Real Patient Protection

An old political maxim has it that "as Maine goes, so goes the nation." A few decades ago, however, the balance of political trend-setting power shifted west—to California. Thus, on November 5th, all eyes focused on the California ballot, and several initiatives that threatened to transform the political landscape.

The overwhelming success of Proposition 209, the California Civil Rights Initiative, suggests that government-mandated racial preferences face political extinction. The failure of two others offers hints about the future of HMO regulation.

Propositions 214 and 216, the so-called Patient Protection Acts, were a response to allegations that managed care insurers (and HMOs in particular) routinely deny patients medically necessary treatment. Both measures would have prohibited health plans from using financial incentives for doctors to withhold "necessary care," firing doctors for advocating on behalf of their patients, and imposing "gag clauses" that impede communication between doctors and patients. These prohibitions constituted the most popular aspects of the ballot measures, but all three actions were already illegal under California law. Their prominence in the initiatives appeared to be a smoke-screen intended to conceal more costly components.

The propositions also would have established more comprehensive staffing requirements for health care facilities, forced insurers headquartered in other states to locate a second (superfluous) review office in California, and mandated a second physical examination of each patient before an insurer could deny payment for requested care. Proposition 216 also would have imposed four new taxes on health care businesses when they reduced or redeployed health care resources.

Finally, Propositions 214 and 216 would have established a new private right of action for individuals to sue health care businesses "in the public interest." Health insurers are the proverbial "deep pockets" about which opportunistic plaintiffs’ attorneys dream. Under this provision, any individual would be empowered to sue HMOs, even if he had not been harmed. Trial lawyers recognized this new possibility, and they lined up in favor of the ballot initiatives.

These new laws were unlikely to help California consumers, but would have raised the cost of health insurance. One study conducted by a research division of KPMG Peat Marwick, estimated that they would raise California’s total health care costs between 1.6 billion and 3.5 billion dollars in 1997 alone. Luckily, a similarly high cost estimate from the nonpartisan Legislative Analyst’s Office was included in the official ballot summary of the propositions, and voters rejected them.

Californians may be wary of costly regulation, but they, like health care consumers around the nation, remain concerned about the quality of care provided by managed care businesses. Just four months before the election, one poll found that 74 percent of likely California voters supported the goals of the Patient Protection Acts. These concerns have prodded a national stampede toward government mandates at both the state and national level. This trend may be the next big thing in health insurance regulation. Tragically, it’s not for the better because it targets the wrong problems and ultimately threatens choice in health care markets.

Not everyone can afford to pay for the best service and broadest coverage available. For many, the best practical choice is managed care, which offers lower premiums and limits out-of-pocket costs, such as deductibles and co-payments. Naturally, the lower cost of managed care means that more people can afford to be covered by health insurance.

Managed care companies keep costs low in several ways. They emphasize preventive treatment. They also utilize their purchasing clout to contract selectively and drive hard bargains with health care providers. Furthermore, managed care plans provide a range of incentives and procedures to keep doctors from providing costly and unnecessary over-treatment. The latter practices, however, have triggered charges that managed care firms deny patients necessary treatments.

When high-priced treatments are not clearly more effective than less expensive ones, the decision to opt for cost reduction is easy. Cost containment dilemmas arise when expensive treatments are only marginally more beneficial than less costly alternatives. Is an expensive operation worth an extra year or two of life to a dying cancer patient? Ideally, only the patient would gauge the real value of the treatment in relation to its higher cost. But by accepting health care coverage from managed care insurers, consumers implicitly give them authority to make some of those decisions. In managed care, patients agree to accept more limited coverage in return for the agreement by other plan subscribers to accept the same limitations. More importantly, this mutual agreement to reduce costs makes premium reductions possible.

To some consumers, the cost savings are worth the reduced availability of expensive treatments. Others prefer to pay more in order to receive more care. Thus, it is important that we choose our health plans carefully, with knowledge of the manner in which managed care plans weigh the expected costs and benefits of various treatment options.

Unfortunately, consumers usually do not purchase health insurance as individuals. Federal and state tax laws encourage employers to provide health insurance and make it comparatively more costly to purchase insurance individually. When someone else pays for the insurance policy, that arrangement necessarily minimizes the influence consumers can exert in choosing the options they want. Naturally, health insurers remain responsive to company purchasers, not consumers. A neutralization of the tax code, so that insurance purchases by individuals are no longer penalized, is a necessary first step toward better information and greater choice.

But tax reform alone will not solve the problem. Health insurance contracts have done a poor job in disclosing the nature and quality of treatment that can be expected by patients. Why? In part, it is because courts have tended to strike down attempts by traditional, fee-for-service insurers to contractually limit coverage to "medically necessary" care, and have insisted on enforcing the medical community’s definition of necessity—one that included all treatment which could provide any level of benefit, no matter the cost.

Insurers should provide more clearly written contracts that specify the rights held by patients and the obligations owed by health plans. These contracts should define the particular level of cost/benefit scrutiny used to evaluate covered services, adjust premiums to reflect value-conscious economizing, and provide more effective and expeditious mechanisms for dispute resolution. And courts must stop overruling the clear intent of these contracts.

Insurers also need to be proactive in creating innovative new ways for individuals to pool their risks and resources outside the workplace, so they can capture the efficiencies of group purchasing. Community groups and membership organizations should be empowered more effectively to offer these additional health insurance options.

Finally, consumers must take responsibility for their choices and arm themselves with the data necessary to make informed decisions. They then must use their leverage to insist on the choices they value most—whether they purchase insurance individually, join voluntary pooling arrangements, or receive coverage as a benefit from their employers.

If insurers and consumers do not act, government surely will. But statutory mandates, such as those contained in California’s Propositions 214 and 216, unnecessarily raise costs and curtail consumer choice.

While Californians rejected the comprehensive regulation of Propositions 214 and 216, they have shown an affinity for incremental regulation. And the rest of the country is now beginning to show that same characteristic. Earlier this year, a number of states, including New York, New Jersey, Georgia, and Virginia, all enacted substantive new managed care laws. The U.S. Congress also imposed new health care restrictions sponsored by Sen. Ted Kennedy (D-MA) and outgoing Sen. Nancy Kassebaum (R-KS) (see "Portability: A Trojan Pony," February 1996 UpDate). State and federal legislators are ready to up the ante in 1997. Look forward to even more incremental managed care legisltion in the 105th Congress.

Trying to prevent some consumers from making bad choices forces us all to accept the same cookie-cutter options. That compels some buyers to pay for services they do not want or cannot afford. It also means that those on the margin may see health insurance become too expensive.

Managed care can provide lower-cost insurance coverage to many who cannot afford the price of fee-for-service insurance. The election results in California suggest that, to some degree, voters understand this, but the cost (in terms of lost insurance coverage) must be made explicit. Different people have different thresholds for risk and desire different levels of health care coverage. To really protect consumers, we must reject proposals for additional regulation and eliminate existing barriers to choice.

Gregory Conko is a CEI policy analyst.