicians for the judgment of buyers and sellers in determining the extent of health insurance coverage.
Good Idea: Allow No-Frills Alternatives.
Failing total repeal of mandated benefits, state governments should allow insurers to sell a no-frills policy to any buyer within the state. Mandate-free insurance could compete side-by-side with regulated insurance. This would extend to the rest of the population a right now enjoyed only by employees of the largest corporations."There is no reason to substitute the judgment of politicians for the judgment of buyers and sellers in determining the extent of health insurance coverage."
Second-Best Idea: Exempt Small Businesses.
At one time it was thought that significant progress could be made in exempting small businesses from mandated benefits. Over the past few years, 24 states have done so to one degree or another. Take Washington state, for example. Normally, health insurance policies there would be subject to 28 mandates - covering alcohol and drug abuse, mammography and the services of chiropractors, occupational therapists, physical therapists, speech therapists, podiatrists and optometrists. Under a law passed in 1990, firms with fewer than 50 employees can buy cheaper insurance with no mandated benefits.
While they are a step in the right direction, most mandate-exemption laws are so narrowly constructed that the qualifying firms are few and dispersed. Unable to identify a large enough market, most insurers have simply ignored it. For example, in 14 states such exemptions apply only to firms with no more than 25 employees. In addition, many states allow a small business to qualify only if it has been without insurance for some period of time: at least one year in seven states, two years in Kansas, Maryland and Rhode Island and three years in Kentucky. In these states, small employers are penalized for providing insurance coverage. All the benefits from the new legislation go to their uninsured competitors.
"Most mandate-exemption laws are so narrowly constructed that few firms qualify."
Second-Best Idea: Require Social and Financial Impact Statements.
Following the lead of Washington, Arizona and Oregon, more than a dozen state legislatures now require social and financial impact statements before they pass additional mandates. For example, because of concern about costs, in 1983 Washington state began putting the burden of proof on mandate proponents to show that a mandate’s benefits would exceed its costs. As a result, no new mandate was adopted by the Washington legislature for several years. Clearly, impact statements slow the passage of mandated benefits, if only because the proponents of mandates need more time and money to overcome the new legislative hurdles.
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