Told Ya’ So: The Trojan Pony’s Revenge

On March 16, the General Accounting Office reported that people who exercised their rights under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) were often charged premiums for individual insurance that were far higher than standard rates. It also noted that some companies discouraged insurance agents from selling policies to people with high-risk medical problems.

At a Senate Committee on Labor and Human Resources hearing later that week, Senator James Jeffords (R-VT) charged that some insurance companies are using marketing practices "to avoid enrolling those who need health care the most." Gail Shearer of Consumers Union testified that although the signing of HIPAA into law gave consumers the impression that they could look forward to true affordability and accountability in the market, "consumers are running into loophole after loophole that limit their ability to achieve health care security."

Of course, Sen. Edward Kennedy (D-MA) had a solution for "price-gouging by the insurance industry" when people leave an employer plan and try to purchase coverage in the individual market — legislation to establish a limit (150 percent of the standard rate) on insurance company charges for eligible individuals.

UpDate readers might recall these words from the February 1996 article, "Portability — A Trojan Pony":

[G]uaranteed issue, renewability, and portability will inevitably lead to tighter health insurance regulation on the federal level. Renewal or issuance of insurance policies cannot be guaranteed without involving the government in setting rating band limits on insurance policy prices. After all, in what sense can the availability of an insurance policy be considered guaranteed if it becomes too expensive for some policyholders to buy or renew?

The GAO analysis found that insurance carriers charge higher rates because they believe that HIPAA -eligible individuals will, on average, be in poorer health and that failure to do so would encourage adverse selection. They seek to prevent non-HIPAA-eligible individuals from subsidizing eligibles’ expected higher costs, and they even permit or encourage healthy HIPAA-eligible individuals to enroll in standard plans, according to GAO. Some insurers have redesigned their benefits in ways that exclude coverage of particularly costly illnesses or procedures for a specified period of time.

As noted last February:

Advocates of Kassebaum-Kennedy deny the bill will raise insurance premiums very much, if at all….[I]f individuals do find that the cost of those insurance guarantees is more than they can (or are willing to) pay, it’s time to reexamine the cost estimates and search for different answers to continuity of coverage issues.

Of course, Congress tried to have it both ways in 1996 — promise the illusion of fully portable health insurance coverage at an affordable price and get through the fall election cycle — but keep health industry lobbyists happy by fudging in the fine print. All it accomplished was to surrender the remaining vestiges of risk-based insurance pricing principles, and set itself up for the next round of demands for increased federal regulation. Before moving on to misguided controls on insurance premiums, Capitol Hill politicians should understand that if private insurers cannot explicitly adjust their premiums and restrict their coverage offers to reflect different health risks posed by different people, they will resort to indirect and less efficient means to match the value of health insurance to the amount people will pay.

Perhaps someday we can get serious about considering market-based alternatives, such as tax neutrality, targeted income-based subsidies, legal reform, preemption of state mandated benefits laws, and encouragement of non-workplace-based voluntary purchasing pools.

Tom Miller ([email protected]) is Director of CEI’s Economic Studies Program.